Hal Austin

Introduction:
According to some reports, the governor of the central bank expressed amazement when a leading credit rating agency reduced the Barbados credit rating to junk status. I am not sure if he was surprised that the agency had the audacity to downgrade Barbados, or that it took them so long to realise that the nation’s economy is insolvent. This aside, there is everything wrong about the governor’s publicly expressed views, given he is by office the senior financial regulator, and what these observations say about his understanding of the importance of monetary policy and of the important role banks play in society.

To deal with just one aspect: he is on record as giving his backing, somewhat surprisingly, for Canadian banks based in Barbados on the basis of their efficiency. Although this may be true, there is a fundamental difference between the regulation of a bank branch and a subsidiary, between the controls exercised by the host jurisdiction and the home jurisdiction, and generally in cross-border banking. And, more so, the importance this structure plays in financial intermediation and the control of M1 money in the economy and the funding of small and medium enterprises and mortgage borrowers. In other words, the economy can be held to ransom by banks that listen to orders from their head offices based in Hamilton, Port of Spain or Toronto, while ignoring the pressing needs of the Barbados economy. Further, some of these banks expatriate money to their home bases at the end of business every working day. This is a key part of the capital flight that is really damaging to the economy.

NIS:
But let us concentrate on the national insurance scheme, its use as a piggy bank by the government and its longer term obligations. In a properly managed scheme, the only obligations the fund has is to existing and future beneficiaries, and to meet these long-term commitments the scheme devises an investment strategy as its main strategic tool.

Investments are highly technical and should be managed by professional experts, not by civil servants or politicians. So, based on the number of retirees each year for the next thirty or forty years and therefore the fund’s long-term obligations, the investment strategy should be structured to meet these commitments without threat of insolvency or default. For example, if the actuary, through his/her complex mathematics has decided that a given number of future beneficiaries will retire over the coming years, they secure this future outlay by investing in fixed income – either government or corporate bonds, preferably over a number of different markets. This is to diversify the investments so that if one jurisdiction runs in to trouble the ‘safe haven’ will balance it out.

The others parts of the investment strategy are investing in equities (or shares) to provide growth or income through dividends, but the risk of this is greater than bonds so there must be caution. Investments are often also made in property, again to diversify the portfolio, and some money is kept in cash. This used to be for rainy day purposes, but cash has now become in the post banking crisis years an asset class. Some adventurous pension fund managers also invest in what is called alternative investments, which bring in greater returns than ordinary bonds or equities. The reason for this is that there are high-risk and the investor can lose his or her money on the investment. This is the basis of modern portfolio theory, that diversification increases risk-adjusted returns.

So, to explain in simple terms, an average pension investment manager may decide to put forty per cent of the fund in bonds, twenty-five per cent in equities, fifteen per cent in property a further fifteen per cent in cash and the remaining five per cent in alternative investments, mainly hedge funds and private equity. Having made that decision, asset allocation as it is called technically, a decision must now be made on stock picking, again a job for the experts. Because the investment board has decided it would invest twenty-five per cent of its money in equities, it now has to decide the strategy for investing that money.

It may decide, for example, to emphasise geographical investments, and plump to invest fifty per cent of that twenty-five per cent in Barbados and the wider Caricom region, a further thirty per cent in the US because US markets are still giving the best returns in the world, fifteen per cent in emerging markets, because these are the fastest growing markets, and five per cent to fund venture capital projects, mainly in Barbados. This breakdown only goes part of the way, the big decision, which is more technical than it seems, is to pick the actual companies – stock picking.
Or, on the other hand, the investment committee may go for a thematic investment policy: investing in energy, banks, tobacco, travel and leisure, etc.

Politics and the NIS:
We do not have to get in to actuarial complexity to understand the degree of abuse of the fund by this and previous governments. All we need is to remind ourselves that the purpose of a pension fund is to provide an income for the beneficiary in retirement. So, people contribute during their active working lives and draw down on the fund on retirement with the state setting the state retirement age based on average longevity.

