$1 billion shortfall in pension fund
THE Contributory Pension Fund (CPF), the main financial support for thousands of less privileged senior Bermudians, is under-funded by at least $1 billion.
But the financial statements are years in arrears, and a recently completed actuarial study which would allow a better estimate of the shortfall has not been made public.
And the deficit in the Public Service Superannuation Fund (PSSF), the civil servants' nest egg, is short by at least $300 million, some $50 million more than the previous year.
The most recent financial statements reveal that contributions to that fund do not even meet current pension payments.
The "pay-to-play" scandal has focused attention on the management of Government pension fund assets, but the other side of the balance sheet appears to be in need of some attention.
Last week, Minister of Finance Paula Cox reported on "some of the successes" that Government's Public Funds Investment Committee (PFIC) has had in investing the public's monies.
"At December 31, 2004 the assets of the Contributory Fund stood at $937.4 million," she reported. "At July 31, 2005, its market value was $983.1 million, an increase of $45.7 million, which represents a return of approximately four per cent after adjusting for cash flow effects."
The press release did not address the liabilities of the CPF, and in particular the unfunded amount of accrued pension benefits which actuaries estimate is owed to all of the contributors to the Fund.
The estimate of liabilities calculated by UK actuaries in 1999 showed total obligations to pensioners of $1.91 billion, and although an actuarial study of the accrued obligations at July 2002 was completed in 2005, the lack of subsequent audited financial statements means that the findings of the 2002 study are not yet public knowledge.
The CPF is almost alone in having a year-end out of sync with the normal Government year-end of March 31. Its July 31 year-end allows it to look better in its reporting responsibilities when comparisons are made, but it is usually two or three years late in reporting.
The CPF has been the subject of complaints by Auditor General Larry Dennis about late reporting for many years.
Without knowledge of the 2002 actuarial study, extrapolation of the 1999 liabilities and comparison to the 2005 assets suggests a shortfall well in excess of $1 billion. But the CPF works on a "pay-as-you-go" basis, and defenders of the under-funding will note that current contributions to the fund exceed current pension benefit payments.
That argument cannot be made for the civil servant beneficiaries of the PSSF; the short-fall in the funding of their account was $313 million at March 31, 2004, and the deficit is growing apace.
"The Superannuation Fund stood at $333.4 million at the end of 2004, (but) at July 31, 2005 the value was $342.5 million, an increase of $9.1 million," wrote Ms Cox in last week's press release.
But a more recent actuarial study of PSSF obligations showed the extent to which these assets fall short of present value obligations. The actuarial division of PricewaterhouseCoopers Consulting made an estimate of PSSF obligations at March 2001; that number was extrapolated to March 31, 2003, the date of the most recent financial statements.
On that date, the present value of total accrued pension benefits to all civil servant contributors to the PSSF was estimated at $619 million. At that time, assets totalled $298 million, giving a deficit of $321 million, a $50 million increase on the $271 million deficit at March 2002.
However, although no audit of the PSSF seems to have been completed in 2004, note 8 (b) of the Consolidated Fund reported that an actuarial valuation of the PSSF was done as of March 31, 2004; according to note 8 (e), the unfunded pension liability of the PSSF at March 31, 2004 was $313 million.
Government has no formal responsibility to match assets to liabilities in the CPF fund, and both funds are managed on a "pay-as-you-go" basis. The notes to the CPF financial statements at July 31, 2002 disclosed that "the financial statements show only the net assets available for benefits of the Fund and do not purport to show the adequacy of the Fund to meet future benefit obligations".
Note 7 to these same financial statements reported that "the most recent actuarial valuation was completed as of July 31, 1999 by the Actuary's Department of the Government of the United Kingdom".
The then-present value of future obligations, "the Fund accrued pension benefits", was "$1,912 million and accumulated assets (were) $679 million at July 31, 1999. This represents a total estimated obligation for future pension benefits of $1,233 million as of that date."
Having noted the under-funding of $1.2 billion, the note went on to describe the "pay-as-you-go basis", whereby "essentially contributions of the current workforce are used to meet the obligations to the current beneficiaries".
