The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government yesterday moved to revive long-awaited public sector pension reform in a bid to halt growth in unfunded liabilities that now stand at $3bn through the creation of a scheme where civil servants will help finance their own retirement.

A so-called ‘white paper’ outlining the latest reform proposals, tabled in the House of Assembly by Michael Halkitis, minister of finance, after the 2026-2027 Budget’s unveiling calls for qualifying civil servants to contribute a mandatory 3 percent of their monthly salary to a new defined contribution scheme with the Government injecting a sum equal to 5 percent of their earnings.

The move will ultimately phase-out the existing ‘pay as you go’ civil service pension where public officials pay nothing towards their retirement which, instead, is financed 100 percent by Bahamian taxpayers from the annual Budget. Pension payments to public officials were pegged at $154.434m for the current 2025-2026 fiscal year, with some $113.917 of this amount paid out during the first nine months, and this is forecast to steadily increase over the next three years to hit $166.75m by 2028-2029.

And, with unfunded civil service pension liabilities forecast to increase by another $1.1bn over the next six years to hit $4.1bn by 2032, change is becoming ever-more critical to resolve what Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business in an April 5, 2024, interview is “the top risk” to the stability of the Government’s finances and need to be “dealt with as soon as possible”.

“The continued growth in pension liabilities and cash outflows is fiscally unsustainable,” the Government’s ‘white paper’ asserts. “With annual cash outflows of $184m and accrued liabilities for pension benefits estimated at $3bn, and projected to grow to $4.1bn by 2032, the Government’s financial capacity is increasingly strained.

“Also, significant deficits within the Government-owned corporations - many of which carry implicit government guarantees - further compound the liability burden with net pension liabilities estimated at $396m.” The latter figure was calculated in 2020-2021, and is likely to have grown significantly since then.

Mr Halkitis, in providing headline details for how the new defined contribution scheme for civil servants will work, confirmed that the mandatory contribution rate for officials will be a minimum 3 percent of their salary with the Government contributing 5 percent.

“As we look ahead to build upon what we achieved over the past five years, we are excited to embrace further reforms, including enhancing the public sector pension system, ensuring it benefits every public officer,” he told the House of Assembly.

“This reform is a positive and necessary stride toward securing our financial future and providing greater peace of mind for public officers. By addressing the pressures of the current pension model and ensuring comprehensive coverage, we are laying the foundation for a brighter and more secure tomorrow.

“In our new approach we are proposing a contributory pension fund, with employees investing 3 percent and Government contributing 5 percent. This system will feature individual accounts and enhanced protections for workers and their families, empowering them to plan confidently for their retirement,” Mr Halkitis added.

“Our next steps in continuing this reform include finalising the legal framework and tabling the White Paper today, marking another milestone in our shared journey toward progress and prosperity for all Bahamians.” Tribune Business records show that civil service pension reform has been discussed since 2012 at least, when the second Christie administration took office, but it has taken 14 years to reach the point where widespread consultation on the reforms has launched.

The new plan, to be called the Contributory Public Sector Pension Fund (CBBP), will be created by legislation modelled on the Pensions Bill 2025 that is now set to be revived. Initial plan members will be civil servants “not yet vested” in the existing civil service pension plan, plus future hires and those workers who want to opt in. Each participant will have an account, the contents of which will “fully vest” in them upon retirement, early retirement, disability, death or meeting other qualifying criteria.

The central government currently employs more than 23,000 civil servants, and the ‘white paper’ added: “Pension obligations limit the ability of the Government and Corporations to secure financing, thereby forming a barrier to investment, development and progress.

“The existence of significant pension liabilities and the future cash outflows required to support pension arrangements have the potential to adversely affect external investors’ view of The Bahamas to the extent that they are viewed as an implicit debt. This can affect credit ratings, and both limit and raise the cost of financing, as well as hinder the ability to execute other types of transactions such as privatisations.”

Acknowledging that defined benefit pension schemes, such as the ones currently in place within the Government and most state-owned enterprises (SOEs) where the employer finances 100 percent of retirement costs and the employee pays nothing, are “rare”, the ‘white paper’ said the proposed reforms will bring the public sector into line with the Bahamian private sector and the rest of the world.

