The Tribune

• ‘Impossible’ for NIB contributions to stay so low

• Report totally contradicts PM’s rate positions

• ‘If this isn’t clarion call, I don’t know what is’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamians must give up the “bargain” of their generous National Insurance Board (NIB) pension to prevent “future generations” facing an unsustainable financial burden, it was revealed yesterday, as “the day of reckoning” arrived.

The International Labour Organisation (ILO), in the 11th actuarial report on NIB’s solvency and sustainability, warned there is no choice but to immediately increase contribution rates beyond the existing 9.8 percent otherwise the country’s future may be endangered by the chronic underfunding.

Disclosing that just 6.05 percent of that 9.8 percent goes to fund long-term pension payouts, which currently amount to a collective $25m per month to 44,000 beneficiaries, the report said: “It is impossible to expect that the contribution rate for the pension branch can stay as low as it is at present.

“A contribution rate of less than 7 percent to obtain the possibility of receiving a pension equal to 60 percent of the last five best salaries at age 65 is a bargain - a bargain that future generations will have to pay if the current generation of contributors do not increase the contribution rate.”

While other reform options involving adjusting the pension accrual rate; raising the retirement age from 65 years to 67; and government funding of assistance benefits, the ILO’s actuarial report warned that a contribution rate hike cannot be escaped given that NIB’s $1.5bn reserve fund is projected to be exhausted in 2028, which is just six years away.

“The analysis and tests conducted.... show that the reform options considered cannot prevent an immediate increase of the contribution rate to avert the exhaustion of the reserve by 2028,” the study said. “It is worth noting that the sooner the increase in contribution rates takes place, the better it is for future generations.

“If the increase is accompanied by modifications in the investment policy to better reflect long-term objectives, this will also be beneficial for future generations.” The last two paragraphs, though, directly contradict the position taken by the Prime Minister who has publicly stated he will not impose a contribution rate increase at this time to give businesses and households more time to recover from COVID-19’s economic devastation.

Philip Davis QC has also said the Government is looking at alternative, as yet unspecified reform options, having described an NIB contribution rate increase as akin to raising taxes in terms of being a “lazy way” out to solve the country’s problems. However, in stark contrast, the actuarial report is warning that he has no choice and cannot afford to postpone the inevitable any longer.

It added: “The required contribution rate to pay all expenditures of all branches during the next 60 years is 22.55 percent. Higher unemployment benefits paid in 2020 due to the severe contraction of GDP because of the COVID-19 pandemic increases the required contribution rate to 23.05 percent from 2019 to 2023.” That rate, the NIB actuarial report said, fall back to the long-term 22.55 percent from 2024 onwards.

NIB’s reserve fund is now forecast to be exhausted one year earlier than previously projected, in 2028 as opposed to 2029, and the report recommended that the Government focus on shoring up the social security system’s short-term viability through “adequately financing” its pensions arm which represents longer-term benefits. This drove the recommendation to increase NIB’s contribution rate by two percentage points to 11.8 percent by July 1.

Further contribution rate increases, to be implemented every two years through to July 1, 2036, “could restore the short and medium-term financial sustainability of the scheme”. However, the 11th actuarial report warned that the contribution rate achieved by 2036 - even if its recommendation was to be adopted - would “likely not be sufficient” to address NIB’s long-term viability.

NIB’s present contribution rate is 9.8 percent, split 3.9 percent/5.9 percent between employee and employer, with the latter paying the majority. The 11th actuarial report is recommending that this rate increases by 72.4 percent, in percentage terms, in the near-term to 16.9 percent by 2029 before more than doubling over the long-term.

Myles Laroda, minister of state in the Prime Minister’s Office with responsibility for NIB, yesterday warned that demographics are also working against the social security scheme’s solvency with persons living longer and birth rates falling. This means there will be an ever-expanding pool of NIB beneficiaries seeking pension payouts while the number of workers able to support this via their contributions is decreasing in relative terms.

The minister said the total fertility rate, as represented by the number of children born to women aged between 16 and 49, had decreased from 1.9 children per woman in 2010 to 1.43 children in 2019. Post-65 years-old life expectancy, meanwhile, had risen over that period from 16.5 to 20.5 years for men, and from 18.8 years to 22.7 years for women.

Acknowledging that NIB is currently involved in a “disinvestment” policy, as it is having to liquidate investments to pay benefits given insufficient contribution income to cover this, Mr Laroda said one reform option would involve the Government providing a $14m annual grant to cover “assistance” benefits paid to some 4,000 persons. These currently represent 6 percent of the NIB pension branch’s expenditure.

With NIB projected to continue running substantial annual deficits, Mr Laroda said: “Immediate action is needed to restore short-term sustainability. The most effective mechanism is to gradually increase the contribution rate. Other reforms will not have the same impact on short-term sustainability.”

Larry Gibson, chief operating officer of CG Atlantic Pensions, who has long advocated for comprehensive pension and social security reform in The Bahamas, yesterday told Tribune Business that “if this is not a clarion call to action, then what is” after being informed of the numbers in the 11th actuarial report.

“This is the first time you are really hearing what the numbers are, an update on the numbers, but it’s no surprise,” he said. “This is what I would have thought all along. Hopefully this will get some attention now and you’re going to have adjustments. 

“Really, you’re going to have to look at eligibility, you’re going to have to look at contribution rates, because 22 percent is not sustainable at all on top of all the other taxes you pay. We’ve got to look at the cost of operating NIB.... We knew that this was going to come home. We knew that there was going to be a day of reckoning. It’s what people have been saying for the longest.”