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Corporations Facing $1.6bn Pension Hole

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government-owned corporations will have a collective $1.6 billion deficit in their employee pension plans by 2032 unless urgent reforms are enacted, a report obtained by Tribune Business reveals.

The document, which was presented to the Christie administration by the KPMG accounting firm, provides stark evidence of the ‘ticking timebomb’ facing both employees of these corporations and the Bahamian taxpayer.

For in assessing the collective financial position of pension plans at corporations such as BEC and Water & Sewerage, KPMG estimated that within 16 years their collective $600 million in assets will be dwarfed by some $2.2 billion in liabilities, which represent benefits owed to present and future retirees.

“Accrued liabilities are expected to grow to around $2.2 billion over 20 years,” the KPMG presentation said. “Assets are expected to grow to around $0.6 billion over 20 years on the assumption that all corporations pay amounts equal to the cost of accruing benefits.”

This data, which has never been revealed publicly before, suggests that Government-owned Corporations and entities will incur a collective $1.6 billion in unfunded pension liabilities within 16 years, as opposed to the current $600-$700 million ‘gap’, if the status quo remains.

Apart from potentially impacting the retirement incomes and living standards of hundreds of Corporation employees and their families, the situation also threatens to impose an impossible financial burden on the Bahamian public and taxpayer if they have to be called upon to fill the gap.

To avoid the looming crisis, KPMG suggested that all existing corporation pension plans - their assets and liabilities - be transferred into a single, centralised plan, followed by the wind-up of the existing schemes.

The Government would support the new plan via an undertaking, with agreed contribution rates for past and future beneficiaries from the corporations.

KPMG said all financing risks would be transferred to the Government under this structure, with legacy funding commitments “treated as a fixed debt repayment in the corporations.

It added that “pooling” all existing plan assets and liabilities into one would boost investment and administrative efficiency, provide for greater control and transparency, and centralise governance.

“There are a wide range of benefit changes that could be made,” KPMG said of the Corporation plans, adding that there was “more flexibility” for reform here than with the civil service.

“Many will be challenging to implement, although some may be welcomed by employees.”

The situation facing the public corporations’ pension schemes also threatens to exacerbate the issues the Government faces in dealing with the unfunded pension liabilities relating to the civil service, plus police and Defence Force officers.

KPMG previously disclosed that unfunded public sector pension liabilities, which it currently estimates at around $1.5 billion, are set to increase to $2.5 billion by 2022, and $4.1 billion by 2032.

Add in the figure for the public corporations, and it appears that the Government’s total unfunded pension liabilities could be as much as $5.7 billion in less than two decades.

“Deficits in the corporations are also significant, and carry an implicit government guarantee,” KPMG said.

The accounting firm’s presentation, which Tribune Business has gone to great lengths to obtain, is dated late July 2013, meaning that the Christie administration has known of the looming crisis for at least three years.

However, despite recent warnings from the International Monetary Fund (IMF) about the need to prevent such liabilities from “crystallising” and adding to the Bahamas’ $6.778 billion national debt, they do not appear to be a current policy priority for the Government.

Michael Halkitis, minister of state for finance, has previously spoken to the need for public sector pension reform, but the current administration - and its predecessors - have done little to address what KPMG has described as akin to “the iceberg that sank the Titanic”.

“Such growth of public pension liabilities and cash outflows is not sustainable given the fiscal position of the Bahamas,” the KPMG presentation warned succinctly.

The accounting firm told the Government that unfunded pension liabilities were a major impediment to any efforts to privatise government corporations, given the financial costs potentially imposed on buyers, and also undermined the purchase price it might receive.

“One of the major hurdles for the Corporations in obtaining debt financing is the future cash outflow required to support pension arrangements,” KPMG said.

“Pensions are therefore a barrier to the capital plans of the Corporations. Further, in any future privatisation of a Corporation, a buyer is likely to take a cautious approach to assessing pension liabilities, impacting Government’s sales proceeds.”

