The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s unfunded pension liabilities have been described as “absolutely staggering”, a well-known financial expert noting they are projected to exceed 50 per cent of current GDP by 2032 without urgent reform.

Larry Gibson, vice-president of Colonial Pension Services (Bahamas), likened the numbers revealed last week by the KPMG accounting firm to “the piper showing up at your front door and saying: ‘Pay me’.”

He called on the Government to immediately place all new public sector hires into a defined contribution-type pension plan, ensuring those workers would contribute something towards their retirement income rather than relying 100 per cent on the Bahamian taxpayer.

As for existing public sector workers, Mr Gibson said a “commuted value” should be created via actuarial studies for all aged under 55, with the Government “catching up” with these liabilities over a specified time period.

He added that the Government’s unfunded pension liabilities, combined with the fact that 77 per cent of the Bahamian workforce lacks any form of retirement income, meant this nation was facing a true “ticking timebomb” that has been described as a ‘systemic risk’ by agencies such as the International Monetary Fund (IMF).

“Not only do we need private sector pension reform, but we need public sector pension reform immediately,” Mr Gibson told Tribune Business. “Those numbers [disclosed by KPMG] are absolutely staggering.

“At $1.5 billion, that’s about 18-20 per cent of GDP. As we stand, projecting out to 2032, that’s over 50 per cent of current GDP. That’s not sustainable at all.”

KPMG, in its analysis of the 2014-2015 Budget, said the Government’s unfunded public sector pension liabilities will hit $4.1 billion by 2032 without proper reform.

It added that 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 to $2.5 billion if the status quo remained unchanged. KPMG described this as “unsustainable” and akin to “the iceberg that sank the Titanic”.

Mr Gibson said the accounting firm’s report was the first time an effort had been made to “put some parameters” around the public sector pension liabilities.

With no formal pension fund supporting civil service workers in their retirement, KPMG had also 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.

There is not even a formal defined benfit plan, meaning the retirement incomes for retired - and about to retire - civil servants are being 100 per cent funded via the Government’s annual recurrent (fixed cost) expenditure.

Calling for immediate reform to what is essentially a ‘pay as you go’ system, Mr Gibson said the first step was to place all new public sector workers on to a defined contribution plan.

This would effectively see tham save a portion of their salary to finance their retirement, with the Government contributing a matching amount up to (typically) 5 per cent of workers’ wages.

A similar move was performed with the Bahamas Telecommunications Company’s (BTC) pension plan during the 2011 privatisation, with the old defined benefit scheme closed to new hires, who are now being placed on to the defined contributiobn variety.

Calling for “anything that’s sustainable”, Mr Gibson added: “What we need to do is start chipping away.”

Advocating for a full actuarial analysis to determine the precise dollar figure for the Government’s unfunded liabilities, the Colonial Pensions executive said a “commuted value” needed to be developed.

“Then you take these liabilities and fund them over a period of time, so you eventually start to catch up,” Mr Gibson recommended, “and they’re not a burden on any Budget. For those civil servants aged over 55, you have to let them run off.

“No matter how you approach it, it’s a significant liability and must be paid. Our debt-to-GDP ratio is close to 60 per cent, and when you add that [the Government’s unfunded liabilities] in, it’s a much higher number.”

Mr Gibson added: “The other point I want to make is that what makes this even more frightening is that these government liabilities are massive, but you’re only talking about 23 per cent of the workforce being covered [by a pension plan].

“What happens to the 77 per cent where these is no safety net? National Insurance is not going to do it, and there’s external pressure coming. Every time there’s an Article IV consultation [by the IMF] this is identified as a systemic risk. Like I said before, it’s a ticking timebomb.”

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.”

Mr Gibson said a detailed actuarial analysis might find the Government’s unfunded pension liabilities to be even higher than allowed for by KPMG.

He added that there were likely numerous government workers, in departments and areas such as local government, who were not covered by any form of retirement provision.

“There’s still a large number of people working for government not included in that number,” Mr Gibson said.

The Colonial Pensions executive co-chaired the private sector committee that developed pension reform proposals under the Ingraham administration. The current government then brought the subsequent Bill to Parliament for its first and second reading, but has held off on moving it through the legislative process as it assesses whether, and how, to make private sector pensions mandatory.

“We need to take pension reform much more seriously,” Mr Gibson told Tribune Business, noting that there was no assigned regulator for the multitude of employer-sponsored and other pension plans existing today.

“With the existing arrangements, there’s no proper oversight,” he added. “How many more implosions can we sustain? We have some well-documented cases now, but there could be more like that. It’s all part of a long-term fundamental reform that’s needed.

“The thinking is that we would present a package to the people that includes both private and public sector reform, as we cannot go on like this ad infinitum. It’s like the piper showing up at your door and saying: ‘Pay me now’,”

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.

Private sector pension plan administrators have subtly begun pushing for these reforms to be speeded up. This was the thinking behind RoyalFidelity Merchant Bank & Trust’s recent pensions breakfast, plus Colonial Pensions (Bahamas) recent event with Suze Orman.