In most societies, the state pension scheme is what is a pay-as-you-go scheme, that means the current generation of workers’ contributions go towards providing an income (a pension) for the retired. But the  Barbados NIS scheme is a hybrid scheme, apart from the contributions from those in work, there is also a huge investment pot from which dividends are earned which go towards building up the reserves of the scheme.

Investment Approach:
A pension scheme, particularly in this global economic climate, should be cautious and aim for Beta returns rather than become over-ambitious and aim for actively managed mandates with the promise of Alpha returns, or outperforming the benchmark. Charges are higher, transactions drive up costs, and any Alpha returns are some how dissipated through high charges. Despite the marketing boasts, few active managers have the skills and knowledge to make consistent Alpha returns. If they did, they would be working for themselves making billions of dollars, rather than for clients. There is no magic and, as the Chicago School has shown, a lot of it is luck. The alternative to an actively managed fund is a passive fund, once that tracks a benchmark for example the S&P 500 or the FTSE 250; the charges are transparent and lower because there will be no trading costs or stamp duty to pay, and bi-annual or annual rebalancing of the portfolio can make a bigger difference than it does with actively managed funds.

Risks:
The risks to the NIS are numerous, but the most immediate one is political interference in the management of the fund and politicians dipping their hands in the pot. This should be restricted by legislation. The other risk is that of high unemployment: the higher the unemployment rate the lower the contributions (and the greater the benefits that have to be paid out for some of the scheme’s other responsibilities. But that is another matter). The other major risks are those of having three active funds managed by US-based fund managers, which is a waste of money, and finally, as we have already seen by the government, changes in legislation that reduces the level of income.

Analysis and Conclusion:
One thing I find really disappointing is that as a nation we have spent over 45 years fooling ourselves of how great we are, convincing ourselves of our own invincibility, of being better at exceptionalism than even the Americans, which is saying something. In the meantime, we have missed one or two good tricks: like how to make a small island people very progressive, not only in a material sense, but collectively socially and culturally.

In a transparent and open system, the NIS should have up–to-date details on its investment strategy on its website, its asset allocation model, risk profiles of all investments and the latest triennial actuarial reports. It should make public its long-term liabilities, including the number of beneficiaries and, over and above the actuarial reports, projected demographic changes. The one thing that should be absent from this entire process should be the involvement of general civil servants and politicians. Civil servants are administrators and should be restricted to managing the back office processes such as updating records, sending out reminders, making sure people receive their benefits on time, etc. Politicians should be restricted to setting the broad framework for the scheme, but not in deciding policy or even, heavens forbid, dipping their hands in the pot when they see fit. The people running any national insurance scheme should be professional actuaries and fund managers and they should do so in the sole interest of beneficiaries. If the national insurance scheme is not living up to these principles then it is failing the nation and its members.

It is a noble policy objective to use the pensions contributions of Barbadian workers to create new jobs for future generations of Barbadians. It is in the interest of beneficiaries. However, in meeting this objective the scheme and government should not put at risk the entire risk the financial viability of the entire fund. In the final analysis, however, we need professional people with the right experience and knowledge running the NIS scheme and not academics or over-ambitious, crowd-pleasing politicians.

In any case, the model is flawed. What we need is a new kind of national pensions, but that is another debate. By the way, one contribution that students at the UWI Business School can make to the NIS as an academic exercise is to carry out the risk-profiling and market risk analysis for the fund as part of their learning process. In that way they will be making an invaluable contribution to local understanding of how equity and bond markets work.

27 responses to “Notes From a Native Son – the NIS: Who Is Killing The Goose That Lays The Golden Egg?”

  1. old onion bags Avatar
    old onion bags


  2. Hal makes excellent points in his analysis and conclusion

  3. millertheanunnaki Avatar
    millertheanunnaki

    Very good article. Very informative but at the same time evoking a measure of concern about the longer-term viability of our local NIS especially in the light of lack of current and reliable information on the performance of the Scheme’s various funds and investments.


  4. The NIS nest egg is just about depleted, now to borrow on the open market with an S&P Junk Status will be really bring Barbados to it’s knees. Politicians and the Bank Governor will not doubt blame the rest of the world. Politicians and the bank governor of course will not blame themselves, however every Bajan will feel the effects in life style and the pocket book.

