The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The City Markets employee pension fund was unable to pay the $11 million owed to beneficiaries as at end-June 2009 “because of lack of liquidity”, a forensic accounting report has alleged.

The report by Bahamian accountant John Bain, which was compiled at the request of the now-defunct supermarket chain`s last 78 per cent majority shareholder, Trans-Island Traders and the Finlayson family, found that the move to invest $3 million of pension fund monies in a sale-and-leaseback deal with City Markets, the operating company, consumed 53 per cent of its total cash assets.

While conceding that the deal, which involved the Bahamas Supermarket Retirement Trust acquiring equipment and leasehold improvements at the Cable Beach store, then leasing the same back to City Markets, was not illegal, Mr Bain said: “The action was not prudent.”

He argued that this was because it tied up 25 per cent of the pension plan`s total assets, and meant that its investments were not sufficiently diversified. They were also too closely linked to City Markets, the operating company, which had established the pension fund.

“The (pension plan) trustees invested a significant portion of the assets of the Trust in land (52 per cent as at the end of 2010), which is not a liquid asset,” Mr Bain concluded. “The land was rented to the employer, who did not always pay rent in a timely manner...... From a cash basis, the Trust operated for significant periods in a negative cash position, including periods of overdrawn bank accounts.

“At the end of the fiscal period ended June 30, 2009, the trust had a payable to (pension plan participants) of over $11 million (this is the amount we were aware of) that, because of lack of liquidity, it was unable to satisfy.

“For some significant periods of this accounting, the Trust generated a cash deficit, indicating a lack of liquidity of the Trust. For most of the years under review, the Trust spent more than it received.”

These statements, regarding the heavy weighting of pension fund assets tied up in real estate that was rented by City Markets - chiefly its former head office and warehouse on East-West Highway - gives an insight into why the current trustees, Trans-Island principal Mark Finlayson, Christine Turnquest-Knowles and Connie Rolle, are eager to achieve the maximum sales price possible for that particular property.

Given the lack of liquidity (cash on hand), a certain sales price is required for the City Markets employee pension plan to monetise its real estate assets and meet all its obligations to beneficiaries.

The report by Mr Bain, which was placed into evidence in the Supreme Court actions initiated by former City Markets employees seeking their due severance pay and other benefits, identified a number of problems facing the pension fund as a result of alleged actions taken during the 2002-2010 period.

Those years covered the final years of Winn-Dixie's majority control, and the full 2006-2010 period of BSL Holdings` disastrous ownership, from which City Markets never recovered.

Mr Bain`s findings alleged: * Lawrence Lewis, the Deloitte & Touche (Bahamas) accountant and partner, who led the last external audits of City Markets and its operating parent, Bahamas Supermarkets, allegedly told Mr Bain in a 2011 telephone interview that the $3 million sale-and-leaseback deal was designed chiefly to benefit City Markets, the company, not the pension plan and its beneficiaries.

Mr Bain also agreed with Deloitte & Touche`s concerns about the accounting treatment applied to the deal. He noted that it was a finance lease, not an operating lease, and opined that both Bahamas Supermarkets and the pension fund were treating it incorrectly in their accounts.

The pension plan received $1.432 million in lease payments from the deal during the period reviewed by Mr Bain.

• Although “not prevalent”, the Bain report alleged there was evidence, prior to Trans-Island Traders acquiring the company in late 2010, of`”commingling of funds” between City Markets and the pension plan.

He found that several Certificates of Deposit at CIBC FirstCaribbean International Bank (Bahamas), worth a collective $846,000, were cancelled in August-September 2008. Subsequently, a sum of $866,596 was transferred to Bahamas Supermarkets, with the Trust account debited with $20,203 to make up the difference.

• Contrary to the Trust agreement, which prevented City Markets recalling contributions it had made to the pension plan, Mr Bain alleged: “In 2009, the trustees demanded funds back from the Trust, using the lack of authorisation by the Board as a justification.”

According to Mr Bain, Board of Directors minutes he examined suggested that $2.1 million was contributed to the pension plan by City Markets without their knowledge or approval - a situation that he suggested was hard to believe.

On March 13, 2009, a $450,000 Certificate of Deposit belonging to the City Markets pension plan was cancelled, with $320,000 remitted to City Markets four days later. Mr Bain alleged that this was “booked as a return of the contribution granted”.

• While the former external auditors, KPMG, had conducted a “review” of the pension plan, this was discontinued after 2004. No outside audit was conducted on the plan, raising questions over the “credibility and transparency” of the financial statements.

“For the period of July 1, 2003, to June 30, 2008, no Allocation Schedule was produced, showing the calculations for the year, due to the participants of the plan,” Mr Bain found.

“The participants also did not receive any statements from the trustees as to the amounts outstanding (or due) to them, or their status as vested or otherwise. At the end of the fiscal period for 2009, it is estimated that the Trust owed the vested participants in excess of $1.5 million.”

Mr Bain also alleged that while Winn-Dixie had previously supplied software that automatically updated each employee pension plan account automatically, this was either “lost or corrupted” after it sold the company to the BSL Holdings consortium.

Essentially, the Bain report, which was completed in 2011, shows that the flaws in the City Markets employee pension plan, inherent when it was first formed in 1976-1977 by Winn-Dixie, came home to roost in 2008-2009 when the company hit financial trouble.

While the plan was a defined benefit version, meaning that staff contributed nothing and payments were left to City Markets discretion, its structure left it too close to the operating company. The pension plan was overseen by a Committee, consisting of City Markets directors and employees, who had the power to direct the trustees - themselves company insiders - over how assets were to be vested.

As a result, Mr Bain said “independent oversight” of the City Markets employee pension plan was limited. Among his recommendations in 2011 were that the plan be outsourced to independent fund managers, administrators and custodians, and that it be converted to a defined contribution version.

Noting that it represented a “continued heavy financial burden” to City Markets in its present form, Mr Bain recommended that employees be required to contribute to it, in amounts up to 5-10 per cent of their salaries, with the company matching these contributions.

None of these recommendations appear to have been acted on to-date, with the City Markets situation becoming a so-called “poster child” for the Government Bill, presented to Parliament last week, to regulate pension funds in the Bahamas.

The Bain report, though, raises questions about how the City Markets employee pension fund was handled during the BSL Holdings ownership. That consortium was headed by Trinidadian conglomerate, Neal & Massey (which took over from Barbados Shipping & Trading), while the Bahamian investors included the hotel industry pension funds, Royal Fidelity Merchant Bank & Trust, and Milo B Butler & Sons.

However, while no trustee from that time wanted to speak publicly on the pension fund when contacted by Tribune Business, they are understood to view the Bain report release as an effort by the Finlaysons to distract attention from their failure to meet their obligations to plan beneficiaries. The release also coincided with a Bay Street demonstration by City Markets workers, and the Pension Bill debate in the House of Assembly.

The BSL Holdings-era trustees are also understood to view Mr Finlayson’s continued threats to take legal action against them as mere ‘posturing’ or ‘sabre rattling’, as he has now had two years to act on the Bain report’s findings but has yet to do so.