The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government could reduce its combined civil service and public corporation pension liabilities by more than $2 billion come 2032, provided it enacts reforms to prevent a major financial and social crisis.

The Christie administration has been presented with two options, which it has yet to enact, to address the growing multi-million dollar public sector pensions deficit by KPMG.

The accounting firm’s presentation to the Government, which has been obtained by Tribune Business, suggests as a first option that it place all new civil service and public corporation hires into newly-created defined contribution pension plans.

This would close existing corporation plans, such as those at BEC and Water & Sewerage, to new recruits, while leaving existing employees - and their accrued benefits (liabilities) untouched.

However, KPMG suggests a second, more radical solution that would have a greater impact in terms of reducing the Government’s liabilities in providing retirement income for public sector employees.

In addition to placing new recruits into a defined contribution pension plan, KPMG calls for the Government to ‘cap’ the growth of pensionable salaries for existing workers.

It suggests that they be ‘capped’ at an annual growth rate of 2 per cent, with existing public sector employees given the ability to contribute any salary increase portion above 2 per cent into the defined contribution scheme.

By combining the ‘pensionable salary cap’ with closing existing pension schemes to new hires, KPMG forecast that the Government could reduce its accrued liabilities (retirement benefits that public sector workers have accumulated) by a total $2.01 billion in the 20 years to 2032.

It broke this figure down into a reduction in accrued civil service liabilities of $1.5 billion, while those owed to public corporation retirees would decline by $510 million.

Over a 10-year period, the accrued pension benefits owed to civil servants and public corporation staff were projected to fall by $365 million and $175 million, respectively.

This data compares favourably with the impact made by only placing all new public sector hires into a defined contribution plan. KPMG predicts that this would cut total accrued benefits by $115 million and $15 million, respectively, over the next 20 and 10 years, respectively.

With civil service pension liabilities forecast by KPMG to total $4.1 billion by 2032, and the collective deficit for public corporation schemes estimated at $1.6 billion that same year, the case for reform seems clear if the Government is to protect both its retirees and prevent a major ‘cash call’ on Bahamian taxpayers.

“Pension liabilities and cash outflows that the Government faces are unsustainable based on the current fiscal position,” KPMG warned the Government, which has possessed all these recommendations for more than three years. “Pension liabilities present significant financial and demographic risk to the Government.

“There is a need for better ongoing management of Government’s pension liabilities and reform is critical. Taking the immediate step of closing defined benefit plans to new joiners would limit potential long-term liabilities.”

KPMG argued that the combination of putting new hires into a defined contribution plan, and the ‘pensionable salary cap’, would have a greater impact in tackling already-accrued retirement benefits.

“Any reforms made to public sector pensions that do no impact accrued benefits will not result in significant reductions in cash flows in the short to medium-term,” the accounting firm added.

While the public corporations have defined benefit pension plans for their staff, the civil service does not even enjoy this. The latter effectively has a ‘pay-as-you-go’ scheme via the Government, where retirees’ pensions are funded out of the Consolidated Fund in the annual Budget.

But, with more civil servants projected to retire in coming decades, KPMG is forecasting that annual Budget spending on their pensions is set to increase from a current $60 million per annum to $142 million by 2032.

The report also warned that existing public corporation plans were outdated and ‘behind the times’, given that employees contributed nothing to their retirement, with 100 per cent of funding coming from their employer.

“Defined benefit pension provision is rare in the Bahamas outside government and the corporations, and is becoming rarer in most countries,” KPMG said.

“Surveys indicate that most Bahamian private sector plans are defined contribution, and that average employer contributions to private sector defined contribution pension arrangements are around 5.5 per cent of salary, whereas KPMG estimates that the average cost of benefit accrual in the public sector plans is around 15-20 per cent.”

Defined contribution pension plans require employees to contribute to their retirement, with employers matching the proportion of their salaries that is invested.

KPMG argued that getting public sector workers to contribute to their own pension plans would reduce the Government’s financial risk and burden.

It suggested that employee contributions start at 1 per cent, and increase to a maximum 5 per cent of salary over five years, to “minimise the impact on employees’ take home earnings”. It recommended the Government’s contributions be set at 10 per cent.

KPMG forecast that placing new hires only into a defined contribution plan would increase the Government’s cash outflows by $199 million and $39 million over 20 years and 10 years, respectively.

And combining this would the ‘pensionable salary cap’ would increase defined contribution outflows by $563 million and $113 million over 20 and 10 years, respectively. However, both figures are dwarfed by the reduction in accrued benefits/liabilities.