Taxpayer burden to rise 33 percent to $219m by 2030

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

PENSIONS for thousands of Bahamian public sector workers are poised for a major shake-up in a bid to tackle “alarming” unfunded liabilities that could impose a $3.5bn burden on taxpayers come 2030.

Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business last night that these pension liabilities represent “the top risk” to the stability of the Government’s finances and need to be “dealt with as soon as possible” to reduce the threat that taxpayers will increasingly be called upon to plug this multi-billion dollar hole.

He spoke ahead of today’s consultation closure on the draft Pensions Bill 2023, which will end the present ‘pay-as-you-go’ pension scheme enjoyed by the Government’s near-20,000 existing civil servants through requiring them - for the first time - to contribute to financing their retirement from their own salaries.

The Ministry of Finance, explaining the background to the proposed legal reforms, revealed that financing the current system will increase the annual burden imposed on Bahamian taxpayers by 32.7 percent or $54m over the next six years as growing numbers of civil servants retire and become pension-eligible. The yearly funding bill is forecast to grow from $165m at present to $219m by 2030.

Civil service pensions are currently 100 percent financed by taxpayers through the annual Budget, and the Ministry of Finance said: “During the past two years, the Government’s mission has been to prioritise the containment of growth in relation to pension liabilities, aimed at reducing the burden on public sector finances. Currently, the Government carries an unfunded liability of more than $2bn.

“Pension consultant, KPMG Advisory Services, conducted a pension reform feasibility study on the Government’s pension scheme in 2013 which was revised in 2022. This study estimated pension liabilities for public sector employees would accumulate to $2.2bn between 2013 and 2020, and projected an increase to $3.5bn by 2030.”

As for annual payouts to civil service retirees, the Ministry of Finance added: “Future cash outflows are also projected to increase significantly, from approximately $165m currently to $219m by 2030 - including both pension payments and gratuities.

“In addition, Government-owned corporations have similar defined benefit pensions with annual cash outflows of approximately $10m. Given these alarming statistics, measures must taken to provide a sustainable solution to bring about reforms to the public sector pensions plan.”

Pension payments for the current 2023-2024 fiscal year were estimated at $134.744m, with gratuities adding a further $33.776m, to bring the total taxpayer- funded outlay to $168.52m. The latter figure is forecast to steadily increase to $173.44m in 2024-2025, and then to $175.413m the following fiscal year.

The Bill, if enacted as is, will create a contributory pension scheme called the Public Service Contributory Pensions Fund. Its members will include all new civil service hires after it is passed by Parliament, and becomes law, once they have completed their six-month probation, while all existing public officials who have held pensionable positions for less than eight years will also be transferred to the contributory plan.

Civil servants in pensionable positions for more than eight years can voluntarily choose whether to join the contributory scheme or retain their current arrangements. The mandatory contribution rate has been set at 3 percent of a plan member’s monthly salary, with the Government making a matching 3 percent payment.

Workers can also choose, on their own accord, to raise the contribution rate for their portion to a maximum 10 percent although this will not be matched by the Government. The Public Service Contributory Pensions Fund will be overseen by a Board, which will appoint an independent investment manager, fund administrator and custodian to manage and safeguard pension plan assets.

Membership in the Public Service Contributory Pensions Fund will not be confined just to central government civil servants. For new and newer employees at state-owned enterprises (SOEs), and what are described as ‘Approved Authorities’ in the Bill, will also participate in the scheme if the legislation is passed as currently laid out, which means thousands will be impacted.

Those who join these ‘Authorities’ after the Bill is passed into law, and becomes an Act, or who have been employed for less than eight years will automatically join the contributory plan. Again, those who have been employed for more than eight years can elect to participate voluntarily, with the ‘Authorities’ involved including the likes of the Central Bank, Bahamasair and the Public Hospitals Authority (PHA).

The list of ‘Approved Authorities’ features the National Insurance Board (NIB); University of The Bahamas; Bahamas Agri- cultural and Industrial Corporation (BAIC); Hotel Corporation of The

Bahamas; Water and Sewerage Corporation; Bahamas Development Bank; Bahamasair Holdings; the Royal Bahamas Defence Force; Bahamas Maritime Authority; and the Public Hospitals Authority (PHA).

Others named in the Bill include the Hospitals and Health Care Facilities Licensing Board; National Museum of The Bahamas; the Airport Authority; National Art Gallery of The Bahamas; Nassau Airport Development Company (NAD); Bahamas Mortgage Corporation; Insurance Commission of The Bahamas; Utilities Regulation and Competition Authority (URCA); Sports Authority and National Training Agency.