The Government is already familiar with the consequences, given that it had to grapple with the Bahamas Telecommunications Company’s (BTC) $38-$39 million unfunded pension liabilities during the sale of 51 per cent majority control to Cable & Wireless Communications (CWC) in 2011.

This likely reduced the purchase price CWC paid to around the final $206 million, but the problems did not cease with the sale.

Under the terms of the deal, the then-BTC pension plan was to be closed to new entrants, who would be placed into a new one sponsored by the company. The Government was then supposed to take responsibility for ‘filling the hole’.

Yet Prime Minister Perry Christie recently bemoaned the alleged failure of the former Ingraham administration to cover the original $39 million deficit, alleging it had now ballooned to $99 million. The pension fund issue is also probably why the likes of Sir Franklyn Wilson have criticised the BTC sales price.

Meanwhile, the KPMG report also warns: “The Government has restricted control and visibility over the operation and financing of the Corporation’s pension arrangements.

“Decisions taken by Corporation Boards in union contract negotiations can (sometimes unknowingly) have severe impacts on pension liabilities.”

KPMG added that collective pension plan contributions among the corporations currently stands at $12 million per annum, with employees making no payments under these defined benefit schemes.

Describing the funding levels as “generally low” and deteriorating, the accounting firm said contributions were “not matching the accrual of benefits”. And some corporations were “relying on government subventions to finance current pensions”.

Comments

Sickened 5 years, 3 months ago

Our foolish government is like a stupid entrepreneur saying "I'm going to start a business and pay myself $1 million a year", even though the business will only have sales of $100 thousand a year. This fool will go around boasting that he earns $1 million a year when he knows full well that the business can't afford it.

Our government knows full well that it can't afford these 25% of salary pension plans (plus tip) but yet continues to hire new people and offer this ridiculous package.

Solution? I don't know all the steps, but I know the first one... STEP 1 - all new government employees must contribute to their pension plan and the government will only contribute up to 5% of your salary. HOW F'IN HARD IS IT TO PUT THAT IN PLACE???

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Well_mudda_take_sic 5 years, 3 months ago

I DON'T AGREE WITH YOUR STEP 1.

STEP 1 MUST BE ENSURING THAT NEITHER MINNIS, NOR CHRISTIE, NOR McCARTNEY EVER BECOME PM!

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screwedbahamian 5 years, 3 months ago

no problem, just do what "PAPPA DID" increase the amount of contributions to 1 billion retroactive to 1967 and that will eliminated having to pay any pensions to the Bahamian people. The Prime minister can then fly on their own 747 " Bahamas1" airplane worldwide and their own 650 gulfstream Learjet " Bahamas 11" to the out islands ( they are not our family islands)

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birdiestrachan 5 years, 3 months ago

A report obtained by this newspaper. it is fine . But when STB reports are found it goes to court. Could some one say what is the difference?When Mr: Ishmael Lightboure"s house
was foreclosed the news media had all of his business and there was much rejoicing now they are all over the place apologizing to Fried Bacon.

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Sickened 5 years, 3 months ago

Winter's coming buddy; time for you to start your journey South. I hear Venezuela's the perfect place for you.

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Honestman 5 years, 3 months ago

This whole situation is due to government corruption and the creation of unrealistic public sector pension benefits. Both FNM and PLP are culpable but the latter much more so. The only options available to any new administration are: raise NIB contributions, reduce pension benefits and increase the qualifying age for state pension. These measures will buy some time but that's all. There is no way that a deficit of $1.6 billion can be reduced (even over a generation) without extremely painful restructuring of the state pension. Shame on all corrupt politicians who have contributed to this sorry mess.

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banker 5 years, 3 months ago

Let's spell this out in simple terms. If you are due to retire in the next 6 years, there will be no money for you to do so. The unfunded pensions will total about 64% of THE ENTIRE ECONOMY or GDP.

There is no way now that they can fix the $1.6 billion. When it reaches over 60% of the entire economy, there will be old people starving because there will not be money to pay their pensions out.

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