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National Insurance Fund in ‘jeopardy’

Exposure to government debt, lack of good governance, non-contribution all challenges
  • The National Insurance Board headquarters. FILE

Guardian Business Editor

Published: Oct 03, 2013

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The awarding of contracts and investments without regard to good governance, a lack of political will to penalize businesses and the self-employed for failure to pay, and the non-contribution of around a quarter of the workforce have “jeopardized the sustainability” of the National Insurance Fund (NIF), its Ninth Actuarial Review has found.

The review has also called a government debt default the NIF’s “primary long-term risk” and urges the National Insurance Board (NIB) to seek to reduce its exposure to Bahamas government debt or public sector securities to a maximum of 50 percent over the next five years.

“Recent defaults and restructurings of public debt by several Caribbean governments show that even government bonds are not as safe as they once were thought to be. With international ratings agencies voicing concerns about Bahamas government finances and debt levels, NIB’s primary long-term risk is the inability of the government to repay the face amount of bonds on or before their maturity dates,” said the review.

The review, which covers the period 2007 to 2011, ultimately concludes that the NIF, administered by NIB, is not financially sustainable over the long term based on current benefit provisions and contribution rate.

It is from the NIF that all government pensions, in addition to unemployment, industrial, maternity, survivor and funeral benefits are paid.

Prepared by consultancy actuary Derek Osborne, the review suggests a firm commitment to implementing and following a good governance framework “at all levels” is required if the NIB is to consistently deliver on its future obligations without having to levy “exorbitant contribution rates” in the future.

Specific examples of poor governance practices at the institution are board members selected without due consideration for terms of the National Insurance Act, selective prosecution of delinquent employers, excessive hiring, issuing of contracts without proper tendering and procurement policies being followed, and directions to invest in securities and properties that have not met social security investment principles.

The review blames the global economic crisis and the local recession that resulted for causing NIB financial projections to underperform projections in all areas, in light of impacts on foreign direct investments and the local labor market.

From 2007 to 2011, there was a “large negative variance”, with contribution income ($828m) falling 17.2 percent below projections; net investment income ($414m), 5.3 percent lower; and 2011 year-end reserves ($1.653 billlion),10.8 percent lower.

Meanwhile, benefit expenditure ($830m) stood at 2.6 percent above projections, while administrative expenditure ($179m) was 11.9 percent higher than anticipated.

Undertaking three sets of 60-year projections of The Bahamas’ population and NIF finances to establish a “range of reasonable prospects” for the fund, the review found that based on current benefit provisions and contributions, total expenditure of the fund would exceed total income between 2017 and 2022. The fund would then be depleted between 2028 and 2033.

The review suggests that contribution rate increases are “inevitable” and that from 2018, annual adjustments of 0.5 to one percent per annum if the following year’s budget suggests that total expenditure will exceed total income.

On the bright side, the assessment suggests that current contribution and benefit provisions provide a “very good level of benefit adequacy and income protection to most workers and pensioners.”

“Recent reforms have resulted in enhanced income protection for higher paid earners and greater predictability of future benefits for pensioners of all income levels.”

The review makes a large numbers of recommendations on how the sustainability of the NIF can be improved, among these, introducing “meaningful penalties” for non-contribution, increasing the normal pension age from 65 to 67.

Also proposed is devising a more “simple and attractive” way for self-employed people, of whom only 30 percent currently contribute, to do so.

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Last Updated on Thursday, 03 October 2013 15:55

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