Most Caribbean jurisdictions have public sector defined benefit (“DB”) pension schemes that are fully financed by their governments. As with those Caribbean jurisdictions, the sustainability of Bermuda’s public sector pension plan, which operates on the same basis, is now under diligent review.

Like the Caribbean, most of Canada’s public sector pension plans are also DB plans. Governments in the Caribbean and in Canada are now struggling with significant unfunded liabilities associated with those plans and the fiscal means to control their costs.

Bermuda, along with many governments around the world, is now considering how it should address public-sector pension reform. We believe that it is helpful to look at how a number of Caribbean jurisdictions, as well as Canadian jurisdictions, are responding to public-sector pension plan challenges and to consider whether those experiences can help to inform Bermuda’s options.

Bermuda

Currently, Bermuda’s pension plan for civil servants, the Public Service Superannuation Fund (PSSF), is significantly underfunded and is under the diligent review of the Bermuda Government. The PSSF’s cost-of-living adjustments were suspended in 2014, and it has been reported that the Government is considering an amendment to the PSSF’s definition of final average earnings, from the salary payable just prior to retirement, to an average of earnings over the final five years of employment prior to retirement.

In March of this year, The Royal Gazette reported that a working group looking into pensions and benefits had been established. According to those reports, the working group has recommended, and is considering, the following PSSF changes:

• Raising the age at which unreduced pensions are payable from age 60 to age 65.

• Applying actuarial reductions on early retirement prior to 65.

• Applying a 10 per cent reduction to the amount payable to a retiree with a spouse who chooses the joint and survivor option.

• Increasing contributions.

• Decreasing the pension accrual rate for active members from 1.5 per cent to a lower rate.

The Caribbean Experience

Jamaica

Jamaica is also experiencing significant challenges with its public-sector pension liabilities. In deciding on pension reform options, Jamaica’s government took into account the principles of adequacy, affordability, robustness, equitability and predictability. Based on those objectives, the following key public sector pension reform measures were implemented, which are expected to take effect in Jamaica on April 1, 2016:

• The DB system will be retained.

• Employee contributions will be 5 per cent of pensionable salary.

• The Government will establish a special fund which will accept contributions and will be segregated from the Government’s general funds.

• New employees will have pension benefits calculated based on a 1.8 per cent accrual rate.

• Pension benefits will be computed using an average of the final five years salary instead of final salary.

• Employees will be eligible for a pension after ten years of service (subject to certain limited exceptions).

• The normal retirement age will gradually be increased from age 60 to 65.

• Pension increases will not be automatic but periodic reviews will be conducted to determine if pension increases can be granted.

• New electronic administration processes will facilitate more efficient and timely payment of pensions.

Although the Jamaica government is committed to the establishment of a special fund which will accept contributions and will be segregated from the Government’s general funds, the exact date on which that arrangement will become operational has not yet been announced.

Turks & Caicos

In 2011, the Turks & Caicos Government proposed several reforms concerning civil servants’ pensions, including:

• The mandatory retirement age of 55 will be increased to age 60.

• Retired civil servants in receipt of two pensions from discrete government funds will receive a single combined pension.

• A period of three months’ advance notice will be provided to retirees prior to any government pension being eliminated.

Puerto Rico

Public-sector pension plans’ unfunded liability in Puerto Rico has been a major fiscal challenge for years. The most significant issue for Puerto Rico is that benefit payouts now cost more than what the government and its employees have put into the system — a member typically uses up his or her contributions in seven years after retiring; however, as a retiree, he or she will likely enjoy 20 or more years of retirement.

Addressing these concerns, Puerto Rico reformed its public-sector pension plan more than a decade ago as follows:

• Employees hired on or after July 1, 2000 cannot join the Government’s DB plan and are required to join a defined contribution (DC) plan which requires employee contributions to be made without any employer contributions.

• In 2013, new pension laws also raised the retirement age, increased pension contributions, and in some cases, significantly lowered monthly pensions.

Bahamas

The Bahamas does not have a formal pension fund in place for retired civil servants. The Government covers public pension costs out of current accounts by paying approximately $60 million a year for its Public Service Pension Plan (PSPP). The PSPP provides civil servants with pensions and gratuities. Eligible members must serve a minimum of five years’ continuous employment service before reaching mandatory retirement.

Due to such significant unfunded pension liabilities, there have been calls for the creation of a DC type plan whereby new public sector employees would contribute towards their own retirement. To date, that has not occurred.

Canadian Experience

The experience in Canada may also be of interest to Bermuda.

Governments in Canada at all levels (federal, provincial and municipal) are also struggling with significant deficits in their public-sector pension plans. There is no single reason for those deficits, although contributing factors include low interest rates and an ageing workforce that is retiring in increasing numbers with generous benefits, along with fewer active employees to fund the retiree benefits.

