4th Pacific Island Investment Forum (PIIF) Conference Speech by Acting Governor Ms Elizabeth Genia
PIIF conference speech – Tuesday 28 March 2023, APEC Haus
Ms Elizabeth Genia, Acting Governor, BPNG
Prime Minister, the Honourable James Marape
The Minster for International Trade & Investment, the Honourable Richard Maru
Chairman, Mr Ian Tarutia,
Distinguished Guests, Ladies and Gentlemen.
Thank you to the organisers of the 4th Pacific Island Investment Forum, for your invitation to talk about the role of the Bank of Papua New Guinea, as the regulator for our Authorised Superannuation Funds (ASF’s) in PNG and on our role in stimulating economic and investment opportunities in PNG.
I would like to start by outlining the Bank of PNG’s core statutory responsibility. As PNG’s central bank, BPNG has 4 key responsibilities to the people of Papua New Guinea. These are set out in the Central Banking Act 2000 and its subsequent amendments.
The first of the Bank’s core responsibilities relates to our role in formulating and implementing monetary policy to maintain price stability and promote employment and economic growth.
Our second core responsibility is to ensure the stability and development of our financial system.
Our other two mandates also have relevance to the superannuation and investment industry. One relates to promoting an efficient payments system. The other relates to providing efficient banking services to the Government.
However, I will concentrate today’s remarks on the issues of monetary policy, economic growth, and financial system stability and development, all of which can be specifically related to superannuation and institutional investment.
I am sure you’ll be delighted to hear that I am not going to give a lecture on the complex economic concepts that contribute to setting monetary policy. Nor will I be recommending specific superannuation rules for other countries to follow.
Rather, I would like to bring the focus to the fundamentals of ASFs as they are in PNG. And from there, share with you how BPNG’s focus on monetary policy and regulatory and supervisory functions balances those ‘big stick’ responsibilities with the ‘sweet carrot’ initiatives we are implementing to encourage growth in the PNG economy.
The superannuation sector in PNG has overcome a difficult past to grow to be the second largest sector in the financial system, after the banking industry. A series of significant reforms and the introduction of several key laws in 2000 resulted in the introduction of comprehensive licensing requirements for entities intending to enter the financial system.
Further tightening up of our rules now requires key individuals in licensed financial institutions to meet the ‘fit and proper persons’ tests. And in the case of an ASF, there must be clear separation between the functions of the trustee, investment manager and fund administrator.
In its role as the regulator of the superannuation industry, the Bank issues prudential standards to provide clear guidelines. The prudential standards cover investments, corporate governance, risk management, fit and proper requirements, external audits and financial statement format and disclosure etc.
All licensed trustees, investment managers and fund administrators must comply with these prudential standards. The Bank ensures compliance through the conduct of ongoing supervision activities. These include off-site monitoring, on-site reviews and enforcement of proper standards of conduct for the licensed institution’s board and senior management.
The ‘big stick’ the Bank carries as the industry regulator means that our statutory oversight can, and does, lead to prosecution for compliance breaches.
With the reforms to the sector in 2000, the subsequent amendments and regulations strengthening the rules governing superannuation, and rigorous compliance activities working to keep sector participants on the right prudential track, the level of confidence in the superannuation industry has grown.
Fund members must also have confidence in their superannuation providers. They need to know that their contributions are deducted correctly by their employer, then transferred to their authorised super fund, invested prudently by their ASF’s trustee in consultation with investment manager , and the correct amount paid out when the member exits the fund.
Before travelling was halted by the pandemic, the Bank conducted regular on site visits to employer companies, to educate them on their superannuation responsibilities. A good example where offering the sweet carrot prevented the need for the big stick.
Onsite reviews of superfunds have recommenced now that restrictions on movement have been lifted again, post pandemic.
Employees are encouraged to report their employers to BPNG if their employers are not remitting superannuation to an ASF on their behalf. The Bank initially refers these complaints to the relevant ASF to follow up with the defaulting employer.
In the event that the employer continues to default on the remittance of the contributions, then the ASF may refer the employer to BPNG for possible prosecution. This sends a strong message that the employees interests are being looked after.
As confidence in the integrity and fairness of the system builds, which encourages more participation in superannuation, such as through voluntary contributions, the importance of the sector as a key contributor to the country’s investment growth also rises.
In 2000 total assets of the superannuation industry were around K700 million.
In December 2022 total assets of the industry were in excess of K16.4 billion.
