Government assets could be used as an alternative solution to ease the strain on the National Insurance Board (NIB) given the conundrum of an ageing population facing the insurance scheme.
This was the suggestion of Prakash Ramlakhan, Lecturer in banking and finance, Department of Management Studies, UWI.
“The sustainability of the NIS is a major concern especially for the Government and members of the fund. The fund receives most of its income from contributions (members) and investments and uses these income to pay pension, other benefits and cover the NIB operating costs,” said Ramlakhan who explained that the fund needs to liquidate assets to generate cash to make payments given the decreased incomes.
“The assets of the funds can no longer support the projected liabilities of the fund,” Ramlakhan said as he explained what contributed to the scheme’s strain, “This risk increased with longer lifespan (more funds required to pay pensioners over a longer time), more pensioners calling on the NIB as they retire, lower investment returns (especially on debt securities), and a decline in contributions as employees lose their jobs and are not replaced.”
The solutions he believes need to be considered are:
1. Increase the retirement age (phase in gradually)
2 Freeze benefits
3. Increase contributions
4 Injection of assets by state (transfer real estate, shares from state enterprises to the fund..)
5 Issue a long-term interest bearing debt instrument to the NIB
“The solutions would not require the state to raise funds, no significant reduction in cash flows to state. The increase in contributions should be gradual so the effects would be insignificant, non employees and employers,” said Ramlakhan,”The NIB must be supported to secure for social and economic stability.”
He noted that it is incumbent the state is not put in a position where it has to borrow funds to support the pension fund.
“So with respect to the funding as one of the many solutions, I don’t want the government to go and borrow money and provide capital to the NIB. So I’m thinking if the Government has assets and income and assets, for example, FCB shares,” he said, “The Government can transfer some real estate as well, so take some of their assets and transfer them to the NIB thereby increasingly assets of the NIB and the NIB in turn will increase its returns.
“So, in this case, the government will not have any need to borrow money. So what you want, is a solution that will minimise a cash impact on the government.”
He explained this strategy would ease cash flow issues while allowing the scheme to be funded.
“Now, the government may get dividends from FCB but that is insignificant to the government. So there is no real negative cash flow impact on the scheme. If they were to say, okay, take 10% of FCB shares and put it in the NIB, take a certain percentage of the real estate, perhaps $200 to $300 million of real estate and put it into the NIB. So that is what I meant by no significant reduction in cash flow to the state,” he said.
Ramlakhan added NIS contributions would have to be increased but he also stressed that if there is an increase in contributions, it should be introduced gradually.
“We have to increase contributions. You have to, let’s say the recommendation is a 20 or 15 per cent increase in contribution. Do it over a five-year period. So, you gradually move into it. Don’t impose a ten per cent increase in the first year. Let it be a gradual increase so that employers, and employees can adjust accordingly. So, the solution should not be one. That is going to be a huge cash impact on anyone whether is a plan member, an employee or as plan sponsor, which is the state.”
While the ageing population contributed to the strain on the NIB, Ramlakhan believes a lack of proper research and planning was the architect of this problem.
“Previous governments, had promised an increase in NIS benefit without proper actuarial analysis and I think the decision was made without the appropriate data and was more political rather than financial,” he said.
“I don’t think it was prudent to promise benefits without attending to the details of the plan or the fund.”
Now the onus has been placed on the state to find a way to fund the scheme, after the fact.