Thursday, July 11, 2019
By NEIL HARTNELL
Tribune Business Editor
Bahamians face paying “another tax on society” to support the near-75 percent of workers not covered by an employer-sponsored pension plan, a leading investment banker has warned.
Michael Anderson, pictured, RoyalFidelity Merchant Bank & Trust’s president, told Tribune Business that the Central Bank’s latest private pensions survey had again highlighted the need for Bahamians to “start sooner rather than later” when it came to building savings for their retirement.
He said the survey, which found that just 25.7 percent of Bahamian workers were covered by an employer-sponsored plan in 2017, underscored the urgency with which this nation needed “to make inroads into what will be a significant problem in the future”.
Mr Anderson added that Bahamians with either insufficient or no retirement savings will face “a deterioration” in their living standards and quality of life, ultimately becoming an increasing financial burden on their families, the state or both.
To prevent such financial dependency, the RoyalFidelity chief urged The Bahamas to finally complete a 22-year effort to introduce legislation that will regulate private pension schemes as a starting point.
The last attempt, the Employees’ Pension Fund Protection Bill 2012, was said by the Central Bank to still be “awaiting approval prior to implementation”, and Mr Anderson suggested that the initial focus be placed on provider regulation before seeking to make it mandatory for all working Bahamians to pay into a retirement plan.
The Central Bank survey confirmed that the two largest national savings pools remain private bank deposits and the National Insurance Board (NIB), but Mr Anderson argued that the latter was “woefully inadequate” when it came to meeting Bahamians’ retirement needs. Most bank accounts, too, fell into this category as 75 percent contained less than $10,000 savings.
The report, which exposes how little progress The Bahamas is making in developing a savings culture that ensures more of its people are comfortable in old age, revealed that as many as 150,000 to 160,000 working Bahamians - based on recent Labour Force Survey data - have currently made no formal financial preparations for their retirement.
“During 2016, the number of private pension scheme participants rose by an estimated 1,403 (2.8 percent) to 50,876,” the Central Bank said. “In the following year, participation strengthened by a projected 1,487 (2.9 percent) to 52,363.
“As a proportion of the employed labour force, the fraction of workers covered in these schemes contracted by one percentage point to approximately 26.4 percent in 2016, and by a further 0.7 percentage points to 25.7 percent in the following year, underscoring more disproportionate employment creation in positions not offering this benefit.”
These percentages have changed little from previous surveys, with the Central Bank’s latest 2016-2017 survey providing more evidence of the “ticking timebomb” faced by Bahamian society and its economy unless immediate action is taken to improve the national savings rate and turn persons away from excessive consumption.
The regulator added that “funds received from private schemes”, along with personal savings from insurance annuities and NIB benefits, often provided the main sources of retirement savings for Bahamians.
“The supplementary importance of private savings is accentuated by the fact that NIB’s contributions are calculated on insurable earnings, capped at $670 per week as at July 2018,” the Central Bank said.
“For employees outside the civil service who do not participate in private pension schemes, the most significant expected sources of retirement resources are bank deposits, assets of domestic credit unions and insurance annuity products.”
Mr Anderson, whose merchant bank offers pension management and administration services, said the proportion of working Bahamians covered by a formal pension plan was likely to be slightly higher than the 25.7 percent figure cited by the Central Bank for 2017 because some would set up their own individual schemes or buy into vehicles such as mutual funds.
Still, he told Tribune Business: “I think it goes without saying that persons without a formal pension plan become beneficiaries of the state, and the country ends up paying for those people. It’s a significant problem for any country.......
“The National Insurance Board, when it comes down to it, is woefully inadequate to meet these obligations. Other places, such as Cayman, have made pensions mandatory. The Government has to look seriously at putting pensions legislation in place and making inroads into what will be a significant problem in the future.
“There’s no good time for this thing to start, but the sooner we start the better. We’re already significantly behind, and if we don’t start now we will be in future trouble.”
The Central Bank report itself said that the low 35 percent response rate, with just 49 out of 140 existing and potential pension plan sponsors responding, “underscores the importance of concluding and activating the regulatory framework for private schemes”.
It added: “Currently, the draft Bill for pension fund regulation - the Employees’ Pension Fund Protection Act 2012 - is still pending approval prior to implementation. The Bill would permit more comprehensive monitoring of activities, especially as it relates to smaller plans.
“As contemplated, the regulatory framework for private pension plans would also reinforce mandates for prudent management practices within private schemes.”
Mr Anderson said attempts to regulate the Bahamian pensions industry spanned at least 22 years given that he saw his first draft legislation in 1997 when the company was called Fidelity Pension and Investment Services. “None have made it to the end,” he added.
He suggested that the Government focus its initial efforts on regulating pension plan sponsors, managers and administrators before seeking to determine the “participation rate” and whether to make it mandatory for all employers, or all Bahamian workers, to either offer or enroll in such schemes.
Asked about the consequences for those with insufficient retirement income, Mr Anderson told Tribune Business: “It’s just like a deterioration in your way of life as you get older and more reliant on state benefits.
“People need to start looking at the massive cost of going through life without a job at the end. It is a huge problem. People don’t die; they end up being poorer and need help, and the country has to pay more towards that.
“It takes the private sector to step in and help build additional retirement savings, or otherwise you will put another tax on society.”
The Central Bank survey identified a further concern in that the rate of increase in pension benefits paid out to beneficiaries appeared to be greater than the contribution growth rate.
“With respect to the net financial obligations to pensioners, the estimated dependency rate, which measures pensions paid as a percentage of funding contributions, rose from an estimated 56.1 percent in 2015 to 59.8 percent and 63.7 percent in 2016 and 2017, respectively,” it said.
“In this regard, the rate of increase in the benefits paid out to pensioners appeared to exceed the rate of growth of contributions made by current participants.” Mr Anderson suggested this was caused by the continuing presence of under-funded defined benefit plans, especially at state-owned enterprises such as BPL and Water & Sewerage, where employer contributions were insufficient to cover benefit payouts.
The RoyalFidelity chief said the relatively low growth rate of total private pension assets in The Bahamas showed that this nation was “not increasing its ability to fund pension liabilities”, as it was barely higher than the annual inflation rate.
“Preliminary data indicates that the total value of private (sponsored) pension assets grew by 3.1 percent in 2016 to approximately $1.128bn, and by a further 3.9 percent to $1.173bn in the following year, outpacing the modest growth noted in the domestic economy,” the Central Bank said. “At end-2017, plan assets stood at an estimated 9.7 percent of GDP, increasing from 2015’s 9.3 percent of GDP.”