The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s unfunded public sector pension liabilities will hit $4.1 billion by 2032 without proper reform, a leading accounting firm yesterday describing this as “unsustainable” and akin to “the iceberg that sank the Titanic”.

KPMG, in its analysis of the 2014-2015 Budget, said the existing $1.5 billion liability associated with unfunded civil service pensions was set to increase by a further $1 billion within the next eight years if the status quo remained unchanged.

With no formal pension fund supporting civil service workers in their retirement, KPMG revealed that the Government is currently covering these costs by paying out $60 million from its recurrent expenditure annually.

And, with another $25 million in staff gratuities having to be completely covered by the Bahamian taxpayer, KPMG said this collective $85 million liability was projected to increase by 64.7 per cent within eight years - hitting $140 million per year come 2022.

KPMG knows from where it speaks, having been contracted by the Ministry of Finance to conduct an assessment of its public sector pension liabilities - both current and projected.

While praising the Government for creating a committee to tackle and oversee public sector pension reform, KPMG’s Budget analysis warned: “The current unchecked growth in defined benefit pension liabilities can be likened to the iceberg that sank the Titanic.......

“Currently, Government employees in the public service receive a defined benefit pension, which is paid out of recurrent expenditures when they retire – in other words, there is no pension fund supporting these payments.”

Explaining the grave implications for the Government’s finances, and the Bahamas at large, if necessary reforms were not implemented, KPMG added: “Public service pension liabilities are estimated at $1.5 billion, increasing to $2.5 billion by 2022 and $4.1 billion by 2032.

“Annual payments out of recurrent expenditures amount to $60 million per annum, with staff gratuities totalling another $25 million.

“It is expected that these will increase to around $140 million by 2022 (less than 10 years away), as more and more current public service employees retire. Clearly, this is unsustainable.”

If the status quo remains, the unfunded public sector pension liabilities threaten to gradually squeeze the life out of the Bahamian economy, as they will potentially consumer ever-increasing tax dollars to fund them - a development that would have grave implications for citizens, the private sector and other areas of government spending.

And, if the Government chose not to meet its obligations, this would have major social consequences for civil service retirees and their families.

KPMG are not the first to express concerns about the public sector’s mammoth unfunded pension liabilities, an issue that has consistently been ‘kicked down the road’ by previous governments who have left it for their successors to deal with.

Raymond Winder, Deloitte & Touche (Bahamas) managing partner, told Tribune Business as far back as 2012 that the Government’s unfunded civil service pension liabilities will “explode” unless urgent reform action is taken.

He suggested in an April 2014 interview that the existing $1-$1.5 unfunded liabilities could lead some observers to suggest that the Bahamas’ national debt, currently pegged at $5.567 billion, was really as high as $6.5-$7 billion.

And Mr Winder told Tribune Business that the Government “cannot tax its way out” of the ticking public sector pensions timebomb, adding that the liabilities were likely “increasing at an alarming rate” annually.

He questioned whether the Bahamas had “the capacity and innovation” to deal with the problem now, rather than wait 10-15 years until it had become unsustainable and allow the likes of the International Monetary Fund (IMF) to impose a solution on it.

To tackle the problem, Mr Winder recommended in April that the Government move all new civil service/public sector recruits on to a defined contribution scheme - one where both employer and employee contribute monies to the latter’s pension.

He also suggested that the size of government be reduced to lower the number of pension beneficiaries, with departing civil servants not replaced unless absolutely necessary.

Most troubling, in the immediate sense, is the implications these massive liabilities have for the Government’s overall fiscal position. Given its antiquated cash-based financial reporting system, its financials (balance sheet) do not recognise future spending commitments, including its pension obligations.

Prime Minister Perry Christie announced in the 2014-2015 Budget that the Government was beginning the switch to an accrual accounting system, which would recognise future spending commitments already ‘set in stone’.

But the fiscal deficit and national debt are already being exacerbated by existing civil service pension obligations, as they are being paid out as part of the Government’s recurrent expenditure - a kind of ‘pay as you go’ scheme.

Given that the Bahamian economy’s per annum GDP is estimated at $8 billion, some $1.5 billion in unfunded pension liabilities are equivalent to 18.8 per cent of the former figure.

Adding these to the existing $5.5 billion national debt, and debt-to-GDP ratio of roughly 64 per cent, that puts the latter at over 80 per cent - well above the IMF’s ‘danger threshold’.