Ticking timebomb of $3.7bn pensions


Tribune Business Editor


The Government’s unfunded multi-billion dollar pension liabilities, projected to hit $3.7bn by 2030, were yesterday branded “a big time bomb waiting to go off”.

Robert Myers, the Organisation for Responsible Governance’s (ORG) principal, told Tribune Business that unfunded civil service pensions were threatening to send The Bahamas “bankrupt” unless swift corrective action was taken.

He spoke out after the International Monetary Fund (IMF), in its full Article IV report on The Bahamas, again warned that the current system - where civil servants contribute nothing to funding their retirement - is “unsustainable”.

The Washington DC-based Fund again listed civil service pensions, together with the public sector’s wage bill and loss-making state-owned enterprises (SOEs), as three key reforms that the Government must target if it is to reverse The Bahamas’ fiscal decline.

“The civil servants’ pension system is unsustainable,” the IMF warned. “Government employees draw pensions at retirement without contributing to the system while employed.

“Staff analysis in the 2016 Article IV Staff report noted that accrued government pension liabilities totaled B$1.5bn in 2012, and would rise to B$3.7bn by 2030 as the population ages.”

The IMF called for reforms that involve “moving to a contributory regime in the near term, and to a defined-contribution scheme in the medium-term”. This would require civil servants to contribute a portion of their salary to funding their retirement, rather than having this financed 100 per cent by the taxpayer through the Budget - as is done currently.

Mr Myers yesterday described these unfunded pension liabilities as the Bahamas’ “single biggest problem” alongside energy costs, the near-$8 billion national debt and $300 million-plus annual deficits, and accused successive administrations of “ignoring” the looming problem.

“That’s going to be a big time bomb waiting to go off,” the ORG principal told Tribune Business of the civil service pensions. “That’s a big issue that they just keep ignoring. The pension liabilities, outside of debt reduction and deficit reduction, it’s the single biggest problem we have.

“It’ll make the losses incurred by Bahamasair pale in comparison, or any of the others. You could take ZNS and all the others, add them together, and the [pension] liabilities would still be significantly bigger. If you look at those numbers, it’s tantamount to telling you that if you don’t deal with it you’re going to go bankrupt.”

The Government has known of its growing pension crisis for some time, but successive administrations have neglected to take any corrective action, instead preferring to ‘kick the can down the road’.

Tribune Business possesses a presentation delivered by the KPMG accounting firm in 2013, the early years of the Christie administration, which provided options for how the Government could arrest a growing liability that threatens to burden future Bahamian generations.

KPMG estimated the unfunded, ‘pay-as-you-go’, civil service pension liabilities at around $1.5 billion. These liabilities are set to increase to $2.5 billion by 2022, and $4.1 billion by 2032, unless reforms are enacted.

The IMF, for its part, said in 2016: “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 accrued pension liabilities [will total] $1.5 billion in 2021 (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. The 2017-2018 Budget allocates $95 million to pension payments, and projects that this sum will be held constant for the next two fiscal years.

The IMF’s 2018 Article IV report projects a $2.2 billion increase in these unfunded liabilities over the 18 years to 2030, which translates into an average increase of $122 million per year.

“If that doesn’t wake somebody up they probably shouldn’t be in the job,” Mr Myers said yesterday. “They’ve got to get that capped. You can’t afford to lose over $100 million per year.”

The IMF previously called for civil servants to contribute 5 per cent of their salaries towards their pensions, with the Government matching this sum, converting the system into the ‘defined contribution’ scheme most commonly used worldwide.

“Pension payments have trended up to an estimated 1.1 per cent of GDP in fiscal year 2017, and population aging will increase them further,” the IMF said last year. “Staff recommended transforming the civil servants’ pension system into a contributory regime in the near term, with contributions commensurate with benefits, and with a view to move to a defined-contribution scheme in the medium term. Setting contributions at 5 per cent of wages for pensionable employees could yield revenues for 0.3 per cent of GDP.”