The Tribune

By larry Gibson

Last Monday, both daily newspapers carried stories about our looming pension crisis which seemingly continue to fall on deaf ears. This is a topic which I, and others, have been warning of for years… yet nothing tangible has been done.

The baton, last week, was taken up by Messrs Simon Wilson, Ray Winder and Gregory Bethel all of whom like me have been trying to bring greater focus to this problem at the policymaking level. I have found over the years that there seems to be a view taken by successive policymakers that unless it affects to outcome of this next election…it can be deferred. This is often referred to as ‘kicking the can down the road’.

Scary Facts

The main fact emerging from those various stories is the reality that the current unfunded liability arising from promised civil service pensions is about $1billion of about 12.3% of Gross Domestic Product (GDP). If that number does not frighten you, it is estimated that if the status quo remains, that number could grow to $4 billion in ten years’ time. That is about 50% of this year’s GDP! It should be noted that the Government’s pension plan for its 20,000 plus civil servants is completely unfunded. What this means is that there are no assets set aside to cover

this liability. The Government operates on a pay-as-you-go system, which means that each year, it must raise through taxes, sufficient funds required to pay retiree benefits for that year.

The $1 billion figure does not include the unfunded pension liabilities of the government corporations, for which the Government is also ultimately responsible. Nobody is saying what the total unfunded liability for government entities truly is, but last week, the unfunded pension liability for BEC alone was said to be more than $80 million and Water & Sewerage more than $70 million (two years ago). The combined civil service and Government Corporation’s number could easily be $1.3 million to $1.5 billion as at December 31, 2013.

Who is going to pay those pensions? How will they be paid? Who will explain the broken promises?

Pension Gap

What is the Bahamas’ true pension gap? The Pension Gap is defined as gap between what is owed to retirees and what assets are set aside to pay them. For the private sector workers with no pension coverage at all… what additional safety nets will we have to put in place to avoid further social anarchy in the future, but more importantly what will be the costs?

In a February 2013 article in the Wall Street Journal entitled Why the Corporate Pension Gap is soaring, it was stated: “Across America’s business landscape, the gap between the amount that companies expect to owe retirees and what they have on hand to pay them was an estimated $347 billion at the end of 2012. That is better than the $386 billion gap recorded at the end of 2011, but the two years represent the worst deficits ever, according to J.P. Morgan Asset Management.” Put in different terms, these estimates indicate that private pension funds have assets equal to only 81% of their estimated liabilities.

In my last column, I reminded readers that 77% of our workforce does not have any pension plan whatsoever. What will happen to the uncovered 77%? By definition if private pension gap in the US is around 20%, the private pension gap in the Bahamas must be a very large number because of the very low percentage of the workforce with pension coverage.

For individuals, there is also a pension gap. In this case the gap represents the difference between what you will be receiving and the amount you will need to maintain a reasonable standard of living. A lack of preparation means that most retirees will experience a dramatic decline in their standard of living upon retirement.

More detailed analysis reveals that a significant proportion of the pension gap is generated by inadequate pension incomes for those close to retirement now (within 10 years of state retirement age). These individuals will not have time to build up adequate savings to close the pension gap before retirement and will need to consider drawing on non-pension assets, working longer or lowering their expectations in retirement. By contrast, younger people have more time to address the gap through increased savings; therefore, there is still time to address the issue.

Conclusion

The inaction of successive governments on the issue of pension reform has proven detrimental to our long term financial security. How long will we continue to ‘kick the can down the road’ as opposed to dealing with this most pressing issue? When history is written, many who would have had the opportunity to effect change…will be found wanting.

Until next week…

Tickets now available

Colonial Pensions will be hosting the world renowned, two-time Emmy Award winning financial talk show host, best-selling author and columnist, Suze Orman on May 17, 2014 at the Melia Cable Beach Resort. Ms. Orman will take the opportunity to prove that you can take control of your finances with simple truths about making priorities about your financial future which will help you to reduce your individual pension gap. Tickets are $35 and can be purchased from Colonial Pension Services, 3rd Floor Atlantic House, and 2nd Terrace & Collins Avenue. Call 502-7526 for full event information.

Until next week…

• Larry R. Gibson, a Chartered Financial Analyst, is Vice President - Pensions, Colonial Pensions Services (Bahamas) Limited, a wholly owned subsidiary of Colonial Group International Ltd, which owns Atlantic Medical Insurance Ltd and is a major shareholder of Security & General Insurance Company in The Bahamas.

“The views expressed are those of the author and does not necessarily represent those of Colonial Group International or any of its subsidiary and/or affiliated companies. Please direct any questions or comments to larry.gibson@atlantichouse.com.bs.