For many, retiring to a tropical location to sip a piña colada on the beach is a dream retirement. In Bermuda, we are already fortunate to have the beach and a better adult beverage — a Dark ’n’ Stormy. What we may not have, however, is a society with a secure retirement.

In 2015, I moderated a panel on behalf of the Bermuda Chamber of Commerce, which was titled “Is Retirement Achievable in Bermuda?”. From what I recall from that day, there was a great deal of anxiety and concern over some people’s ability to amass a significant balance that would support them in their retirement years.

With the recent spike in inflationary pressures and conversations around how many Bermudians are leaving the island to retire, this maths would appear to be even more challenging for the median salary earner. We are increasingly concerned with the shape of private and public pension systems. From the recent data that we have, the situation appears to be challenging.

We are writing this as a warning and hopefully a call to action for those planning their financial futures, including the Government, which will have a role to play in ensuring public plans are there for those who will need them. This brief article will run through some of this with some more straightforward estimations. Overall, we could be on the cusp of a severe pension crisis in Bermuda, and we want to initiate the conversation.

To gauge where one is and assess, in general, your level of financially security and progress, one can use a few “rules of thumb”. Note that everyone’s financial situation is different and you should discuss your retirement plan with your pension provider or financial adviser.

These are just starting points for consideration but are not substitutes for a plan that evolves over time and is consistently monitored. A more conservative version of retirement funding is the Rule of 25x, which multiplies what you assume to be the income you would require in your first year of retirement by 25. This can be adjusted by assuming a lower replacement rate, given some costs may not be indicative of your lifestyle in retirement.

From the 2023 figures released in the latest Bermuda Job Market Employment Briefs, the median gross annual income is reported to be $70,238. Taking this number and assuming the Rule of 25x multiple and applying a 70 per cent replacement rate, one would need approximately $1.2 million in savings. Even if we assume 20 per cent of this is covered by the contributory pension, we need a 50 per cent replacement rate. In this case, a 12.5 times multiple could be required and the amount would be approximately $900,000. I would like to emphasise that these are simple rules of thumb and it is important to sit with your pension provider and/or financial adviser to work out a plan and the particulars for yourself: personal finance is personal.

So how do we stack up?

We have been given some limited data from the Pension Commission to get a general sense of the situation. At the end of 2023, the value of assets held in Financial Institutions Pension Plans amounted to $2.7 billion and the value of Individual Retirement Products was $1.3 billion. The table below summarises some key details:

Our first emotion upon seeing this was disbelief. The gap based on the required savings seems dramatic. It is worth noting, however, several things:

1, Pension Commission numbers are average numbers. A median number may be more indicative of the true balance held by each individual, as averages can be skewed by large outlier values. Unfortunately, if there are some exceptionally large pension balances, the median might be even lower.

2, Plan participants may have multiple accounts, so their own individual balances may be higher.

3, The average balance fails to account for age stratification. Young people would naturally have lower balances than workers who have been in the workforce for several years. It is difficult to assess how this breaks out by age, which is essential to assess funding status. The average worker’s age in Bermuda is about 47, according to our analysis of the latest employment briefs. Based on this, we would suggest the average-age worker with the average balance would need to materially accelerate savings considerably to secure some form of safely funded retirement, barring no other sources of savings and income.

4, This could be only one source of retirement income. Participants may have other assets, including real estate, which they can derive income from to supplement this. I would pause here to mention, however, that this would not include your primary residence, which would not provide income but only eliminate the expense of renting. I have unfortunately heard many mentions that their retirement revolved around owning the house with no consideration about ongoing expenses — including house maintenance.

We can make some calculations to get a sense of the savings rate needed to fund a retirement.

We would not use the above table as a financial planning tool but the cursory analysis would suggest funded retirement is possible with adequate savings — critically, it is important to start early to achieve decent returns. If one interrupts the compounding effect of these savings or does not invest with the goal of achieving good real returns, the outcome is likely to be unfavourable.

Given what appears to be a relatively low average balance at this stage, we are concerned with the recent passage of the National Pension Scheme (Occupational Pensions) Amendment Act 2024. For those under 45, withdrawing 30 per cent of the balance of their pension to buy a home could greatly impact their ability to fund a stable retirement.

A house is considered an asset but it does not provide the cashflow needed in retirement. While it does offset the need to pay rent, it remains a cost to a retiree to maintain even if the mortgage is paid off. Ironically, Bermuda is suffering from a form of housing pressure already and offering more demand incentives without addressing supply constraints may frustrate the shortage and increase costs further.

The other concern is that funds taken out this way do not have guardrails to ensure they are available for retirement. For example, there is nothing preventing an individual from buying a house using funds from their pension and then selling the home five years later to fund their lifestyle, only to discover they have an inadequate pension in retirement. I would suggest seriously considering the late Charlie Munger’s quote on this:

“The first rule of compounding: Never interrupt it unnecessarily.”

Here are some suggestions to consider helping alleviate a developing retirement shortfall:

1, The default option on pensions should be a target date fund — not the most conservative option. This may be one contributing factor for the low balances as accounts may never have been adjusted to invest in higher-return products.

2, Savings rates likely need to be higher — and the adage “pay yourself first” applies here. For some individuals, special consideration will need to be given to larger-ticket items and the price paid for things such as homes, cars and education.

3, The importance for many to receive social insurance should not be overlooked. If pension balances do end up being inadequate, the importance of this government entitlement programme is critical. Unfortunately, it is underfunded by close to $3.5 billion based on the last details we have received. If the Government is serious about securing retirements for Bermudians, it should focus on public-sector programmes that it oversees. The Government needs to conduct some form of entitlement reform.

4, Consideration should be given seriously to extending employment and the ultimate desired age for retirement. As noted above, adequate savings can be achieved with a later retirement age.

5, Financial literacy is paramount. In our conversations with numerous people, there seems to be an unclear understanding by some of the importance of compounding and sanctity of retirement savings. The CFA Society of Bermuda along with Bermuda College offers an introduction to basic money and financial concepts to build practical financial skills so one can begin to take control of their financial future. See this link for details: https://www.college.bm/index.php/pace/pacedesignations/financial-literacy-course

Everyone’s retirement plans are unique and individual. The numbers above are only cursory values where we tried to get a sense of where we may be in our private-sector funding status. If these figures are truly reflective of the bulk of people’s funding for retirement, and they are nearing that age, we would be gravely concerned.

Pensions and saving for retirement are an exercise in delayed gratification. It involves sacrificing consumption today to be able to adequately consume in the future. This is often difficult as the temporary headaches of far-out future environments may seem insignificant in the present.

We believe it is urgent to conduct a deeper assessment of the true funding status of Bermudians today before we find ourselves in a pension crisis in the future. What we see is concerning.

• Nathan Kowalski CPA, CA, CFA, CIM, FCSI is the chief financial officer of Anchor Investment Management Ltd and can be contacted at nkowalski@anchor.bm