  5. millertheanunnaki Avatar
    millertheanunnaki

    @ Wily Coyote | July 20, 2012 at 10:24 AM |
    “Politicians and the Bank Governor will not doubt blame the rest of the world. ”

    Every word that cometh forth from the mouths of the DLP politicians and their lackeys is one of passing the blame. Blame the BLP, blame the international recession, blame Seethru again, blame Moodys, Blame S&P but praise Moody’s this time. Blame, blame, blame every body but themselves!
    Dennis Kellman has just advised us to dismiss the rating agencies and our junk bond status. According to him, the Barbados brand is top notch (AAA+) among investors in the UK and who are just lining up to invest in Bim!
    What a load of lies and rubbish! Has he forgotten or suffering from convenient amnesia that the CEO of Invest Barbados recently complained about the investment climate in Barbados which is anathema to the effective facilitation of FDI to the extent where approx. $1 billion of FDI and 2,700 slipped through our lazy and “don’t-care” fingers?

    What then is this propaganda piece about the UK investors? Re they queuing up for the Four Seasons villa project and the Merricks dream of paradise in Sunny Barbados? Why don’t they put in a bid for Almonds, or even our sugar industry? Maybe they are waiting for the GAIA to be put on the block!

    God help Bim on its inexorable path to economic and social ruination under this administration!


  6. @ miller
    “Dennis Kellman has just advised us to dismiss the rating agencies and our junk bond status. According to him, the Barbados brand is top notch (AAA+) among investors in the UK and who are just lining up to invest in Bim!
    What a load of lies and rubbish!”

    miller,

    I just read my paper and was coming on to make this point when I read yours. Good blog! Can you imagine how stupid these people we have in charge of this country are? Our credit rating has been reduced to junk status, something investors look at when looking to invest and he could boldfacedly tell intelligent people, dont mind the downgrade, people lining up to invest in Barbados? Then where are these people? He must have been jet lagged, I wonder if he ever went to London before he went on the taxpayers’ dime cause he seem to be only confined to Moontown before they won the government.

    He went on to say and I quote ” as long we have overpayments in the NIS fund, as long as we have foreign reserves, as long as we have a liquid banking system including credit unions, we have nothing to fear”.

    Do Barbadians understand the mentality of this DLP government? Look at the word he is using….overpayment in the NIS fund…….. if this is the case as I have asked already… why not lower the rates for a little while to ease the burden of the people until this recession eases. How do they know that there is this “overpayment ” when we have not been told that the financials are up to date?

    Look, this government has me so mad at their arrogance, my head is spinning. They have treated this in just the same way they dismiss the CADRES poll a few months ago. Polls dont vote, they said! But we all know that there does not seem to much between Kellman’s ears only a loud mouth a little lower!

    But to top it all off is Dr Francis Chandler’s new acronym for NIS:

    * Nipples Incessantly Sucked
    * Nipples Infinitely Sore
    And I like her suggestion that the structure and the management of the scheme needs a general overhaul and that it should be removed from political influence………and this applies to Bees and especially to these Dees!

  7. old onion bags Avatar
    old onion bags

    D L P stands for DUMB LUMBERING POSSUMS….and that is no joke.
    But Prodi…..why are you still getting unwound wid these preternaturals ?
    From here on in it’s a done deal…..these blo-funks have really undone themselves this TIME…..all we got to do from here on is enjoy the Crop Ova….take a page outta Onions book …..relax like a true marquess…..until he hears DING DING ! Then you can get up and put back on the shoes in time to see the likes of Ac and Aarson walk……Irene too..lol

    Boss relax nuh !

  8. old onion bags Avatar
    old onion bags

    Prodi…do the maths…help a fellow !

  9. old onion bags Avatar
    old onion bags

    Man Prodi
    We gine have to get holda this land of the hummingbird fella…..and learn how to exorcise some of we demons….but looks muh crosses….two bobs for a tub.LOL


  10. We have to discuss NIS in context.

    Let us accept that successive governments have abused the fund. The challenging state of the economy explains why this government has depended so heavily on the fund in lieu of sending home public servants and avoided draconian cuts to transfers and subsidies.

