Proposed Public Pension Formula Makes Bad Situation Worse

The following important comment was posted by Actuary and Talk Show host Walter Blackman to respond to a comment raised on the blog 60 Love Can LoseBlogmaster

Walter Blackman – Actuary and Brasstacks host

Pensions have surfaced as an extremely important issue at this stage of our national development, so I want to commend you for bringing this pension-related matter to the attention of BU readers.

The challenge for me is to distil esoteric, actuarial and mathematical concepts into information that you and all BU readers can understand. Please forgive me if I fail to overcome that challenge

We grew up hearing that one of the major benefits derived from working for the government was the receipt of a pension and gratuity.

I will use a 5-year average pay of $5,000 (assumed to be under the NIS ceiling, for illustrative purposes only). I simply want to show how the changes in pension legislation have affected government workers hired before September 1, 1975, those hired on or after September 1, 1975, and those to be hired on or after January 1, 2023.

A person born on January 1, 1945, who was hired before September 1, 1975 and who retired after 33 1/3 years of service will receive the following:

  • Government pension = $3,333.33
  • NIS Pension = $3,000
  • Total Pensions received = $6,333.33

Note that this pensioner is receiving a total monthly pension which is greater than the pay he was getting as an active worker.

This was a problem that the government decided to solve.A person born on January 1, 1945, who was hired on or after September 1, 1975 and who retired after 33 1/3 years of service will receive the following:

  • Government pension = $333.33
  • NIS Pension = $3,000
  • Total Pensions received = $3,333.33

Note the drastic reduction in government pension. This was not the best approach to be taken by the Government of Barbados to solve the pension problem.

A person born on January 1, 2003, who will be hired on or after January 1, 2023 and who will retire after the following years or less of service will receive the following:

  • Government pension (1-36 years of service) = $0
  • Government pension (37 years of service) = $$83.33
  • Government pension (38 years of service) = $166.67
  • Government pension (39 years of service) = $250.00
  • Government pension (40 years of service) = $333.33

This proposed pension formula makes a bad situation worse. The unions ought to make their voices heard.

Walter Blackman – Audio Version

Gratuity = 25% x monthly pension x 150
Pension to be paid = 0.75% of calculated pension

For example:
Government Pension = $3,333.33 per month
Gratuity = $125,000.00
Monthly Pension to be paid = $2,500.00

Kemar Stuart on IMF Reform to Public Service Pension System

Kemar J.D Stuart is an Economist and Director Business Development , Finance and Investment Stuart & Perkins Caribbean

The recent announcement by the IMF states that Barbados is in line for reform to it’s pension system. With drastically reduced revenue intake due to Covid-19, the expenditure associated with pensions , gratuity and retirement benefits will of course take the spotlight .

The intended pension reform is preparing government for the reality of an ageing 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 plan along with high youth unemployment in the public sector. As government now seeks to prioritize limited revenue, funds will be redirected to other areas in order to free up revenue . The amount of funds will be determined by the depth of the cut to the pension budget.

The budgeted expenditure for financial year 2020 is $298 million. The expenditure for 2021 is $335 million and projected total for 2022 is $369 million which suggests that pension expenditure is increasing $36 million on average yearly. Such a rapid increase in spending will pose financial challenges to government especially in this environment. Any intention to maintain this level of expenditure will result in more borrowing or increases in taxation.

To curb these economic and social challenges posed ahead the following measures are likely to face Barbadians from a legislative angle via bills of parliament which may be amended to match IMF’s fiscal affairs policies on pension reform.

  1. An increase in the retirement age across all pension schemes which will decrease outpayment from government while linking the retirement to average life expectancy.
  2. 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 maybe recouped through an increase in contribution on other groups.
  3. An end to specific offerings e.g non-contributory pension as it should be noted the IMF is on record stating that such schemes are programs poorly targeted at poverty alleviation.
  4. New entrants will face strict regulations as it relates to digital payments only, increased contribution rates, increased penalties on early retirement.
  5. The NIS will be restructured from the board level to revamp its operations i.e relaxed regulation to allow the fund to invest in riskier financial options in order to increase financial rewards. Increased payment of NIS contributions are likely and a legal restriction on buying government paper similar to the restrictions the central bank has on printing money. Although funded by private citizens any strains on the fund as seen with unemployment claims will expose government to financial liability The main aim of amendments to the NIS act will be to protect government from being shouldered with debt from the institution which will starve off a potential crisis when payments of financial obligations to vulnerable groups become due.

The social implications are grave to bear with the BERT plan in place. As a new Barbados will emerge with less state responsibility to its citizens.