IDB calls for pension and financial sector reforms in Barbados

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by Marlon Madden

With Barbados having the highest pension expenses in the region, a recommendation is being made for the revision of current systems to ensure the sustainability of state-operated pension schemes.

The issue was highlighted by Inter-American Development Bank (IDB) officials in the recently released Quarterly Bulletin for December, titled Economic Institutions to Advance Beyond 2020.

“In 2019, Barbados had the highest level of public pension spending among Caribbean countries, reaching 7.7 per cent of gross domestic product (GDP), followed by Trinidad and Tobago (5.59 per cent), Guyana (5.28 per cent), and Suriname
(4.05 per cent). Rising costs going forward could be a challenge, particularly given the impact of the debt restructuring and the pressure of COVID-19 on the National Insurance Scheme,” the IDB said.

“Policymakers should also periodically review the design of multi-pillar systems and assess what parametric and non-parametric changes in the pension schemes are required to achieve adequate benefits, expanded coverage, and financial sustainability
of the systems,” it added.

The 58-page document pointed out that pension expenses in Barbados are the highest in the Caribbean region, adding that the island had a broad social security system that includes both contributory and non-contributory pensions, as well as a public
service pension scheme.

It also pointed to a “rapidly” aging population that supports a high dependency ratio of about 24.3 per cent, compared to 28.9 per cent in member countries of the Organisation of Eastern Caribbean States, which it said was responsible for helping to drive up pension costs.

Among Caribbean countries, Barbados has the highest ratio of contributors as a share of the workforce (78.99 per cent), with more women contributors than men. Barbados also has the highest pension expenses among Caribbean countries, with a point estimate of 8.9 per cent of GDP and a range from 7.5 to 13.2 per cent of GDP.

“The disbursement of pension expenses for civil servants as a share of total pension expenses is also the largest in the Caribbean at 33.2 per cent,” said the IDB in its publication, which examined several aspects of the region’s economies.

When it came to Barbados’ financial sector, the Washington-based development financial institution highlighted that in terms of market discipline, despite the importance of an accurate audit, Barbados did not grant the power to supervisors to take legal actions against external auditors, and that the specific requirements or extent of the nature of audits were not spelled out.

“The country could also reinforce transparency, as banks currently do not have to disclose off-balance-sheet items or their governance and risk management framework to the public.

“In addition, bank directors are not legally liable if disclosed information is erroneous or misleading,”
the publication authors highlighted.

The IDB said, “Given the macro prudential approach in the region, the implementation of all or some elements of Basel III is highly recommended”. Basel III is an international regulatory framework developed to address deficiencies in financial regulation relating
to areas of stress testing, capital adequacy, and market liquidity risk.

The IDB added that greater support for supervisory authorities “with a clear, verifiable, and quantifiable guide for the diversification of assets in bank portfolios is also advised”.

“Finally, promoting rules that support greater market discipline is recommended, particularly with regard to audits and transparency,” it added.

The IDB also raised concern that barriers to financial access and inclusion remain in Barbados, despite some progress over the years.

“Despite the country enjoying high income levels and performing well on many socio-economic indicators, barriers to finance for individuals and firms persist.

“Barbados performs well on indicators related to financial access for individuals, including the level of deposits in commercial banks, which stands at 98.5 per cent of GDP compared to the Caribbean average of 57.9 per cent. The ratio of commercial bank loans to GDP is also higher in Barbados (64.6 per cent) than the average for all Caribbean countries (40.6 per cent).

“However, some impediments remain with respect to the ability of individuals to access financial services, including increasingly stringent know-your-client and documentation requirements. Firms and banks in Barbados also report that the strict know-your-client and regulatory burdens, including those related to anti-money laundering/combating the financing of terrorism, hinder domestic financial transactions and credit provision,” the institution explained.

The IDB recommended that in order to address some of those challenges, there should be promotion of greater use of new and innovative financial technologies and the revision of relevant regulatory requirements.

“In this context, the authorities should consider policies and initiatives aimed at further exploring and addressing barriers to financial access and inclusion. For example, fostering greater use of technologies, such as digital payment services, could support lower fee structures and costs for users, following examples of other countries around the world (Beecher, Bissessar, and Julien 2018).

This would require supportive regulations and the revision of relevant legislation and regulatory processes, as well as greater coordination and improvements of supervisory agents,” the IDB explained.