    Why has the most important fund in Barbados never been audited in a timely manner which predates this administration?

    How can transparent investment decisions be made under such circumstances?

    It seems we are in a dilemma, we use the fund to protect the country or allow the country to sink while boasting of a health fund.

    Rampant consumption has caught up with us is all.

  11. Observing (and still waiting) Avatar
    Observing (and still waiting)

    @DAvid
    “Rampant consumption has caught up with us is all

    That’s the bottom line. We still have not adjusted to the “new normal.”
    Working, making policy, and operating as if tomorrow is going to get better and our circumstance will “automatically” change.

    Those who are doing well are those who accepted reality from the get go and plodded on with faith and a dose of hard honesty and self evaluation. I’m still waiting for us as a country to do so.

    Observing


  12. ‘Let us accept that successive governments have abused the fund”
    not true. yes, successive governments have used the fund but judiciously. this present administrationhas abused the fund.


  13. “Why has the most important fund in Barbados never been audited in a timely manner which predates this administration?”
    From inception there used to be a comprehensive day to day external audit of the NIS scheme in conjunction with a limited internal audit of the benefits payments system. In recent times the internal audit section has been professionally staffed and the audit expanded to cover all aspects of the scheme. I am sure that the board is in receipt of monthly financial reports for consideration. The problem seemingly lies in the formulation of the monthly reports into annual reports but there is an ongoing audit of the accounts of the nis on a day to day basis.any changes would have to be recent.

  14. millertheanunnaki Avatar
    millertheanunnaki

    @ balance | July 26, 2012 at 11:25 PM |
    “…The problem seemingly lies in the formulation of the monthly reports into annual reports but there is an ongoing audit of the accounts of the nis on a day to day basis.any changes would have to be recent.”

    Balance, I must confess my disappointment in your statement. If I were to grade you, an “F” would be appropriate without denting your pride too much as if your were to be given “AN” for “Arrant Nonsense”.
    All modern computer-based book-keeping applications and systems operate on a cumulative or rolling system. So it is patently obvious that if monthly reports can be formulated (to use your phrase) then its follows that year-to-date data would automatically be generated. The report for the month of December would automatically result in the full year’s result assuming the entity’s fiscal year runs from January to December.
    Stop finding lame excuses for what is a clear case of managerial incompetence from top to middle.
    One would expect that an organization handling such huge sums of other people’s money and with such enormous fiduciary responsibilities to be more, should we say, “professional’ in its financial operations and reporting. But then again we can all blame it on politics even if we dismiss Senator Chandler’s suggestion as bit too radical a surgery to cure a bad case of political interference.


  15. @Miller

    Agreed, the issue with NIS others with insider knowledge have mentioned is being able to reconcile the suspense accounts. It came up when the NIS wanted to transfer pension payments to the banks as a way to resolve this problem you may recall.

    By the way did you hear former Chairman and talk show host Tony Marshall on brasstacks yesterday given Vernie Hinds a good send off?.


  16. Ah shure hope when I is be ready fuh me two cents dat dem got what I is dun put in to gid back to muh bohseeeee!!!!!!!!!! I ent wanna hear nutting bout Rent Spent,,,,Bank Brek,,,Tings Tight Shop at Buy Right…..

  17. millertheanunnaki Avatar
    millertheanunnaki

    @ David | July 27, 2012 at 6:52 AM |

    That much is suspected as to the real delay in finalising the accounts for earlier years.
    Exceedingly large un-reconciled balances in numerous suspense accounts might be a major reason for the auditors’ not releasing the accounts for Board approval.
    The abuse of suspense accounts is prevalent when the senior accounting staff are a bunch of incompetents and bullshitters. The suspense accounts should be reconciled at the end of each accounting month and approved by senior staff. These senior incompetents should be fired if they lack underpinning knowledge and understanding of accounting principles and standards.
    But these are the kind of workers Freundel adulates and sees as the best thing since slice bread.
    What can we do in such an environment other than sink in the new economic market place?

