The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The National Insurance Board (NIB) has been advised not to increase contribution rates in the short-term, for fear that the extra revenues generated will be wasted on “inappropriate investments and increased administrative costs”.

The NIB’s ninth actuarial review, conducted by recently-departed in-house actuary Derek Osborne, effectively warned that increased income from a rise in contribution rates would likely be squandered by government, and politically-led, profligacy.

In a little-noted section of the report, Mr Osborne acknowledged that while it was tempting to increase NIB contribution rates as a way to enhance the $1.6 billion reserve fund’s long-term solvency, other areas deserved more immediate attention.

“While an immediate contribution rate increase may be enacted as a means of improving short-term finances and enhancing long-term sustainability, there are significant risks involved with further advanced funding of future benefits,” the actuarial review said.

“Firstly, generating additional income may provide opportunities for inappropriate investments and increases to administrative costs. Also, with increasing annual surpluses, suitable investment vehicles will have to be found.

“A larger Fund, which has difficulty finding investment opportunities, could therefore open itself to demands from Government and quasi-government agencies to borrow funds at below market rates.”

And the review added: “With the above risks and the potential for poor governance practices that may result in imprudent investments and escalating costs, a contribution rate increase is not recommended at this time.

“Instead, it is recommended that initiatives aimed at improving contribution compliance, reducing administrative costs and diversifying the investment portfolio be adopted.”

Setting out a more nuanced process, Mr Osborne urged that NIB adopt a 10-15 year policy of not withdrawing from its reserves to meet current expenditures, and instead only adjust contribution rates if the following year’s spending was forecast to exceed both this and investment income.

This, he forecast, would require 0.5 per cent contribution rate increases every year starting from 2018.

“The recommended financing strategy for the next 10 to 15 years is to increase the contribution rate in steps of 0.5 per cent to 1 per cent per annum if the following year’s budget suggests that total expenditure will exceed total income,” Mr Osborne wrote.

“With assets of over $1.6 billion, NIB may appear to be an institution that can afford to hire more people than it needs, pay more for contracts than another organisation would, and invest in securities where the risk/reward trade-off suggests that it is not prudent to do so.

“This is not the case. For NIB to consistently deliver on its future obligations without having to levy exorbitant contribution rates in the future, a firm commitment to implementing and following a good governance framework at all levels is required.”

Mr Osborne recommended that NIB set a goal of having overseas investments account for 20 per cent of the total within 10 years, compared to the 7 per cent of investment assets held internationally at end-2012.

However, his report noted that all National Insurance Fund asset allocations were outside the target ranges set by the most recent NIB investment policy guidelines.

For instance, NIB’s investments in Bahamian government bonds, and corporation fixed income securities, accounted for 66.6 per cent or two-thirds of investment assets at end-2011, outside the 40-60 per cent guidelines.

And investments in non-government fixed securities accounted for 15.8 per cent of the total, compared to 4-10 per cent stipulated by the investment policy guidelines.

“Although there has been slight improvement in asset diversification since 2006, National Insurance Fund assets remain too heavily invested within the Bahamas, and too heavily invested in Bahamas Government and public corporation instrument,” the review said.