The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s unfunded $2.2 billion pension liabilities are “a significant fiscal risk” that could undermine efforts to get the public finances back on a sustainable footing, the International Monetary Fund (IMF) is warning.

The Fund, in its just-released full Article IV report on the Bahamas, said it was “inevitable” that the Government would have to reform both public sector pensions and the National Insurance Board (NIB) to defuse a potential social timebomb.

It warned that unless corrective action was taken, both schemes would become an unsustainable burden on the Bahamian taxpayer and society, with ageing populations and a reduced workforce exacerbating the problem.

“Fiscal risks emanating from public entities and the public pension system are significant, and could further exacerbate the debt path if they materialise,” the IMF warned of the potential impact on the Government’s fiscal consolidation efforts.

“The unfunded pension liabilities of the public pension system, amounts to around $2.2 billion (about 26.2 percent of GDP), and in addition to the implicit debt of the social security system [NIB], estimated at about 50 per cent of GDP in 2015, are projected to grow further in the next decades due to population aging.”

Neither issue is new, and successive governments have been warned repeatedly by Bahamian financial services professionals of the devastating consequences if nothing is done,

However, both PLP and FNM administrations have, to-date, both preferred to ‘kick the can down the road’ on both public sector pensions and meaningful, sustainable reforms at NIB.

In response to the latest Article IV review, the Christie administration was said to consider pension reform, and the creation of a defined contribution scheme, “an important objective”, and acknowledged the need to soon begin public consultation on the issue.

A defined contribution scheme would ensure that civil servants, together with police and Defence Force officers, contributed a portion of their income towards funding their retirement. Currently, most public sector pension schemes are of the defined benefit variety, which means that these are 100 per cent funded by the corporation or Bahamian taxpayer.

“Government pensioners (15 per cent of the public work force) receive pension payments from the Budget that, on average, stood at 1 per cent of GDP and 7.3 per cent of tax revenue per year in 1994–2014,” the IMF’s Article IV report said.

“The accrued pension liabilities [will total] $1.5 billion in 20121 (17.9 per cent of GDP). Pension payments and liabilities are projected to reach $230 million (1.5 per cent of GDP) and $3.7 billion (24 per cent of GDP), respectively, by 2030.”

The payments to civil service pensioners come directly out of the Government’s annual Budget, as no specific scheme has been set aside for them. This thus represents the “material risk” referenced by the IMF with respect to fiscal consolidation, should these liabilities crystallise.

As for the public corporations, the IMF said they were estimated to spend a collective $12 million annually on funding their employee pension schemes.

This, it added, exacerbated the $116.8 million in government subsidies granted to state-owned entities during the 2014-2015 Budget year, a sum equivalent to 1.4 per cent of Bahamian GDP.

“Their combined pension shortfall - unfunded component of future pensions - amounted to $0.7 billion (8.3 per cent of GDP),” the IMF report said.

“Pension costs, reportedly a drain on most entities’ cash flow, also impacts their viability, due to limited resources left for productive capital spending. Entities such as the Water and Sewerage Corporation (WSC), Bahamasair, and Bahamas Electricity Corporation (BEC) continue to record financial losses as a result of their public service mandates, operational inefficiencies and inadequate regulatory framework.

“Reflecting aged facilities and generous employment policies, their operating cost are noted to be particularly high while tariffs remain low, necessitating continued budget support,” the Article IV report added.

“Moreover, the pace of public entities reform is lagging, and could hamper efforts towards alleviating infrastructure bottlenecks, enhancing medium-term growth and stemming their drag on public finances.”

Turning to NIB, the IMF said its $1.6 billion reserve fund was equivalent to around 20 per cent of GDP, a sum that could cover 7.6 years of benefit payments without further revenue infusions.

“Compared with Caribbean peers, excluding Jamaica, the Bahamas’ NIB appears to lag behind in contribution rate, asset accumulation and administration cost,” the Article IV report added.

“However, as a result of low growth, high unemployment, relatively low contribution rate, and compliance issues, the income from contributions (2.7 per cent of GDP) can no longer finance total expenditure (3.3 per cent of GDP). Beyond 2033, the scheme is projected to run operational deficits as it matures.”

Old age pension benefits paid out to pensioners matched 2 per cent of GDP in 2013, with these persons equivalent to 23.4 per cent of the workforce. However, the IMF said “unfavourable” demographic trends would further increase NIB’s liabilities.

With life expectancy projected to rise to 79 per cent in 2030, the Article IV report said the “old age dependency ratio will increase four-fold from 9.4 per cent in 2010 to 38 per cent in 2075.

“Thus, under the current benefit rules, pension liabilities would become fiscally unsustainable in the next two decades, as a significant number of employees retire,” the IMF warned.

“Pension reform is inevitable. Staff analysis indicates that a parametric reform that raises the contribution rate by 1 per cent, freezes pension benefits for two years, and raises the retirement age from 65 to 67 years, if implemented together, will nearly wipe out the NI[B] implicit debt, estimated at 49 per cent in 2015, and put the pension scheme on a sound financial footing.

“The authorities should begin to take steps to implement policies that would contain increases in pension costs, and over the medium, term, gradually phase in more far-reaching reforms.”