Rounding out the list are the Bahamas Public Parks and Beaches Authority the National Health Insurance (NHI) Authority; Bahamas Agricultural Health and Food Safety Authority; Aircraft Accident Investigation Authority; National Crime Intelligence Agency; Civil Aviation Authority; and Bahamas Air Navigation Services Authority.

The two major entities missing from this list are the Bahamas Telecommunications Company (BTC) and Bahamas Power & Light (BPL). BTC’s pension plan underwent a similar restructuring to a contributory scheme when it was privatised in 2011, but it is unclear why the BPL plan with its $120m deficit, as revealed by Jobeth Coleby-Davis, minister of transport and energy, was not included.

Mr Wilson last night told Tribune Business that the proposed reforms are “very important to stabilise our public finances, very important” given that in six years’ time they could potentially represent a further $3.5bn in unfunded liabilities in addition to the present $11.5bn national debt.

“This is probably the top risk to our public finances, pensions,” he reiterated. “The greatest risk is pen- sions, and the state pension deficit. It has to be dealt with as soon as possible.” The “risk”, which is akin to a ticking fiscal, economic and social time bomb, has been known for more than a decade given that KPMG’s first study was conducted in 2013, but successive administrations elected to pass on dealing with it.

Mr Wilson said he had yet to see written feedback on the Bill with consultation set to close today, but added: “I can tell you feedback from the SOEs and so forth has been very positive. We have wide gaps in our financial coverage in the public sector. This is an important step forward.”

Kimsley Ferguson, the Bahamas Public Services Union’s (BPSU) president, told Tribune Business he was preparing for a memorial service last night and wanted to review the legislation before commenting. However, one source familiar with the public service but speaking on condition of anonymity, warned the Government may face protests from existing civil servants over being transferred to the new scheme.

“It’ll be very interesting to see how that plays out with the unions and hundreds of existing civil servants,” they said. “I’d be surprised if the union head agrees with that. That is where the problems are going to be with those in the non-contributory pension. They’re going to scream and howl.

“A lot of them are tapped out with salaries now as they’ve maximised deductions and the like. For a lot of them, that 3 percent is going to be a chunk of what they take home now. I don’t think what they’re [the Government] doing is necessarily a bad approach as you want to populate it [the new scheme] with a cadre of people.”

Still, the source said there remain a number of unanswered questions in relation to the reforms. “What will be the impact of making the change?” they asked. “How is what you are doing going to mitigate against these entitlements? How will the taxpayer liabilities be reduced down? How is what you’re doing going to fix the underlying problem?

“We need something that speaks to the financial implications of that decision, and why it makes sense over other options. Will employees be just as well off at the end of the day?” On the latter point, Mr Wilson replied: “They might be better off actually. The current scheme is not portable. This is portable.”

Asked how much in savings will be generated for Bahamian taxpayers via the proposed pension reforms, Mr Wilson replied: “We haven’t sorted out the figure. We will make sure we get the legal framework approved, move forward and get some actuarial work done.” As for when the Bill may go before Cabinet, and then proceed to Parliament, the financial secretary said he has “no control” over that process.

The Ministry of Finance, in explaining the rationale for the reforms, said the draft Bill had been approved for consultation release following talks with public sector officials and their unions. “The proposed legislation seeks to transform from a non-funded, non-contributory pension scheme, to a funded and contributory pension plan for public servants,” it said.

“The objective of the proposed pension legislation is to provide for the establishment of a public service pension fund and a public service pension scheme. It aims to promote employee inclusivity, fiscal responsibility, accountability and efficiency in the management of the public sector finances through the implementation of a defined contributions pension scheme.

“The Pension Bill also seeks to provide for the governance, functions, organisation and management of the fund, to provide for the collection of contributions to the fund and payment of retirement benefits to pensioners and their survivors,” the Ministry of Finance added.

“The Pension Bill further seeks to provide for the investment of the monies of the fund and for related matters. In the current pension arrangement, under the Pensions Act, a number of challenges are presented relating to its exclusivity of certain categories of employees, and the unsustainable pension liabilities, owing to its non-contributory character by public servants....

“Given the extensive revisions required to address these concerns, it was agreed that it would be best to repeal the current Pensions Act and draft new pensions legislation that is in alignment with modern public service pension laws, and would improve the effectiveness of the Government’s fiscal policy outcomes.”