For the 2002 accounting year, "net assets available for benefits are more than 11 times the current benefit payments. This is a relatively high level of funding when compared to national social insurance schemes of other countries."
Given the improvement in asset performance since 2002, the multiple of assets to current benefits will be even greater, but care should be taken in comparing Bermuda's pension position to that of other countries.
Bermuda's economy is markedly more fragile than those of larger developed countries, particularly given the decline in tourism, and the continued success of the international sector, thousands of whose employees are current contributors to the CPF, depends on decisions made by people over whom the Government and people of Bermuda have little control. Also, like most developed countries, the ratio of contributors to the CPF to its beneficiaries will decline as the population ages.
The situation of the PSSF is in some ways worse than the CPF: assets on hand are also less than half of the currently estimated present value of future obligations, but the PSSF is falling further behind.
Recent payments into the PSSF by civil servants and their Government employer do not meet current pension payments to retired civil servants. Each year, Government must make up the shortfall from general taxes, in the shape of a payment from the Consolidated Fund, or allow the PSSF deficit to grow.
The most recently available PSSF financial statements, for the year ended March 31, 2003, showed contributions to the Fund of $11.7 million each from civil servants and Government, and a "Government special payment of $500,000", giving total contributions of $23.8 million. Pension benefits paid in that year, however, totalled $34.2 million, giving a shortfall in contributions of $10.4 million. The comparable 2002 shortfall was $10.2 million.
Opposition Leader Dr. Grant Gibbons told the Mid-Ocean News that he had "noted the need, as has (Auditor General) Larry Dennis, to ensure that the combined contributions from both Government (as employer) and civil servants (as employees) are sufficient to exceed benefits paid out on an annual basis.
"Currently, the annual shortfall in the (PSSF) has been met to some degree by Government writing off amounts paid by the Consolidated Fund, which is not a long-term solution. There is clearly a need for an actuarial analysis to look at the viability of the PSSF, and specify what increases are necessary on the contribution side from employer / employees.
"This is important for both the beneficiaries of the superannuation fund as well as the tax payers, as Government is obligated by the legislation to meet any unfunded liabilities."
The CPF's under-funding situation was exacerbated last year, when pensions were increased by nine per cent. Dr. Gibbons had addressed the issue in his 2004 Budget Reply: "No one can argue with the long-overdue nine per cent increase in pension benefits, but even at that level, the maximum benefit of $1,000 per month is not sufficient to live in Bermuda today.
"But the Finance Minister provides no indication that any thought has been given to the structural issue of adequate pensions and how to finance them. Unless that happens, employers and workers should be prepared for substantial increases in social-insurance deductions every year."
He pointed out that Minister Paula Cox had set aside $2 million of the funds received from the US Government in lieu of maintaining the Longbird Bridge to meet the pension increase, but that that amount only covered about one-third of the cost of the nine percent increase.
"Although the Finance Minister is dipping into 'bridge money' to pay for (part of) this year's nine per cent increase, she has not indicated how this will be funded in the following year. The likelihood is that workers and employers will face another ten to 13 per cent increase in 2005 on top of the 4.25 per cent increase this year."
"After five years," he said then, "the PLP Government has failed to articulate a pension policy. A UBP Government would commission a thorough actuarial analysis to determine how the social-insurance scheme and the National Pension Plan might work in parallel over the next decade to improve the benefits of current retirees and strengthen the plans of future retirees.
"If the PLP Government continues to ignore these (pension and senior health-care) issues, and push care of seniors back to families, Bermuda will suffer the consequences. The population is ageing. We can't turn back that demographic clock. Without action and reform, even ten to 13 per cent social-insurance increases will look insignificant compared to what we will face in the near future."
Bermuda Public Services Union leader Armell Thomas said he had discussed the PSSF situation with Government recently, and that Government had promised that proposals would be forthcoming.
The Minister of Finance is with a parliamentary delegation in Fiji and was unable to respond to questions by press time last night.