Billion-dollar liability hangs over public-sector pension fund

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  • Underfunded: The public-sector workers’ pension fund is underfunded by about $1 billion, according to actuaries

    Underfunded: The public-sector workers’ pension fund is underfunded by about $1 billion, according to actuaries


Only a third of the public service employees’ pension plan is funded right now, according to an actuarial valuation report by Canadian consultants Morneau Shepell.

The plan’s unfunded pension liability was $876 million as of March 2010 while its projected unfunded liability at March 2012 was close to a $1 billion ($978.7 million).

The funded ratio was 33 percent in March 2010, meaning there’s just $33 in the pension plan for every $100 owed. The shortfall would have to be made up by the taxpayer as Government is the ultimate guarantor of the benefits paid under the plan.

Government yesterday admitted the large unfunded pension liability was “concerning” and said it planned to order an actuarial review to “ensure the future sustainability of the fund”.

That could mean increasing contributions or changes to benefits.

“The tabled Consolidated Fund financial statements for 2011 reported an unfunded liability of the PSSF of $778 million, an increase of $84 million, or 12 percent, from the 2010 amount of $694 million,” a Finance Ministry spokesperson said (Ministry figures differ from those given in actuarial report because of unamortised experience loss.)

The planned review, the Ministry revealed to The Royal Gazette, will look at the following:

- The contribution rates required to sustain various funded ratios of the Plan;

- The contributions required if the Plan was closed to new entrants;

- Consider the impact that changes to the benefits provided under the Plan would have on the long-term sustainability of the Fund;

- The level of benefits required to sustain the Fund at the current contribution levels.

The Ministry spokesperson added: “It is important to note that the actuarial liabilities of the Fund are based on the benefits earned up to the valuation date assuming the Fund continues indefinitely, accordingly the majority of these obligations are not actually due until extended periods into the future.

“Nevertheless it is important that Governments take early actions to ensure that sufficient provisions are made to meet future pension obligations. This is exactly what the Government did when contribution rates were increased in 2006, which has had a positive impact on the sustainability of the Fund. Following this review we will again take the required actions to ensure the future sustainability of the Fund.

“It is important to note that for sustainable solvency, it is not necessary that all accrued benefits be fully funded. Research of the funding statuses of regional and international public service pension plans indicate that there is no internationally prescribed funding level.

“In closing, the Government wish to assure current and future pensioners and the general Bermuda population that the Government is sensitive to the challenges facing pension plans of this nature and will continue to monitor the financial position of the Funds to ensure that the Fund remains viable in the long-term. Moving forward The Ministry will formulate a policy in a manner which is responsible and fair to both the pensioners and Bermuda’s tax payers.”

By comparison, 2010 municipal pension funding ratios in the US ranged from a low of 45.4 percent in Illinois to 68.7 percent in Massachusetts and 101.5 percent (overfunded) in New York, according to Bloomberg data.

“Is this a worry? Yes. In the US, the individual states are already facing the results of these outcomes,” said Chamber of Commerce’s Economic Committee chairman Peter Everson.

“Currently the position is getting far worse because the Government decided to ‘borrow’ $65 million from the pension fund this year to plug a hole in the 2012/13 budget and so we will be looking at something closer to 30 percent funding by March 2013.”

Government put in place a year’s freeze on payments into the pension system.

The figures in the Morneau Shepell report take into account a number of data adjustments since the last valuation in 2008 including such things as lower investment returns, lower pay increases than assumed, fewer deaths than assumed and earlier and later retirements than assumed.

The actuary valuation report of the fund was tabled in the House on Friday by Premier and Finance Minister Paula Cox.

The March 2012 report said the plan, or Public Service Superannuation Fund’s valuation and going-concern financial position at March 31, 2010 was:

- Active (contributing) members’ benefits earned = $710 million

- Deferred vested members’ benefits earned = $49 million

- Retired members’ and beneficiaries’ earned benefits = $554 million

And, at March 31, 2012 the projected financial position of the plan was:

- Value of assets = $504 million in 2012 compared to $438 million (actual) in 2011

- Total actuarial liability = $1.48 billion in 2012 compared $1.3 billion (actual) in 2011

- Unfunded liability = ($978.7 million) in 2012 compared to (876 million) (actual) in 2011

Public service employee contributions were projected to be $35 million at March 31, 2012 compared to $33.7 million in 2011; and the employer normal actuarial cost was $22.1 million compared to $21.5 million in 2011.

In 2010, disbursements from the plan totaled $57.5 million.

There were 5,308 members of the fund, with an average salary of $73,300, 444 deferred vested members, and 2,210 retired members and beneficiaries getting an average annual pension of $19,895. Employee contributions were 7.6 percent of payroll projected at March 2012, and 4.8 percent for employer/government.

The Public Service Superannuation Fund (PSSF) provides retirement pensions for retired public sector employees.

“It is expected that the unfunded liability will continue to increase assuming that the plan experience is similar to the assumed and that there are no significant employer special contributions,” Morneau Shepell said.

Morneau Shepell recommended Government “set up a formal funding policy for the plan as there is no such policy currently in place”.

The Ministers and Members of the Legislature Pension Fund was also not fully funded with liability exceeding value of assets by $12.5 million at March 2012, Morneau Shepell’s report said.

It said at March 2010 there were 31 retired members getting an average annual pension of $38,222.

Contributions by members for the 12 months period to March 2011 were $507,200 with employer normal actuarial cost at $948,700.

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Published May 17, 2012 at 8:43 am (Updated May 17, 2012 at 8:42 am)

Billion-dollar liability hangs over public-sector pension fund

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