By NEIL HARTNELL
Tribune Business Editor
The government is in the process of hiring consultants to study the feasibility of making civil servants contribute financially to their own retirement via a defined contribution pension plan.
KP Turnquest, deputy prime minister, told Tribune Business yesterday that while no final decision had been taken the government was mulling such reforms as it grapples with the multi-billion liability presented by unfunded civil service pensions.
While unsure whether all responses to the consultancy request for proposal (RFP) have been received, Mr Turnquest said: “We want to update a study done in a previous period with respect to converting to a defined contribution plan. Hopefully we will have that study, and finalise our planning and progress around that.”
Asked whether the government was exploring changes that will require civil servants to help fund their own retirement, the deputy prime minister described this as an “unconfirmed thesis” but added: “The government has not made any final decision about that, but it’s in line with the general thinking I believe.”
The Minnis administration has little choice but to tackle an issue that could ultimately sink the government’s finances once these multi-billion dollar liabilities start to become due in the next ten to 15 years.
Defined contribution pension plans, which virtually all companies and public sector entities now employ, require employees to contribute a portion of their own salary towards their retirement. These are matched by employers, although their contribution is usually capped at five percent of the worker’s salary.
However, the current system for Bahamian civil servants is more “a pay as you go” with funding currently worth around $100m a year allocated to retirees every year in the budget. Reform will be especially difficult given the potential opposition from many in the civil service, plus the existence of union contracts.
The International Monetary Fund (IMF) has for several years, with increasing urgency, been prodding the government to address the multi-billion dollar liability it and Bahamian taxpayers face as a result of unfunded civil service pension liabilities.
Previous research by the KPMG accounting firm suggests this unfunded liability is now likely to be approaching $2bn, with this sum set to increase to $2.5bn by 2022, and $4.1bn by 2032, unless reforms are enacted.
The IMF, for its part, said in 2016: “Government pensioners (15 percent of the public work force) receive pension payments from the budget that, on average, stood at one percent of GDP and 7.3 percent of tax revenue per year in 1994–2014.
“The accrued pension liabilities [will total] $1.5bn in 2021 (17.9 percent of GDP). Pension payments and liabilities are projected to reach $230m (1.5 percent of GDP) and $3.7 billion (24 percent of GDP), respectively, by 2030.”
Its 2018 Article IV report projects a $2.2bn increase in these unfunded liabilities over the 18 years to 2030, which translates into an average increase of $122m per year.
Mr Turnquest, meanwhile, yesterday said the unfunded civil service pension liabilities “belong in the same bucket” as the obligation to inject $39m into the now-closed Bahamas Telecommunications Company’s (BTC) former defined benefit employee pension plan - a commitment two previous administrations have failed to meet.
The Ingraham administration committed to place the money into a feeder trust to cover the plan’s deficit as part of BTC’s sale to Cable & Wireless Communications (CWC) in 2011, but this sum was never paid.
Former prime minister, Perry Christie, said this obligation had ballooned to $62m and $99m in 2014 and 2016, respectively, but his administration also failed to pay. The Minnis administration has now allocated $3m in the 2019-2020 budget to start dealing with this as it works on a “multi-year” strategy to cover the balance.
Mr Turnquest said new actuarial valuations will have to be performed to determine the size of the now-closed BTC plan’s deficit, confirming that it will increase the existing $360m in unfunded arrears that the government is paying off through the 2020-2021 fiscal year.
“This is an added commitment,” he said. “However, just like with the arrears, we’re going to pay that out and liquidate it as best we can. It’s now becoming more significant as more and more of these persons in the pension plan start to retire. It is a priority, absolutely.”
The deputy prime minister said he became aware of the government’s unmet BTC pension obligation last year during a meeting with the company’s executives when the issue was raised.
“It’s one of those issues where I don’t know if we have an actuarial valuation; that’s part of the issue,” he told Tribune Business. “We can’t pay unless we know what the hell it is we’re paying, and when the commitment is going to come to fruition and crystallise.
“I wouldn’t say it’s a surprise but it’s one of these things you try to manage. It is an unfortunate liability we’ve inherited, and a commitment we’re going to have to deal with. It’s no different from the liability we have for pensions for public servants. You can put it in the same bucket, quite frankly.”