“The Government has limited visibility and purview of the operation and financing of the corporations’ pension arrangements. Decisions taken by corporations’ Boards in contract negotiations can, sometimes unknowingly, have severe impacts on pension liabilities. This lack of transparency and control presents a governance challenge and heightened financial risk,” the Government’s ‘white paper’ added.

“Pension liabilities present significant financial and demographic risk to the Government. Financial exposure is driven by inflation and salary growth. Additionally, demographic risks stem from increasing life expectancy and changing retirement patterns, both of which often extend the period over which benefits should be paid.

“Benefits currently provided by the existing public sector pension scheme are low for employees who leave public service before reaching retirement. This disincentivises people from changing careers and discourages labour force mobility, potentially leading to inefficiency and stagnation in development across various industries and sectors.”

However, the Government conceded that not all its employees may welcome pension reform as the existing ‘pay as you go’, fully taxpayer-financed structure provides greater assurance over their likely level of retirement income. “There is greater certainty for employees over the level of retirement income under the current system,” the ‘white paper’ said.

“Under the proposed contribution-based pension plan, it is not possible to predict with certainty what level of income the member will receive at and/or in retirement, as benefits will depend on contributions and investment performance. However, the proposed CBPP provides Government with greater predictability over its financial obligations and helps avoid unfunded liabilities associated with the current scheme.”

The Government said it thus has little alternative but to “contain the growth in pension liabilities to reduce the burden on public sector finances”. It added that the CBBP’s creation will “reduce administrative and financial inefficiencies associated with multiple corporations operating separate pension plans or savings arrangements”, and “regularise staff of decentralised bodies currently without a pension or gratuity” such as local government or school Boards.

The ‘white paper’ said labour force mobility and pension governance should also improve under the proposed reforms. It added that the CBBP would be overseen, and governed, by an independent Board and employ private sector investment managers to invest contributions and generate returns to support retirement incomes.

“The Bill will set out the various investment classes in which the CBPP may invest and those in which it may not invest,” the Government’s ‘white paper’ stipulated. “In particular, the Bill will prohibit investment of the CBPP’s assets directly in real estate.

“Investments are not restricted to government assets. However, there will be strict limitations on investments made in higher yielding and volatile investments. In due course, it is intended that the CBPP will permit investment in such asset classes to be made only from surpluses derived from the interest income of the CBPP’s assets….

“Administration expenses will be met from investment returns. Administrative expenses will be limited to less than 2.5 percent of total annual contributions. Consideration will also need to be given to the capacity of the local capital markets to absorb the increased investment levels, both the initial larger amounts relating to past service contributions, and then the subsequent ongoing employer and employee contributions which are estimated to be upwards of $20-$25m annually.”

The “normal retirement age” for members of the new plan is being raised slightly to 67, though, although existing pensionable and permanent officials can keep 65.

“Employees are required to pay a mandatory fixed minimum percentage of their pensionable salary to the arrangement each month, initially set at 3 percent, and may choose to pay additional voluntary contributions subject to certain limits. These contributions are deducted from the employee’s monthly pay and paid to the CBPP,” the ‘white paper’ is proposing.

“This differs from the current public sector pension scheme where employees are not required to pay any contributions. The employer also contributes a fixed percentage, initially set at 5 percent of the employee’s pensionable salary per month.” Those civil servants who switch from the existing scheme will have their contributions transferred. and these will be financed “by a promissory note” that is interest bearing with the full sum paid over within three to five years.

Mr Halkitis, meanwhile, told the House of Assembly that the changes do not stop there. “In addition to pension reform, our government will introduce comprehensive health insurance plans for public officers,” he said. “Three plan options will be available, allowing public officers to choose coverage that best reflects their healthcare needs and income level.

“The Government will cover a significant portion of the cost, depending on which plan is selected by the officer. These plans will also include vision and dental benefits, survivor benefits, and options for family coverage. Comprehensive healthcare access for all is a priority for us. Further details will be provided by the Ministry of Public Service in the weeks ahead.”