PensionReforms' summary and comments
This report by the International Labour Organisation (ILO) is one of a series of five that looks at micro-states in the South Pacific.  PensionReforms has already looked at the report on Samoa here - this one is about Vanuatu.

"The scope of these reports covers areas of critical importance in extending social security coverage to all workers. These include overview of social security, extension of social security, formal employment sector and informal economy surveys, feasibility studies of pensions, unemployment insurance, traditional systems, workers' compensation, social assistance, maternity protection and health insurance. As a cross-cutting issue, focus on gender equality has been underpinned for all the feasibility studies."

As with the report on Samoa, PensionReforms focuses mainly on retirement income issues.  The report covers all aspects of social security.

Vanuatu is small (12,189 square kilometres), dispersed (83 islands over an economic zone of 680,000 square kilometres), relatively heavily populated (187,000 in 35,400 households) and poor.  As well, it faces the challenges of 80-100 local languages, a cyclone-prone climate and, being on the Pacific 'rim of fire' is earthquake and volcano prone.

A high 43% of Vanuatu's population is children under the age of 14 (compared with Australia's 20%).  The overall dependency ratio (aged + the very young in relation to the population aged 18-64) is 83%.  That compares with Australia's 33%.  Only 3% of the Vanuatan population is over age 65.

Emigration has not been significant in Vanuatu (unlike the position in other similar Pacific countries) but that means foreign remittances are virtually absent.  On the other hand, a very high 98.4% of the population are "ni-Vanuatu" or of local descent.

Vanuatu's unusual history as a condominium between The UK and France (until 1980, it was known as the New Hebrides) means that it belongs to both the British Commonwealth and the French League of Nations.  Most commercial law is derived from English law and Vanuatu is a tax haven with no income tax, estate duties, gift duties or double taxation agreements.  The main government revenue derives from a 12.5% 'value added tax' - VAT and from import duties.

Vanuatu suffers from the usual crop of difficulties faced by poor countries - a high dependence on subsistence agriculture - probably 82% of the working age population is in the informal economy with 69% involved in only subsistence-style agriculture.

"Vanuatu is one of the least developed countries of the world with only 2 per cent of its current adult population in the wage economy.  Of these 2,922are men and 1,553 are women employed in the government sector."

Traditional forms of social security are much more important than modern concepts of government support:
"There are two major formal social security programs in Vanuatu and they are the Vanuatu National Provident Fund [the Tier 2 'compulsory' VNPF] and the Workers compensation system.  There is no social assistance program nor is there a specific ministry or department that focuses on the welfare and social development issues.  As such there is no social development plan that includes social security or social welfare."

The report suggests, therefore, that "...there is an urgent need to mainstream welfare in government departments."

The 'compulsory' VNPF had 39,938 member records at the end of 2003 and requires an 8% contribution (down from 12% before 2004) that is 4% each from employers and employees.  It provides lump sum benefits from age 55 or earlier death or incapacity.  It is supposed to be compulsory but:

"The compliance process has been made difficult by the VNPF being refused access to data sharing by other government agencies including the rates and taxation office.  This means that the VNPF is required to undertake a 100 per cent visitation program or business to business program to verify its contributor base.  At this point in time the initial program is about 60 per cent complete and whilst the program is labour intensive it has enabled the fund to promote its services amongst employees and employers and raise awareness generally."

"Soft fraud" (delays in payment by employers or the accumulation of arrears and use in the employer's business) is a compliance issue.  The government as employer is an offender and this seemingly leads to a reluctance to prosecute offenders.  The police is helping to resolve this.

From 2004, only 15% of the VNPF's assets may be invested overseas.  The VNPF's investment strategy illustrates the risks of all similar vehicles in a 'constrained' political environment:
"At the moment VNPF is not permitted to invest in shares so most of its external assets are in the form of capital guaranteed schemes that give returns in the order of 4.75 per cent and some variable returns are in the order of 7 - 8 per cent.  The current offshore assets are managed by the Bank of Hawaii.

"For the period 1987 to 2000 the fund was required to return an annual dividend of not less 3 per cent to all contributors but this was changed with effect 2001 to return a dividend in accordance with the available surplus of funds.  Returns on investment since then have been as low as 1.5 per cent and 2 per cent....

"The VNPF self manages its property account but the situation with regards to property investment in Vanuatu is not very good and the three multi storied buildings (one in Santo) owned by the VNPF have only 50 per cent occupancy rates and the domestic residence on the portfolio is also vacant."

At the end of 2003, 39% of the VNPF's assets was lent to the government.

The report analysed surveys of the formal and informal employment sectors and identified a need for improved social security arrangements, even at some cost by way of an identified social security tax.  Much work seemingly needs to be done on this.

PensionReforms notes the contrast between the open private, commercial environment of the tax haven and the closed investment environment that characterises the VNPF.  The amount of money lent to the government is unlikely to be in the best interests of members - neither are the 'flagship' style of poorly performing direct property investments.  It seems to PensionReforms that the government should shift its policy focus away from the considerable investments in time and resources needed to maintain and enforce the compulsory VNPF.

The government's very limited resources would seem to be better applied in developing a universal Tier 1 pension scheme such as Samoa has.  That is unlikely to happen until the government establishes some form of central agency to monitor social welfare issues.  The government acknowledges this need but, at the report's date, had done little about it.

It also seems to PensionReforms that in a country like Vanuatu, changes to social security arrangements that involve contribution-based entitlements seem out of place.  They depend on a relatively large formal sector, something that is both conspicuously absent in Vanuatu now and unlikely to change.  Whether citizens might like such an arrangement or not seems unimportant.  As the report itself notes:" Clearly, a contributory social insurance scheme is not generally practical."  PensionReforms agrees. (File size 5.4 MB;  462 pp)  272