The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s unfunded civil service pension liabilities will “explode” unless urgent reform action is taken, a senior accountant suggesting these could mean the national debt is really as high as $6.5 billion.

Raymond Winder, Deloitte & Touche (Bahamas) managing partner, told Tribune Business that the Government “cannot tax its way out” of the ticking public sector pensions timebomb, which is estimated to be worth $1 billion and growing daily.

Mr Winder, who has previously addressed this issue at length in Tribune Business, said the unfunded civil service pension liabilities were likely “increasing at an alarming rate” annually.

He questioned whether the Bahamas had “the capacity and innovation” to deal with the problem now, rather than wait 10-15 years until it had become unsustainable and allow the likes of the International Monetary Fund (IMF) to impose a solution on it.

To tackle the problem, Mr Winder recommended that the Government move all new civil service/public sector recruits on to a defined contribution scheme - one where both employer and employee contribute monies to the latter’s pension.

He also suggested that the size of government be reduced to lower the number of pension beneficiaries, with departing civil servants not replaced unless absolutely necessary.

Most troubling, in the immediate sense, is the implications these massive liabilities have for the Government’s overall fiscal position. Given its antiquated cash-based financial reporting system, its financials (balance sheet) do not recognise future spending commitments, including its pension obligations.

Indeed, the fiscal deficit and national debt are already being exacerbated by existing civil service pension obligations, as they are being paid out as part of the Government’s recurrent expenditure - a kind of ‘pay as you go’ scheme.

Given that the Bahamian economy’s per annum GDP is estimated at $8 billion, some $1 billion in unfunded pension liabilities are equivalent to 12.3 per cent of the former figure. Adding these to the existing $5.5 billion national debt, and debt-to-GDP ratio of roughly 64 per cent, that puts the latter at over 75 per cent - well above the IMF’s ‘danger threshold’.

“It just lets you know that there are liabilities that are continually accruing to the Government that are not factored into the normal debt-to-GDP ratio, and this is one of them,” Mr Winder told Tribune Business of the unfunded civil service pension liabilities.

“This is unsustainable, and at some point in time the Government will have to reduce these obligation, as it will not be able to continually pay them.

“The question is whether we have the capacity, creativity and innovation to deal with it today, or wait until some time when some external party imposes more measures on us to deal with it.”

Tribune Business has continually urged the Government, for many years, to tackle its unfunded civil service pension liabilities. And this newspaper revealed last year that the ‘hole’ was estimated to be around $1 billion, the confirmation of this value by a senior civil servant last week causing little surprise.

Acknowledging that the Government had been including civil service pension payments in its normal financial spending, Mr Winder said such accounting methods were “not sufficient or adequate” because they did not account for the likely obligations in five to 10 years’ time, and the extra funding required to meet these.

To ease the burden, Mr Winder suggested that the Government re-hire “productive” civil servants who had reached retirement age as a means of deferring pension payments to them. Such a move would also save the salary costs incurred in hiring a replacement.

The downside of such action, the Deloitte & Touche (Bahamas) managing partner admitted, was that it blocked younger civil servants from acquiring the necessary skills and advancement in the public sector.

“Every time someone retires, the Government should be asking: Do we need to fill that position?” Mr Winder said. “To the extent the Government can be efficient and not fill that position, the Government can reduce the potential for that cost to explode on them.

“If every time someone retires the Government has to fill that vacancy, it is heading down a path that is going to explode at some point in time.”

Retiring civil servants are currently paid a ‘defined benefit’ pension, which effectively assigns an “actuarial value” to them. The Government is committed to paying them a pension calculated on a formula involving years of service and final salary, with the state assuming 100 per cent of the burden (civil servants contribute zero dollars of their own income).

Mr Winder instead urged the Government to switch all new hires to a defined contribution plan, the type now in vogue in the private sector. Here, employees contribute a portion of their own income to their pension, with the employer matching it up to a threshold usually set at 5 per cent of salary.

The Deloitte & Touche (Bahamas) said the plight of defined benefit schemes at the Government-owned utility corporations had exposed how precarious the situation is.

Advisers to the Bahamas Electricity Corporation (BEC) privatisation have pegged the deficit in its employee pension plan at $81 million, meaning these are liabilities not supported by assets/monies currently belonging to the plan.

And the Water & Sewerage Corporation’s last published accounts, for the 2011 financial year, showed a pension plan deficit of more than $70 million.

The issue also reared its head in the Bahamas Telecommunications Company’s (BTC) recent privatisation. As part of the deal, the Government and Cable & Wireless Communications (CWC) had to close BTC’s existing defined benefit plan to new employees and create a new defined contribution structure. And some $39 million had to be placed into a trust structure by the Government to fill the unfunded liabilities in BTC’s existing pension plan.

The Central Bank of the Bahamas, too, recently revealed it was facing an “unsustainable” employee pension contribution rate of 20 per cent, following strong union objections to recent adjustments.

Mr Winder told Tribune Business that apart from being one of the greatest challenges to privatising state-owned utilities, unfunded pension liabilities “tend to eat up a lot of what is received from the privatisation”. In other word, the net benefits/proceeds the Government receives from selling such assets are much reduced.

Arguing that Bahamians ought to be “very, very concerned” about the situation, Mr Winder said: “This obligation is growing faster every year than the year before, because the Bahamas is gradually becoming an older nation.

“We’re not only living longer, but we have more people employed today than we did before, so this number could be increasing at an alarming rate on an annual basis.”

Urging the Government to improve efficiency and reduce the civil service’s size, Mr Winder said it would be unable to tax its way out of the pensions hole.

“No amount of taxes could potentially dent this problem if we do not take steps to control it and reduce it,” he told Tribune Business. “This is not something we can tax ourselves out of.

“So the question is: Do we deal with it now, or wait until 10 years later or 15 years later, when it becomes a disaster situation, and we have to look at it in the same way as larger countries who’ve allowed their situation to deteriorate to the point where it’s totally unsustainable.

“This is probably one of the biggest challenges for the Government.”