Later retirement age, lower benefits possible in IMF-led reform

In light of looming public sector pension reform, one economist is predicting that there could be an increase in the retirement age.

Additionally, Kemar Stuart, director of Business Development, Finance and Investment at Stuart and Perkins Caribbean, told Barbados TODAY among the other likely options were a limit in retirement benefits to “highly-paid” civil servants or changes that could affect non-contributory pension.

His assessment comes on the heels of a recent revelation by the International Monetary Fund (IMF) that an actuarial review of the civil service pension system was completed last November and would be the basis for “upcoming public pension reform”.

The IMF gave no details on what changes were likely or how soon they were likely to begin.

Stuart said he was not surprised, pointing out that he expected that with the drastic reduction in Government’s revenue intake due to COVID-19, the expenditure associated with pensions, gratuity and retirement benefits would soon take the spotlight.

“The intended pension reform is preparing Government for the reality of an aging population, declining birthrate, declining workforce which will be further depressed by further digitization of the public service and by extension, agreed retrenchments under the BERT (Barbados Economic, Recovery and Transformation) plan along with high youth unemployment in the public sector,” said Stuart.

Recalling that budgeted expenditure for pensions was $298 million in financial year 2019/2020, increasing to $335 million for financial year 2020/2021 with projections of $369 million for the next financial year, Stuart said the “rapid increase” will pose financial challenges for Government especially in the current environment.

“Any intention to maintain this level of expenditure will result in more borrowing or increases in taxation,” he said.

However, he argued that in order to curb pending economic and social challenges he believed the Mia Mottley administration was likely to take one or a mixture of measures “from a legislative angle” to match the IMF’s fiscal affairs policies and pension reform.

These options, he said, could include an increase in the retirement age across all pension schemes which will decrease out-payment from Government while linking the retirement to average life expectancy or limiting retirement benefits for highly-paid civil servants which may come in the form of reduced direct contribution now to save output later.

“The reduction may be recouped through an increase in contribution on other groups,” he suggested.

Stuart said there could also be an end to specific offerings. He pointed to non-contributory pension.

“The IMF is on record stating that such schemes are programmes poorly targeted at poverty alleviation.

“New entrants will face strict regulations as it relates to digital payments only, increased contribution rates, increased penalties on early retirement [or] the National Insurance Scheme (NIS) will be restructured from the board level to revamp its operations.”

He suggested that a restructured NIS could see relaxed regulation “to allow the fund to invest in riskier financial options in order to increase financial rewards” said Stuart. There was a possibility that government could also restrict the NIS investment in Government paper, he added.

Fearing that coming out of the BERT programme there will be “less state responsibility to citizens”, Stuart said he believed there will be changes to the National Insurance and Social Security Act to protect government from being shouldered with debt from the institution which will “stave off” a potential crisis when payments of financial obligations to vulnerable groups become due.

Officials of the investment firm Fortress Fund Managers told Barbados TODAY they were not sure what type of reform was pending, but commenting generally on public sector pension plans, said it would not be surprising if Barbados adopted a more shared contribution approach.

Chief Investment Officer of Fortress Advisory and Investment Services Peter Arender said looking at global trends over the past decade, there seemed to be a shift from “very generous defined benefit schemes” to much more cooperative defined contribution schemes where the employer and employee contribute to a fund for the employee.

In any case, Arender added that a pension plan should be “sustainable” and be able to be invested responsibly.

“The machinery of pension savings is hugely valuable and there is a reason most countries have them. The balance has to be struck between what is sustainable for the sponsoring entity and the benefits that are going to come to the employees,” he explained.
(marlonmadden@barbadostoday.bb)