The precarious position of Maldivian pensions

The capitalist system under which the Maldives operates incorporates pensions as a way of working and saving for retirement. By definition, a pension is a fund into which a sum of money is added during an employee's employed years and from which payments are drawn to support the person's retirement from work in the form of periodic payments. However, the effectiveness of such pension funds depend on how the fund matures by the time people retire. The current system in place in the Maldives, however, does not inspire such confidence.

Pension contributions are mandatory by the Pension Act of the Maldives, and regulated by the Maldives Pension Administration Office (MPAO) under the Maldives Retirement Pension Scheme. The objectives of the MPAO are to ensure the funds are invested properly, of which the returns are then disseminated to the beneficiaries under proper regulations. The issue arises when considering the investment policies of the MPAO.

According to their website, ”MRPS Investment philosophy is to generally preserve the capital value of member contributions and grow in line with the Maldivian economy at a rate higher than domestic inflation by investing in assets allowed in the Pension Act.” In writing this is well and good, yet the sorts of investment is dependent on using the Maldivian Rufiya entirely, and the investments are all within the Maldivian economy alone. On a broader sense, this means that all eggs are being put in one basket.

When contributing for the pension fund, it is mandated upon an employer to make contributions to the fund, with 7 percent coming from the employee’s earnings, and 7 percent from the employer. When considering pension fund contributions, the latest annual report (of 2020, rather than 2021), show that the public sector has contributed MVR480 million while the private sector contributed MVR634.5 million, 43 percent and 57 percent respectively. The public sector contributions include 7 percent, which is from the employer, the government, roughly half of the amount, at MVR 240 million.

The amount that is then invested in investment schemes includes, curiously, government issued Treasury Bills and Bonds. A whopping 87.2% of all investments in the year 2020 was in T-Bills and Bonds, with the remaining investments in Equity, Fixed Deposits, General Investments (further details would include investment in shares in Maldivian public companies), Sukuk Bonds, and Cash at hand. 

To understand the issue, consider what T-Bills and Bonds are. They are, in all senses of the phrase, loans, taken by the government from the fund, who then issues certificates (T-Bills, or Bonds, depending on whether they exceed the 364 day duration), which are then beholden to the fund to be paid back. The instrument works albeit differently from a loan that citizens would take from the bank, and the repayment system is also different, but all in all, these are more of loans than investments.

The combined asset value of the funds was at MVR11.9 billion, with 87.2% of the assets in government T-Bills and Bonds, amounting to over MVR10 billion. This is MVR10 billion the government owes the fund, money that needs to be repaid and then distributed as pension earnings for the retirees who contributed to the fund.

These numbers are worrying. The Solih Administration, hit with a pandemic and then with the impending effects of global conflicts, had come into power preaching the evils of being in debt, yet are now proudly shouldering and constantly increasing the debt owed to a different benefactor. The budget for 2022 included multiple dependencies on investments and loans, and it appears that the pension fund is one of these sources. The health of credit has been in question with Moody’s downgrading and then Fitch’s consolation, and the whole endeavour is dependant on a highly profiteering tourism industry bouncing back strongly.

So when the Maldivian people’s hard work and dedication in terms of pension contributions are lumped into the debt that the government would owe when the bonds and bills mature, the realistic view is that the government may not be able to return the payment in full. While this is an assumption, credit worthiness is based on such informed assumptions, and as such, the current system in place yields little confidence overall.

Pension schemes are not always government regulated in other countries. In India alone there are over 20-plus different pension plans for employers to choose from, all of them regulated independently and as such, controlled by the contributors themselves. The lack of such diversity in the Maldives is worrying, and the people themselves need to be given a sense of control over the way their investments are being used.

Yet if the competition element is impossible to be brought into the Maldivian economy at this stage, then the MPAO direly needs to diversify their investment portfolio. The Maldivian Rufiyaa has been depreciating in value even if the exchange rate is controlled, and this depreciation would only continue over the next few years at this rate. As such, the lack of investments into T-Bills from healthier economies globally also means that the point mentioned earlier needs to be iterated; all the eggs are in one basket.

Furthermore, investment need not be restricted to within Maldivian borders; with the world already getting comfortable with globalisation at an unprecedented scale, it is only inevitable that financial flows need to be adjusted and taken advantage of accordingly. By diversifying the investment portfolio beyond the Maldives, and investing in international companies of stellar records, the return on investment can be substantially increased and profitable. 

The entire system, at a glance, feels stagnated and wholly dependent on diligent administration. The lack of opportunity for different pension schemes can be alleviated by internal changes to the investment policies of the MPAO, as well as through changes to the law to allow investments beyond the Maldives, and made more enticing for the people contributing in the scheme. These investments would only pay off in time, not immediately, and whether the investments yield defaults of profits, would only be confirmed at the time they mature. For this reason, further consideration and innovation is paramount in such a fast-paced world.