A top accountant yesterday urged the Government “to get serious” on making changes to civil service pensions, warning that ever-increasing unfunded liabilities threatened to create “huge deficits” regardless of fiscal reform.

Raymond Winder, the Deloitte & Touche (Bahamas) managing partner, told Tribune Business that the Central Bank’s efforts to restructure its “unsustainable” defined benefit had brought the Government’s own pension issues into ‘sharp relief’.

Public sector pensions do not even have a formal structure, effectively operating as a ‘pay-as-you-go’ scheme, and Mr Winder said addressing this problem was “a bigger issue than a lot of the things” the Government is focused upon now, particularly tax and fiscal reform.

Calling for the Bahamas to “pay a little more attention” to this, Mr Winder credited the Central Bank with “having identified and brought to the surface the fact they have a pension fund that is unsustainable on a medium and long-term basis, and trying to identify strategies to deal with that”.

While that has brought the regulator into conflict with the two trade unions that represent many of its employees, the Deloitte & Touche chief said the Central Bank had highlighted the fact the Government will need to address the same issues.

Calling for it to “seriously look at and calculate the unfunded liabilities” bound up in its civil service pensions, Mr Winder said International Accounting Standard 19 (IAS) now required corporate entities – but not governments – to record obligations due to defined benefit pension plans on their balance sheets. These have to be noted as liabilities, whether funded or unfunded.

“The Central Bank, as a standalone entity, having to put those things on its balance sheet, has driven home how unsustainable those kinds of plans are,” Mr Winder told Tribune Business.

The Christie administration has moved to tackle the civil service pensions issue, and the likely multi-million dollar unfunded liabilities the Government is carrying, having commissioned a study by the KPMG accounting firm.

It is unclear whether this has been completed, with some investment analysts estimating that the Government’s current unfunded civil service pension liabilities could range from $500 million up to $1 billion.

When this sum is added to the Government’s existing $443 million fiscal deficit, and almost $5.5 billion national debt, the need to tackle its unfunded civil service liabilities becomes critical.

Mr Winder told Tribune Business that the Government needed to be careful in making temporary workers permanent public sector employees, as this would “create huge obligations for the future”.

“As part of the restructuring and planning, the Government has to get serious about whether adjustments are made to these pensions, to ensure we deal prudently with the possibility of having huge exposures that create huge deficits for the medium and long-term prospects of our country,” the Deloitte & Touche (Bahamas).

“We can’t afford to wait 10-15 years to make these adjustments, when the liabilities are going to be many times what they are now. It has the potential to be a bigger issue than a lot of things we are looking at now. It is one of the biggest parts of fiscal reform, tax reform and has to be taken into consideration.

“This is an issue that is going to become a big problem for the Government as time progresses, and like the Central Bank, it should begin to look at ways to respond to the obligations that would have to be recorded by a defined benefit plan.”

Mr Winder said the Bahamas Telecommunications Company’s (BTC) recent privatisation had exposed the problems posed by unfunded pension liabilities.

As part of the deal, the Government and Cable & Wireless Communications (CWC) had to close BTC’s existing defined benefit plan to new employees and create a new defined contribution structure. And close to $40 million had to be placed into a trust structure by the Government to fill the unfunded liabilities in BTC’s existing pension plan.

Mr Winder added that the Government was likely to encounter similar issues with the Bahamas Electricity Corporation (BEC) and any other corporations it sought to privatise, with “the biggest potential obligation” being unfunded liabilities due to the pension fund.

The Central Bank of the Bahamas last week said it was facing an “unsustainable” employee pension contribution rate of 20 per cent, following strong union objections to recent adjustments.

“Following a fundamental change in the Plan design (the removal of the integration clause with the National Insurance benefits), mandated by the staff, among other cost factors, the Bank is now faced with a double-digit contribution rate of over 20 per cent, which is clearly not sustainable or reasonable,” the Central Bank said.

Source: Tribune 242