The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A top accounting firm yesterday said the Government’s mid-year Budget statement had effectively ignored the growing $1.5 billion public sector pension fund deficit, despite projections showing it will hit “unsustainable” levels within less than 10 years.

KPMG, in its review of the Government’s latest fiscal pronouncements, said Prime Minister Perry Christie’s address was silent on an issue his administration had identified as a priority, with forecasts showing the ‘hole’ will grow by another $1 billion within seven years.

The Government’s public sector (civil service) pension liabilities are the unspoken ‘ticking timebomb’ that lie buried underneath the Bahamas’ existing fiscal crisis.

As Tribune Business has previously reported, there is no formal pension scheme for Bahamian civil servants, meaning that the Government has to fund their retirements out of its annual recurrent (fixed cost) expenditure.

This effectively means that civil service pensions are almost a ‘pay-as-you-go’ system and, without a structured pension scheme to fund them, it places an ever-increasing burden and drain on the Bahamian taxpayer.

KPMG, which itself had flagged public sector pension liabilities as a major problem post the 2014-2015 Budget, reiterated that without urgent reform these would hit $4.1 billion by 2032.

It added in its mid-year update that the Government is currently allocating $85 million worth of its annual recurrent spending to civil service pension, a figure it forecasts will grow by 64.7 per cent to hit $140 million by 2022.

“The Prime Minister was silent on the issue of pension liabilities, though this had already been announced as a major initiative by the Ministry of Finance,” KPMG said of the mid-year Budget statement.

“In our review of the full year Budget last year, we noted that the pension issue can be likened to the iceberg that sank the Titanic.”

The Government’s current financial statements, which are produced on a cash as opposed to accrual accounting basis, do not recognise its civil service pension liabilities or their scale.

This, arguably, means that the Bahamas’ fiscal woes are far worse than they currently appear, especially if the existing $1.5 billion pension liability is added to the $6 billion national debt.

Doing so would push the Bahamas’ national debt beyond the $7.5 billion mark, easily breaching the 70 per cent debt-to-GDP ratio ‘danger threshold’ identified by the International Monetary Fund (IMF) as a point when countries start to lose control of their financial affairs.

Detailing the problem’s root causes, KPMG said in its newly-released mid-year Budget review: “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. Further, most Government entities that do have pension funds find themselves with large deficits.”

Turning to the numbers, the accounting firm 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 $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.”

KPMG is not alone in its concern over unfunded civil service pension liabilities, and the Government’s failure to-date to provide for them.

Raymond Winder, Deloitte & Touche (Bahamas) managing partner, has repeatedly raised the same concerns via articles in Tribune Business. While the Government has indicated it is aware of the problem, it appears to have taken little visible action to combat it to-date.

Any solution will likely involve creating a defined contribution pension plan to which civil servants will have to contribute a portion of their salaries, with the Government matching these payments.

All existing and future civil servants will be transferred to this plan, with retirees continuing to be funded by the taxpayer from the Treasury purse.

The longer reform is delayed, the greater the difficulty and pain in effecting the necessary change, as the Government’s unfunded pension liabilities are set to increase sharply as more civil servants retire.