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Pension reform

Premier and Finance Minister Paula Cox’s promise last week to review pensions and health care is a welcome one.Ms Cox may have engaged in some hyperbole when she described them in the House of Assembly as the two “hottest issues facing policymakers” when most people would say the economy and crime are past the melting point, but pensions and health care are both high on the list and might be better described as time bombs.That’s because defined benefit plans like the Public Service Superannuation Fund for retired government workers and the parliamentary pension fund pay out fixed pensions calculated as a proportion of a retiree’s salary. They have the added feature of being required by law to rise with inflation.When pensions were introduced, they were also “pay as you go” funds with pensions being paid out from the start of the fund, thus creating an immediate unfunded liability. Ms Cox got a little political when she pointed out that the actuary at the time recommended against that step, but the United Bermuda Party Government of the time ignored the advice. Still, that was all right in the early years of pension funds, when the number of contributors was high and the number of pensioners was low. But as the number of pensioners rose, and the number of contributors remains relatively static (even allowing for the growth in the number of Government workers), these funds begin to run short of money. Better health care and standards of living also mean people are living longer than they were expected to, so the payouts are higher than originally expected.In theory, the money that is invested should help to make up the difference. But the last two or three years have demonstrated that markets can fall, often dramatically, as well as rise, and this cannot necessarily be relied on.In the case of the PSSF and other Government pension funds, the Government can always top the fund up, but this merely increases the burden on the hard pressed taxpayer. A case can be made that that is justified for the Contributory Pension Fund, from which all Bermudians will eventually benefit, but it is harder to justify supplementing the PSSF and the parliamentary pensions, especially now, when most private pension plans are defined contribution plans under which pensioners get back what they put in, along with contributions from their employers.As Shadow Seniors Spokeswoman Louise Jackson said last Friday: “It’s not a happy thing when Joe Blow Public sees retired parliamentarians and civil servants will be getting an increase and they are not.”Ms Cox’s response that Ministers and MPs are often undervalued and rely on their pensions on retirement is likely to fall on deaf ears.In this case, Government said its hands were tied because the law required that the pensions be increased in line with inflation.That will be part of the upcoming review, but it needs to encompass more than that.There are no easy or popular answers. The first to consider is turning the pension into a defined contribution plan. This takes much of the risk out, and it is the form of pension used already in the private sector. The risk and the responsibility lies with the future pensioner, not the Government. This is not perfect, particularly for people retiring when investment markets are falling. But it is a better alternative than expecting the taxpayer to bail out the fund every few years.In 2006, Ms Cox raised the contributions to be paid by PSSF members and others in order to get the funds on a more solid footing. This appears to have worked, in the sense that the funds are now taking in more than they are paying out. But another market downturn could change that, and the inexorable growth in pensioners will have an effect, as will any reduction in the Government workforce, which will lower contributions as a consequence. So increasing contributions may have to happen again. This is only fair.Another alternative is to raise the retirement age (now 65) for Government workers. Currently, Government workers can work on until they are 70 with permission, but it may be time to raise the retirement age to 67, with pensions becoming payable then.A similar step can be taken for the Contributory Pension Fund. This will not be popular, but it may well be necessary.