The breakdown of the asset classes shows:
• 47 percent of super fund industry investments is in fixed interest, notably government securities, as well as bank deposits.
• 24 percent is in domestic equities and 13 percent is in international equities.
• 8 percent is invested in property.
• 7 percent is held in cash and other receivables and 1 percent in loans and advances.
This brings us to the issue of monetary policy implementation.
BPNG uses open market operations as the main tool to implement monetary policy. Open market operations take the form of weekly Central Bank bill and Treasury bill auctions, coordinated with monthly Treasury bond auctions, where securities are sold directly by the Bank to the intending securities investor.
In recent years the Bank’s monetary policy decisions and actions to manage liquidity in the market, including open market operations, have provided superannuation funds with attractive fixed interest investment opportunities and have enabled a modest level of diversification through holding a selection of securities with different terms to maturities.
In the last few years the secondary market has become more active, providing institutional investors with an alternative platform to access the auctions through which to trade government securities.
The huge disruptions we have seen over the last few years – the Covid-19 pandemic and the Russia-Ukraine war – have certainly adversely affected production and supply chains, commodity and capital markets, international trade and investment and global transport operations in PNG, as has been the case for most other global economies.
The economic stimulus measures taken by the PNG Government are now starting to show results, with improvement in domestic activity in the key sectors of trade, transport, tourism and hospitality, manufacturing and construction.
Which brings us to “what’s in store for the future?”.
The Securities Commission made an announcement yesterday, advising that work is soon to start on the development of PNG capital markets. The establishment process will need to set out the provisions required to issue licences to market intermediaries, and determine the rules for regulating issuances of securities, bonds and other financial instruments to the public.
The policy and legislative conditions are intended to facilitate the direct pooling of funds. These pooled funds can then be invested in a range of sectors, profit-driven or development-oriented, seeking sustainable and broad-based economic growth in the medium to long term.
When in operation, a vibrant and active capital market will enable superannuation funds to diversify their domestic investment portfolio, as well as expand their local investment opportunities.
Further advances in superannuation fund operations may result from a review, commissioned by the Treasurer, and currently under his consideration. The report evaluates the effectiveness and efficiency of the PNG superannuation and life insurance legal frameworks, to ensure they are consistent with the Government’s Financial Sector Development Strategy.
Now we come to the prospect of expanding the potential market for future superannuation fund members.
With over 95 percent of the PNG population living in rural and remote areas, many living in hand-to-mouth subsistence conditions, the concept of being part of a savings culture has not been on the ‘must-do’ list for many individuals. Even using the national currency is not universal in our country. Barter is still widely practised.
So it’s no surprise that superannuation, as a way to build a financially secure future, has not been embraced by people who may not be employed and therefore not required to make superannuation contributions.
However, this state of affairs may soon start to change.
For more than a decade BPNG has been involved in working towards financial inclusion, initially as the instigator of a range of financial awareness activities, and in the last 10 years as an integral part of the Centre for Excellence in Financial Inclusion (CEFI).
Financial inclusion, the desired outcome in which all members of society have access to basic financial services, is now driven by the national government-directed Financial Sector Development Strategy.
I invite you now to take a step into the future.
A future where financial technology provides ways and means for all Papua New Guineans to have access to important financial services, including the opportunity to build towards a financially secure retirement.
To date, superannuation has not been a key focus of the financial education activities that have been rolled out around PNG as part of the financial inclusion strategy. However, once basic financial needs, such as savings accounts and loans, are fulfilled, then we may see people developing an appetite for access to superannuation benefits.
Here’s where BPNG can offer another sweet carrot to product providers – access to our Regulatory Sandbox. The Regulatory Sandbox provides a controlled environment for testing products and technologies that create new social and economic opportunities.
The Sandbox is a facility that allows innovators, typically technology-focussed solutions developers, to test their solutions, using real customers and real data in a safe and controlled environment. The Sandbox has already proven very worthwhile in the recent Digital ID pilot program.
A final point relating to the combination of ‘big sticks’ and ‘sweet carrots’ to describe BPNG’s approach to financial institution regulation and supervision. The rules require the key individuals of regulated financial institutions to be ‘fit and proper’.
To help participants meet this requirement, BPNG supports a development program for intending directors, in which they undertake a graduate diploma in corporate governance.
Through initiatives such as these, our aim is to broaden and deepen the understanding and cooperation between the Bank as the regulator and the industry participants in this very important sector.
I look forward to the opportunity of meeting each of you over the course of this Forum.