    Tony Marshall paid special respect to his old buddy, sprite and friendly nemesis Verney Hinds. An old geyser with loads of oral history but cast in the mould of King Dyall. He was rather sharp but witty. The old fellow’s voice and contributions would be missed dearly. RIP VH!

    Notice that Tony the old firebrand on the radio has gone underground and taciturn. Rather cowardly of him and leaving much to be suspicious of. CLICO springs to mind. The BIPA group would be in good grazing if they were to sue personally this ex-banker for negligence and lack of due care during his directorship of the CLICO affairs.


  18. Aren’t the suspense accounts generated by a software system which appears not to be easily understood?


  19. “That much is suspected as to the real delay in finalising the accounts for earlier years.
    Exceedingly large un-reconciled balances in numerous suspense accounts might be a major reason”

    I DO NOT MIND THE GRADE MILLER, IT WOULD NOT BE THE First time i have been so graded but i would tend to believe that the true cause of the non-finalisation of the accounts do lie in your above comments. would concede that there has been square pegs in round holes where management of the accounts is concerned but i can categorically state that lack of timely presentation of annual accounts commenced after the 1981 budget.

  20. millertheanunnaki Avatar
    millertheanunnaki

    @ balance | July 27, 2012 at 8:15 PM |

    Take it easy balance. Just ribbing you a bit about the grade. Not my style to grade or categorize people; like Zoe does. I know you are one tough cookie as I have seen you handled fairly well some heavy, albeit misplaced, blows from other bloggers.

    The only people who would benefit from this state of incompetence and accounting madness are the outside consultants who will be charging the Scheme millions of dollars for this kind of clean up work.

  21. millertheanunnaki Avatar
    millertheanunnaki

    @ David | July 27, 2012 at 8:13 PM |
    “Aren’t the suspense accounts generated by a software system which appears not to be easily understood?”

    Don’t buy or swallow that foolishness. A computerized book-keeping system will always default to a suspense account if the person coding or entering the transaction does not or cannot provide the other real or nominal account in order to satisfy the double entry principle of book-keeping. The use of the suspense allows the transactions to be entered temporarily into the system but must be subsequently reversed and allocated to a balance sheet or income & expenditure account if the accounts are to be prepared according to generally accepted accounting principles in order to reflect a true and fair view of the business financial performance.


  22. yes, mr miller i do not know how you happen to be in possession of such information but your above view is ‘spot on’; and to think that all of the staff involved in the management and preparation of the accounts from top to bottom and involved in internal audit as well have some kind of accounting certification.


  23. As an accountant, I am really disappointed at the crap that occurs in the financial reporting of entities connected to Government, whether direct or statutory boards. There is NO LOGICAL REASON that financial statements of previous years should be delayed more than six months past the year end. International financial companies have to report year end results within the month following the year end, to their parent company. Audits are often completed not long after.

    As the above commentrs suggested, suspense accounts are temporary and should only be used where documentaiton of a transaction is not available or where (temporarily) accounting treatment of an item is in dispute.

    The issue is that the leaders of the relevant department or statutory board are at fault, for allowing this nonsense.

    But we really do know that there is a problem, the Auditor General, the only one who seems to be doing his job, has told us so. But he is ignored repeatedly by incompetent buffons.


  24. To repeat a suspense account which is generated has to be reconciled. If the suspense accounts are not reconciled the external auditors will not sign off. Isn’t the issue about the NIS Data Centre unable to reconcile pension cheques outstanding?


  25. As an accountant, I am really disappointed at the crap that occurs in the financial reporting of entities connected to Government, whether direct or statutory boards. There is NO LOGICAL REASON that financial statements of previous years should be delayed more than six months past the year end. International financial companies have to report year end results within the month following the year end, to their parent company. Audits are often completed not long after.”

    Let me state unequivocally that i am a critic of govt depts/boards who fail to produce timely financial annual statements but where we differ is where you seek to give the impression that such a situation does not occur in the management of private entities.


  26. Let us start the debate from the very beginning.


  27. Seven years ago and still relevant.

The blogmaster invites you to join the discussion.

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