A top accountant has argued that the enormous size of the government's unfunded pension liability is yet further evidence of why the government must not only act immediately to reform its current pension system, but also begin to reduce the size of the civil service as a critical component of addressing this "unsustainable" financial situation.
Raymond Winder, partner with local accountancy firm Deloitte and Touche (Bahamas), said he is pleased to see some recognition by the government of the size of the unfunded liability and said the key question now is, "What is the government's response to this?"
He further argued that the government must ensure that it does not push the problem down the road, seeking to address it in the short term through tax measures, such as the implementation of value-added tax (VAT), but get to the root of the issue.
"This isn't a matter of tax reform, it's a matter of government reform. It's an issue of how we give benefits to government employees and how we deal with it. We shouldn't be seeking to raise taxes to compensate for an unsustainable system, but we are. We should be looking at how we reorganize this, how we work and how we operate, to stop the bleeding.
"In my humble assessment, this is something that needs to be done or we will find it very difficult to continually raise taxes to try to deal with it," said Winder.
Turning to pension reform, the accountant proposed that the government should act to ensure that no new government employees are brought into the civil service on a defined benefit pension plan, which offers retirees a set financial benefit, notwithstanding their contribution level or the performance of the pension fund. At present, all government employees who benefit from a pension plan through their service are entitled to a defined benefit plan.
He also suggested that the government could move to "lock down" its current pension liabilities by transitioning current government employees from their defined benefit plans to defined contribution plans, allowing them to access their benefits from the original plan, but ensuring no further growth in liabilities.
He was commenting after Deputy Financial Secretary in the Ministry of Finance Simon Wilson revealed that government calculations suggest that the government is facing a "very, very rapidly" growing $1 billion unfunded pension liability. An unfunded liability relates to where an organization's liabilities, in this case benefits owed to civil servants in the public pension program, exceed the financial holdings available to meet them.
Wilson, speaking at a pension breakfast organized by Royal Fidelity Merchant Bank and Trust, a provider of pension plan products, said that while no actuarial studies have ever been done on the size of the liability, government calculations suggest it has reached this level.
He blamed the government's offering of the defined benefit plan, in part, for the problem, adding that it was particularly problematic given that it calculates benefits based on "final pay." This, he explained, would allow for individuals promoted to a higher pay grade just days prior to their retirement to receive higher retirement benefits, notwithstanding contribution levels or salary paid leading up to that point. Wilson admitted that he sees the role of pension reform as "critical" to the sustainability of government finances going forward, and admitted that the government's growing pension liabilities have played a role in driving demand for tax reform.
In an interview with Guardian Business, Winder said it is "extremely important" that the government takes steps to address the financially unsustainable position.
"That $1 billion is real, and there's nothing we can do to address that, and the government must just now find excess cash to respond to that. I don't seriously think that the government would be able to change what it is currently in the short term. That would be a big, big, political hurdle for the government to reduce what's owed as of today's date. I'm not saying it's totally impossible to do it. It's a greater hurdle to overcome."
He added: "I think the government has to not take on any new employees in a defined benefit plan. If any new employee joins government, they must have a new plan for them which is a defined contribution plan. That's the first thing they must do.
"Another thing the government can do is stop the existing defined benefit, as of today, and lock in what's there and for today forward, then they have a second plan, which is a defined contribution.
"So you could lock off the plan and start over here, and there would be two plans. That would mean that if I am a current employee of government it is possible for me to receive value as of today's date as if I left the government and start new employment.
"Doing that would require actuarial analysis, but then you would've locked that down and for existing employees would've started a new plan to deal with them going forward."
Winder said that if the problem is not "taken into hand" now it will only rear its head further down the road, in the form of major cuts in benefit payments by the government to retiring civil servants, depending on the financial position it finds itself in.
The accountant urged that, in addition to tackling the issue of liabilities through reforms to the pension system, the government must take steps to address it via reductions in civil servant numbers.
"We have a potential for in excess of $1 billion in unfunded pension liability and the reality is unless we can find a way to be more efficient at actually reducing through technology the number count, we have a problem.
"There is a huge challenge for the government in the sense that if, for example, we had an employee who, as an example, earned $1,000 a month, and if that employee when he or she retired, for the sake of example, gets $300 per month, now if after that person retires there's still a need for government to fill that position. So the government in the total picture now finds itself in a situation where that position is costing them $1,300. That's $1,000 for new employee and $300 for the person who retired out of that position, so it is one thing to say we have these liabilities to pay, but it is an even bigger problem if we can't find a way to actually reduce that job count; to consolidate that job and not have it available anymore, or to somehow find a way to reduce the cost of that job.
"The big challenge for the government is that it has to begin to put itself in a position where, as these individuals retire, the government has been able to so organize themselves that there isn't a need to continually add new employees to replace retiring employees.
"That would reduce the possibility of new liabilities, and secondly it can basically stabilize the cost of government overall."
Winder noted that if added to the government's debt levels, as it would have to be in the case of a corporate entity under standard accounting rules, these unfunded pension liabilities would significantly add to the national debt.

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