Return on National Insurance Fund investments continued to decline last year, a clear sign that the country’s social security scheme is in urgent need of reform, according to Chairman of the Social Security Reform Commission Alfred Stewart.
Mr. Stewart, who was a guest on the radio Love 97 programme, “Jones and Company” Sunday, said at the end of 2003, the rate of return to the Fund was just under six percent.
When the 7th Actuarial Review of the National Insurance Board was completed at the end of 2001, the rate of return stood at 6.25 percent.
The Review, which was made public last year, created widespread concerns about the future of the Fund and prompted the government to establish the Reform Commission to chart the way ahead for NIB.
The returns to the National Insurance Fund peaked around 1984 when the Fund was earning close to 10 percent per annum, said Mr. Stewart, who added that since that time, there has been a decline in the level of the returns to the Fund.
He said this is a clear sign that the social security programme is earning less and less money every year.
“The need to make changes to the Fund to increase contributions and so forth could significantly be impacted depending on the level of investment returns,” he said. “In other words, the higher the investment returns, the less you need to increase rates or increase the contribution ceiling and the like.”
With the National Insurance Fund facing depletion by the year 2025 unless serious reforms are instituted, the commission wants a portion of the Fund to be invested outside The Bahamas.
Mr. Stewart said this would give the Fund a chance to diversify its portfolio and help it grow.
“In addition, what we’re recommending is a proper investments policy and proper investment guidelines so that all investments of the Fund, whether local or international, are done within the context of the approved investment policy of the Board,” Mr. Stewart said.
He added, “In The Bahamas, $1.4 billion available for investments is a very large sum of money. The local capital market in the Bahamas is only just beginning to develop and it is difficult to lay off $1.4 billion in The Bahamas in sufficient investment instruments to give the National Insurance Fund the kind of asset allocation that it ought to have and also the diversification that it ought to have.”
The government appointed the commission after the Actuarial Review warned that depletion was imminent without reform.
Changing demographics and other factors are being blamed for this possibility.
It is a problem that is not unique to the Bahamas, with developed countries like the United States facing the same dilemma with their social security schemes.
The challenge for administrators of these type funds is keeping them afloat, as aging populations would mean more recipients and fewer contributors.
“When the National Insurance scheme was initially established given the characteristics of the demographics of the Bahamas and the expected mortality, the design at that time was adequate and could meet the needs for the indefinite future,” Mr. Stewart pointed out.
He added, “However, [like in many places around the world] people are living much longer than was initially anticipated, so what’s been happening is the number of persons in retirement compared to the number of contributors in the scheme has been increasing rapidly.”
In addition to falling birth rates and increasing life expectancy among the elderly, the Actuarial Review also pointed to a contribution rate that is below the average cost of benefits as a key factor that would contribute to the death of the Fund.
According to the review, on December 31, 2001, NIB benefits reserves stood at $1.1 billion. Mr. Stewart revealed while on the show that those reserves now stand at $1.4 billion.
He pointed to problems faced in investing the Fund, saying that some changes need to be made.
Keith Major, who chairs the commission’s public relations subcommittee, said the commission recommends that up to 40 percent of the Fund be invested abroad.
The Actuarial Review pointed to the challenges associated with investments, saying that the size of the National Insurance Fund relative to the Bahamian economy, and the restriction on investing overseas, often makes it difficult to find suitable investments.
As a result, almost one-third of the portfolio is now held in short-term bank deposits, investments not consistent with the long-term nature of NIB’s liabilities, the Review said.
“With reserves projected to nearly double in the next 15 years, new investment avenues and a revised approach to investing NIB funds will be required,” it also said.
Mr. Major on Sunday reminded that, “Funds like these are affected 20, 30 years down the road by decisions you make now.”
He said there are five contributors now for every person who is receiving retirement money from the Fund.
“A few years down the road there is going to be two or one and a half,” he said. “A lot of us are going to be receiving. So the Fund will go up and it will come down suddenly if we don’t make these changes.”
The Review said that reserves are expected to begin decreasing in 2019, when total expenditure will exceed total income for the first time.
The Actuary has recommended that the insurable wage ceiling be reviewed and changes should occur annually and reflect the increases in either official wage or price indexes, as are commonplace in social security schemes in developed countries.