Central Bank Governor suggests incentives for private pension schemes

By Marlon Madden

Acknowledging the need for urgent reform of the pension sector, Governor of the Central Bank Cleviston Haynes has indicated that the time has come for authorities to consider offering incentives to Barbadians to invest in private pension schemes.

He made the suggestion as he said that Barbados’ ageing population and the continued rise in pension benefit payouts matched against lower contributions threatened the long-term viability of pension funds.

In fact, referencing the latest highly discussed actuarial review, Haynes said it “underpinned the urgent need for additional pension reform”.

He told participants of the annual Eckler Investment Policy Review for Pension Plans conference on Thursday that the “absence of urgent reforms will place greater burden on the state” once expenditure continues to outstrip contributions, and he said officials may need to look at incentivising individuals to make private pension schemes more attractive.

“A reduction in future benefit requires individuals to make greater sacrifices now to support retirement income in the future. Therefore, we need to examine how we can incentivise the individuals to invest in their future and to do so while maintaining the fiscal discipline required to achieve our macroeconomic targets,” said Haynes.

“The discipline of the state and of individuals need to be supported by investment instruments that will generate sufficient investment income and value for all,” he added, while pledging greater engagement with  pension sector officials to better aid “planning and future improvements”.

The number of employees contributing to the National Insurance Scheme (NIS) has declined significantly between 2007 and 2021, from just over 124 000 contributors to just over 100 000. Unemployment was also still a challenge in 2021.

Lisa Wade

At the same time, the number of pensioners has been steadily rising, increasing from just over 20 in every 100 persons insured in 2016 to an estimated 45 pensioners in every 100 persons insured.

Declaring this “a source of concern”, Haynes said “it means that the income being generated from the pension fund will be exceeded by the expenditure, and eventually what will happen is that the reserves could be depleted if reforms are not taken”.

“The earnings increased quite substantially during 2021, which is a good sign, but expenditure is also rising and that is a reflection of the fact that this is an ageing population and, therefore, what we are likely to see going forward are significant increases in the expenditure of pension funds,” he said.

Data from the Financial Services Commission (FSC) showed that earnings for the private pension sector increased by 117 per cent or $244 million at the end of 2021, driven mainly by local gains on investments.

Expenditure was approximately nine per cent higher or $37 million more in 2021 than the year prior. A payout of pensions was the primary contributor to rise in expenditure.

This, Haynes acknowledged, was also representative of what was happening at the NIS.

“Clearly, to strengthen our pension sector reforms will be needed, particularly as it relates to the NIS, but I suspect that other elements of the pension sector will also need to be looked at,” he concluded.

Over the past several weeks, authorities have been engaging members of the public and actuarial specialists as they try to determine how best to counter a depletion of the NIS pension fund and increased payouts.

Among the options so far are an increase in the pensionable age and a decrease in benefit rates.

Principal and consulting actuary with Eckler Lisa Wade said she was anticipating two types of reforms within the national pension scheme – governance and parametric reform.

“Governance reform is very much going to be focused on areas such as the management and operation of the particular scheme, whereas the parametric reform is going to be looking very much at the financing of the scheme as well as the level of benefits that are provided under the scheme and the contributions that are going to be required by employees
and sponsors of pension plans,” she
explained. 

marlonmadden@barbadostoday.bb