April 25, 2011Dear Sir,I write in response to the piece on the front page of today’s Gazette regarding the underfunded status of the pension fund.It is true that the pension fund, despite very good investment gains most recently, is seriously underfunded. I question the degree of this underfunding as the degree cited by Stewart does not sound right given the Government’s most recent statements, but given my interest in this area I wanted to make a few points that the article fails to make with sufficient emphasis in my opinion.1) Firstly, this problem is not unique to Bermuda. Developed nations around the world are grappling with the effects of an ageing population where the ratio of retired to active workers is increasing. This in no way is a reflection of poor fiscal, social or economic policy. It is purely a reflection of dramatic changes in our demographic fabric. The birth rate is declining. People are having fewer children. Fewer workers now contribute to the social insurance fund which pays monthly benefits to our seniors. More recently, our contributing labour force has shrunk thanks to the global recession, another force over which this Government has no control.2) The pension fund which supports payments to our seniors, is managed by an astute group of highly qualified investment managers and accountants who comprise the Public Funds Investment Committee. Over the last ten years, they have significantly improved the fund’s ability to satisfy the funding liabilities of the Fund. The Committee inherited many years ago a fund solely dedicated to fixed income and cash instruments, yielding three to four percent barely matching Bermuda’s burgeoning inflation rate. At one time, it was considered prudent to only invest in fixed income instruments given the nature of the client the pension fund and its investors. However, modern portfolio theory has taught us that such funds must incorporate allocations to other asset classes such as stocks and alternatives which not only provide better returns (as required for future payments) but diversify the fund, thereby reducing risk. This re-allocation offered significant protection to the fund during the stock market meltdown that followed the subprime debacle and has contributed greatly to the fund’s more recent investment returns. The fund’s strategy must equally pursue income and growth.3) One of the largest contributors to the increasing liability of the plan is the civil service which provides benefits at retirement which reflects final pay, rather than what the retiring worker actually put into the plan. Unlike the defined contribution plan which forms the basis of retirement planning for so many Bermudians as mandated by the National Pensions Act of 1998, retirees receive a monthly cheque that reflects a percentage of final income. It makes no consideration of what the employee put into the plan. The Pensions Act of 1998 introduced legislation which compels us to save ten percent of our incomes, where ultimately the nest egg at the end of the day is a function of our individual levels of contribution and our own investment decisions where we bear the investment risk. This is a different plan to that enjoyed by the civil service. Those covered under a defined benefit plan, have this risk (future income payments) borne by the government and hence, the taxpayer. This has to be addressed. There are a few local corporate defined benefit plans also managing an underfunded status and they tend to disguise the degree of underfunding by assuming a higher rate of return on assets. This has the effect of reducing the current liability figure.The US tax code prohibits a shift to a defined contribution plan from a defined benefit plan when there is any underfunding. I’m not sure if there is any such prohibition in Bermuda. But I do know that we need to be making significant additional payments every year or take on unprecedented risk levels (I am not advocating this at all) to meet the income needs of our aged over the next 30 years and beyond. Funding the needs of our aged will be our most significant fiscal challenge.4) Composition of retirement plan assets. We read recently and I am shocked that this did not raise further discussion on the airwaves and the media, that the pension assets of Argus and Keytech, I believe were investors in the Tuckers Point Resort. Argus Funds acknowledged Madoff exposure. What structures or parameters are in place to protect these assets for the benefit of the people who are covered by such plans? Are there maximums as to what can be invested in Bermuda assets, namely Bermuda real estate? Who is policing this? The Pension Commission is not equipped to address seriously these types of issues. Their focus is administrative, not investment suitability and compliance. They have done nothing to address the ridiculous fee structures of our pension providers.5) We have to recognise as well that any increase in pension benefits given the fund’s growing dependence on current contributions and investment performance, takes away from other social programmes. The funding requirements this year are twice what they were last year. We know what that means for spending but what if Government revenue continues its decline next year, how will we fund the needs of the pension system?6) Michael Fahy, of the BDA/UBP, recommends the issuance of a bond to support the fund’s obligations. He didn’t fully think that one through. The issuance of a bond increases the overall debt level of the government. He has been one of the most vocal of critics on that one. We can’t issue debt for current consumption by pensioners. Not an option.7) We have to improve the nation’s level of preparedness. Simply, we have to spend less, save more. While ten percent is mandated by the Government (really five percent is invested/saved after all fees), then people need to be saving/investing at least another ten percent to ensure comfort during retirement. Unfortunately we do not collect sufficient information to measure our national savings rate or gauge the fiscal preparedness of our populace for the financial strain of retirement. Stewart does cite a plausible way to improve pension values removing the two-year vested requirement for employees so they cannot access pension monies when they move jobs if they have been employed at the job for less than two years.Without question, the pension system is in need of reform. While I rarely agree with anything Bob Stewart says, he raises again a perplexing issue. Like a number of things that require fixing however, to do so will require a radical shift in policy, a shift in people’s thinking and priorities and money.The Health Minister said in the preface of the National Health Plan that: “A community is judged by the way it treats its weakest members.” He goes on to say that “it is essential that we treat (proper) healthcare as a fundamental human right”. As a woman who has watched aged family members and friends die prematurely due to inadequate healthcare access, I could not agree more.2034 RETIREECity of Hamilton