Bermuda’s seniors will be getting a 5 per cent raise in their pensions as of August this year — the first increase for five years.

However, the hike will come at a cost for employees and employers.

Minister of Finance Bob Richards told the House of Assembly this morning that contributions would go up by 7.5 per cent — meaning the worker will have to pay an extra $2.40 each week, the same as the employer.

“After carefully reviewing the Contributory Pension Fund 2014 Actuary Report, I propose to increase CPF benefits and contributions by 5 per cent and 7.5 per respectively, effective August 2016, when benefits under the plan are traditionally amended,” said the minister.

The maximum benefit is currently about $1,399.14 per month, said Mr Richards. Altogether, some 12,365 seniors currently receive benefits.

Mr Richards noted that the cost of living had increased by 7.9 per cent since August 2011, when the last increase was granted.

He said: “Although the benefit increase does not fully cover the prevailing rate of inflation, the Government is of the view that this increase should meet the important policy objective to assist our seniors and strikes the right balance between fiscal and social responsibility.

“The 7.5 per cent increase in the contribution rate is based on actuarial advice and is intended to maintain the long-term viability of the CPF. The current policy is to increase contributions by 2.5 per cent more than any benefit increase awarded. The 7.5 per cent increase represents a rise in contributions of $2.40 per week payable by the employee and an increase of $2.40 payable by the employer.

“The employer would be responsible for submitting the total weekly increase in contributions of $4.80 and would have the authority to deduct up to $2.40 from each employee. As at March 31, 2016, the fund had total assets of over $1.623 billion, representing approximately 11.7 times the annual value of benefits paid in the 2014-15 fiscal year.”

He noted the next actuary review of the CPF was scheduled for the period ending July 31, next year.

“I wish to assure members, and more importantly, current and future pensioners that the Government is sensitive to the challenges facing pension plans of this nature and will endeavour to take the appropriate steps to enhance the benefits paid from the scheme as well as ensure the fund has the ongoing ability to pay for such benefits.”

Mr Richards also told MPs that the financial performance of the CPF had exceeded expectations of the last three years.

That, he said, was because of “higher investment returns, lower administrative and investment expenses, lower levels of inflation and lower net benefit/contribution cash outflow”.

He explained the main purpose of the 2014 Actuarial Review had been to “consider the implications for future contribution rates of maintaining benefits at their present levels in real terms and to consider the long-term sustainability of the fund.

“The review includes projections of contribution income and expenditure (on benefits and administration), projections of the fund balance (allowing for an assumed rate of investment return), and projections of the number of years’ outgo secured by the fund.”

The Contributory Pension scheme played an important role in Bermuda’s pension arrangements, he said, “providing a first tier or basic pension to more than 10,693 seniors and other beneficiaries the majority of whom live in Bermuda. There are also disability pensions, and non-contributory benefits.”

“Even though the actuarial review is an excellent tool in overall pension management, it is important to recognise that the financial projections for future years are based on reasonable assumptions and they should not be taken as forecasts of the outcome,” said Mr Richards. “The projections should be updated at successive actuarial reviews in light of the latest information available.”

The main findings of the actuarial review was that the fund’s contributor base fell by 3 per cent due to the downturn in the economy. And both the benefit and contribution rates remained unchanged during the three-year review period 2012 to 2014 except contribution rates were increased in August 2012.

“Based on the population projection figures, the pensioner support ratio has declined marginally since the last review. The ratio was 4.4 in 2011 versus 3.9 in 2014. The ratio is projected to decline to 1.5 over the next 50 years. The comparative ratio using the actual contributors and beneficiaries of the fund declined by 11.8 per cent from 3.4 in 2011 to 3.0 in 2014. This was due to the decline in the number of contributors as a result of high unemployment in the 2010/2011 period.

“Contribution income ($107.4 million) decreased by 8 per cent and benefit expenditure ($133.7 million) increased by 16 per cent over the three years since the last review.

“Total expenses for the three years averaged 0.52 per cent of the average fund, down from 0.66 per cent over the previous three years. Pure administrative expenses averaged 0.24 per cent of the average fund over the three years and were 0.19 per cent of the average fund at the review date. As a percentage of contribution income, total expenses have been relatively stable over the last ten years at 7.7 per cent.

“The net assets of the fund grew 18 per cent over the three years from $1,532.8 million to $1,802.3 million. This was 2.9 per cent above the projected value from the previous review.

“The fund earned a nominal rate of return of 7.2 per cent per annum and a real rate of return of 5.0 per cent per annum over the three years since the last review (6.6 per cent and 4.4 per cent respectively if investment and administrative expenses are excluded). This compares with the real rate of return assumption of 3.5 per cent per annum.

“The Asset/Expenditure ratio is a static measure of the size of the fund to annual expenditure or the number of years cover provided by the fund based on the current annual expenditure. This ratio increased over the three years from 12.3 years to 12.6 years. Compared with 14 other regional social security schemes in a 2013 study, Bermuda’s ratio is better than 9 of these countries (average 7.5 years). By comparison, the ratio for the Canada Pension Plan in 2013 was 4.98 years.

“The viability of the fund in the short to medium term is good with the fund being able to cover at least 12 years of the current expenditure and being positive for the next 25 years. However, recognising the long-term challenges of the fund the ministry will continue to closely monitor the performance of the fund.”