Pension plans (including the public-sector plans) are considerably more expensive today than they were 50 years ago, when the average employee retired at age 65 and lived about 15 years in retirement. Now, the average government employee in Canada is expected to retire at 62 and is expected to live 22 years in retirement.

In addition, public-sector DB plans provide generous benefits, regardless of the financial performance of the pension fund. These plans exist at the federal, provincial and municipal levels. Several Canadian jurisdictions have implemented various strategies to address public-sector pension plan deficit reform.

Saskatchewan: In response to concerns about the growing public sector pension plan debt, Saskatchewan implemented DC public-sector pension plans nearly four decades ago.

Alberta: In 2014, Alberta introduced a controversial civil service pension reform bill that was intended to affect the pension plans of more than 200,000 active provincial public-sector workers starting in 2016. That legislation proposed benefit reductions resulting from the elimination of inflation provisions, the imposition of higher penalties for those who retire early, and a contribution cap on both employee and employer contributions. As a result of negative reaction to the proposed law, the bill was never passed. The search for a sustainable solution in Alberta continues.

New Brunswick: Due to a significant funding deficit in its public-sector pension plan, the Province of New Brunswick developed a new pension model which offers New Brunswick civil servants pension protection, while reducing its liabilities.

As of December 2013, some 33,000 current and former civil servants are no longer able to participate in a DB pension plan and are required to participate in a form of target benefit pension (TBP) plan known as a “shared risk” pension plan where benefits are not guaranteed and the Government is afforded some funding relief. The new pension model will mean a phased-in higher age of retirement and may require increased contribution levels. Benefits under a shared risk plan are based on a formula for the “targeted” amount of benefit to be paid. As a result of the changes, public-sector employees may have to retire later in order to earn the same pension. Since the introduction of the shared risk pension model, however, there has been ongoing legal action by public-sector retirees. This has resulted in the Government entering into negotiations with public sector retirees and providing them with a new pension offer as that model continues to be worked out.

Under DB plans, plan sponsors bear the investment and funding shortfall risks. TBP plans, like the shared risk pension plan, provide pension plan sponsors with more cost certainty than that under DB plans by placing limits on the volatility of plan sponsor contributions. DB plans also contribute to inter-generation inequality because retired members continue to receive benefits regardless of whether those benefits were adequately pre-funded. The advantage for members under a DB plan is, of course, benefit certainty. Under a DC plan, on the other hand, while a sponsor’s contribution rates are certain, members bear the investment risks and member benefits are not guaranteed. Under TBP plans, benefits are adjusted depending on the funding levels. TBP plans, some would say, take the best features of DB plans and DC plans, with more variability in benefits for members than DB plans, but less than DC plans.

Federal Jurisdiction: At the federal level in Canada, changes were made to the public service pension plan on January 1, 2013 to reflect:

• Increased contribution rates for all active and future public sector pension plan members, with the objective of reaching a more balanced cost-sharing ratio for employer/employee contributions of 50:50 over time.

• An increase in the age at which new employees can receive an unreduced pension benefit from age 60 to 65.

On April 24, 2014, the federal government also announced proposals to allow crown corporations (as well as organisations within federally regulated industries) to adopt TBP plans.

Bermuda — Where could it go from here?

The Caribbean region has youthful regulations and now may be the time for bold pension reforms together with a move towards universal public sector pension coverage.

According to actuarial reviews of several Caribbean public pension systems, DB public sector plans in the region are largely unsustainable. Public pension plans in Antigua, Barbuda, Bahamas, Barbados, Belize, Dominica, Guyana, Jamaica, St. Vincent and the Grenadines will likely encounter cash flow deficits by 2025 or before, and, in any event, no later than 2035. Also, in some jurisdictions, contribution rates which would allow for benefits projected over a period of 60 years are significantly higher than current contribution rates.

In an effort to improve sustainability, Caribbean countries such as Barbados, Belize, Dominica, St. Vincent, the Grenadines, and Trinidad and Tobago have increased total contribution rates, while Barbados, St Lucia, and the Dominican Republic have increased the retirement age. Other Caribbean jurisdictions have decreased accrual rates.

Will Bermuda follow their lead or will Bermuda explore the viability of a TBP plan model, which has been introduced in at least one Canadian Province? Alternatively, Bermuda may radically change its public-sector pension plan design by switching to a DC plan, in order to improve sustainability.

The Government of Bermuda should be congratulated for announcing its prudent, measured, and diligent review of the numerous public-sector pension reform options that are possible. Pension reform is complicated, and requires the excellent governance approach now being undertaken.