Pension funds and investing in Bermuda
Bermuda faces many challenges and the economy remains quite possibly its greatest. Governments of both political parties have used debt-fuelled deficit funding to address our fundamental imbalance — we spend more than we earn. The result is that our debt at present is in the region of $2.4 billion.
There are, I suggest, but three ways to address this: we tax existing people more; we spend less on the people we have; or we grow the number of working people on island.
Quite a bit has been written on the first two solutions, so I will summarise their risks briefly. People who are taxed more consider ways to reduce that taxation, which can lead to a reduction in jobs on island. People we spend less on feel an increasing financial burden, and this can lead to growing social unrest. My focus, therefore, is on growing the number of people working on the island.
The multiplier effect
There is significant evidence to suggest that there is a positive multiplier effect on the economy when the number of working people on island grows. This is particularly so where those jobs come from industries that provide their services to markets outside the island and bring hard currency into it. The longstanding impact of international business has been shown to drive much needed American dollars into the Bermuda economy, and many other local industries rely on customers who work in international business to survive and prosper. The same can be said of the growing vacation rental business and newly renovated hotel stock. As tourists visit the island, they bring foreign dollars to spend, prompting a growth in jobs and government payroll tax generation. Our country’s revenues grow when our working population grows.
What this means for Bermuda
So how do we grow jobs on island? Our national focus has been to encourage companies to locate in Bermuda because of favourable conditions here, and we have historically seen much success: financial services regulation, immigration, taxation, education, political stability. Viewed from the outside in, we have a strong history. Our service offering has been to entice investors to locate businesses they own on our shores. There is a further possibility, however: encouraging companies we own to our shores.
What do we own?
Bermuda’s pension funds are invested by professional asset managers in companies and markets around the world with a view to achieving a return for our pensioners. These investments represent a diversified set of companies, which in turn represent a significant number of employees. What some countries have recognised is that while it is important to obtain the best return by accessing the world’s capital markets, it is equally important to recognise the impact of job creation and demographic shifts on pension funds.
Bermuda faces challenges similar to other countries with ageing populations. With birthrates in decline and a growing seniors population, there will be fewer people contributing to the pension fund and more demands on it. Add to this fact, the contraction in the number of jobs in international business leading to fewer contributions, and the real demographic risk to the pension fund becomes apparent.
What some countries have done to combat that demographic risk is to use a portion of their pension funds to stimulate investment in their own countries, normally by collaborating with professional investment managers, who also put their own capital at risk. By being involved in the investment process — having skin in the game — there is a greater opportunity to direct new economic activity on island that is best suited to our interests.
Whether that is fintech, biotech or enterprise software, we are able to actively play a role in what the third pillar of our economy can become. We can look for opportunities that are not correlated to our existing international business, but are complementary in nature and can happily live alongside it.
Ireland went through a far-reaching shift of this nature. The entire €8 billion Irish National Pensions Reserve Fund was transitioned into the Ireland Strategic Investment Fund with a clear mandate to “invest on a commercial basis to support economic activity and employment in Ireland. This unique mandate reflects a shift from being a Sovereign Wealth Fund focused solely on wealth creation, to a Sovereign Development Fund with a ‘Double Bottom Line’ objective. In other words, [Irish] success will be measured by both investment returns and economic impact achieved”.
While a wholesale shift of pension assets in this way is not appropriate for Bermuda, considering whether some measure of “on-island investment” is warranted certainly is. To do so, however, two further things are needed: a strict and robust governance, and wide and all-embracing consultation.
Regarding governance, Singapore followed this course. With a 15 per cent total shareholder return since 1974 and an almost doubling of their net assets over the past ten years, one of the most successful long-term records of public funds investment is held by the Singapore wealth fund Temasek. As with most successful public fund investment organisations, Temasek has a robust governance structure, which is separate from its political structure. “Under Singapore’s Constitution and laws, neither the President of the Republic of Singapore, nor the Singapore Minister for Finance, [their] shareholder, is involved in ... investment, divestment or other business decisions, except in relation to the protection of Temasek’s own past reserves”. This places the responsibility for investment into the hands of investment professionals, as is the case today, and not politicians.
Wide consultation and discussion
With respect to consultation, where pension funds have successfully been used this way, what has preceded has been a long period of multiparty consultations. This means Government and Opposition, unions and managers, investment professionals and governance experts, seniors advocates and young people’s advocates. In short, it is a solution that needs time and understanding before any steps can effectively be taken.
The Bermuda challenge
The challenge presented by Bermuda’s economy can be solved. Growing the number of working people on island grows the revenue available to our government and allows our country to take the lead in our future.
•Barclay Simmons is a lawyer and Harvard MBA. He has travelled extensively in North America, Europe and Asia speaking with investors in the software industry about opportunities to locate businesses in Bermuda. He sits on a number of public and private boards in the financial services industry
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