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Safeguarding pensions

In his speech to the Progressive Labour Party and in his later curtailed statement to the House of Assembly last month, David Burt provided some details on the Government's plans to allow holders of private pension funds to withdraw a portion of the funds and use them for investment in Bermuda.

One of the reasons given was that Bermuda lacks capital for entrepreneurs and small businesses, and in this Mr Burt was correct. He framed this as part of his assault on the “status quo”, the allegation being that a shadowy establishment was deliberately preventing people from getting ahead.

In the past, it was certainly true that black Bermudians were starved of investment funds — as a young businessman, Sir John Swan was turned down for his first big loan by the Bank of Bermuda and it took an intervention by then chief general manager Sir Henry Tucker to set him on the road to success. But not everyone was so fortunate — or bold.

Whether this is still the case is debatable. But what is certain is that Bermuda does a poor job of funding businesses, new and old.

Mr Burt's new tendency to frame everything in a divisive “us and them” narrative may satisfy his base political support, but it may also drive away potential investors who understandably do not wish to do business in a place where they may become the next public enemy.

That's a topic for another day.

But what is undeniable is that Bermuda, perhaps ironically so given its arrogation of the brand “risk capital of the world”, is poor at funding business ventures and has very little appetite for business risk.

The banks tend to shy away from lending to anyone who does not already have the equivalent amount of money or assets in their pockets, reinforcing the sense that only the rich can get richer. But in fairness, they are banks, not venture-capital funds, and are perhaps chastened by their irresponsible behaviour in Bermuda and elsewhere in the years leading up to the 2008 financial crisis.

However, Bermuda, unlike larger countries, has little venture-capital money available, either for start-ups or for small and medium-size businesses that have the ability and desire to expand. The Ignition project is the exception that makes the rule and the Bermuda Economic Development Corporation was set up to meet this need as well.

Even the Bermuda Stock Exchange suffers from this problem. While most of the established companies whom Mr Burt appears to be targeting are listed there, the reality is that the illiquidity of the exchange makes it unattractive for many investors. Why invest in something when it is difficult to know if you will get fair value for the stock when you have to sell, assuming there is a buyer at all?

For those people who do have cash, and they are not completely extinct, the tendency has been to either put money abroad or into local real estate. Bermuda's realtors have reported that cash sales for property have soared in the past year, suggesting that many investors are seeking bargains in this area, and are gambling that prices have hit bottom.

The problem with both these forms of investment is that the money is effectively lost to the economy. This is obvious in the case of overseas investments, but local real estate is for the most part a long-term investment and is passive by nature, at least when prices are static. It does not contain the risks — or the rewards — that investing in businesses that generate activity and jobs do.

That this is so may reflect the essentially conservative nature of many Bermuda investors, but it also suggests, as recent surveys have shown, that investor confidence in Bermuda was already low before Mr Burt went on his recent attack.

Visiting venture capitalist Tugce Ergul made this point as well, noting that Bermuda's branding as a tech centre was poor. That will not be music to the ears of Mr Burt, given his efforts in the fintech field, but it is a valid criticism.

But Ms Ergul is also right that the situation is redeemable. As she said, Malta has become a centre for technology investment in just a few years. Clearly its position as a European Union member is different, but it also has a growing reputation for corruption and has until very recently shown a shocking reluctance to investigate the murder of a journalist investigating that very corruption. So if Bermuda can maintain a reputation for probity, then surely it can attract new companies and capital.

But that is a big if. Local investors have shied away because of lack of confidence in the direction of the economy. Mr Burt's suggestion that pension fund holders should now take some of their savings to invest in local business needs to be handled with caution.

One of the reasons that insurance companies and other pension managers invest Bermudians' pensions overseas is as a hedge against something going wrong in Bermuda. Since many pension holders may well have other investments in Bermuda — in savings accounts, real estate and local businesses, there is a genuine risk that a saver could lose everything if Bermuda, for whatever reason, suffered a severe economic downturn.

This is a greater concern than it would be in a larger country with a more diverse economy. Even Singapore, often cited by Mr Burt in his arguments, has more than two industries to depend on.

Pensions are not only a hedge against the possibility of something going wrong, they should be conservatively managed. Advisers encourage employees to take more risk when they are younger, on the basis that there is time for downturns to even out while the rewards are greater, but they also advise their clients to become more conservative as retirement nears and the focus shifts from capital growth to capital preservation. Yet only those who have accumulated a decent sum for their pension will have enough money to invest in the kinds of companies Mr Burt presumably wants to encourage.

The word “presumably” is used deliberately. Even in a few weeks, Mr Burt's description of how these funds could be invested has changed. When he addressed the Progressive Labour Party's delegates conference, he noted that Singaporeans can take a portion of their pension money to make a down payment on a house or invest in companies listed on the Singapore Stock Exchange.

Previously he had said: “So this government will take direct action in tackling these forces, by using recently changed laws that allow the Government to start corporations through the BEDC that will keep our local companies honest, while providing relief to many in this country.

“Not only will we start these companies, but all of you will have the option to become shareholders, so you can enjoy the collective benefit. What does this mean? Does this mean that the Government is going to get into the business of providing food? Not entirely, but this does mean that a government-backed company must challenge the high prices of food on our island.”

He went on to say: “Collectively, we can unleash the power of co-operative banking and give you, the citizens who have been paying our local financial institutions for years, the power to start your own co-operative financial institutions. What does that mean? You can pool your resources to start your own bank!”

Governments, regardless of where they stand on the political spectrum, have a poor record at choosing business winners and losers. And nationalised businesses have a poor track record as well.

So when Mr Burt talks about government-backed companies and banks, taxpayers should beware and pension depositors should be nervous.

Mr Burt may already have run into some blowback for these statements by the time he attempted to deliver his “not a Throne Speech” ministerial statement in the Lower House only two weeks later before he was rather abruptly shut down by the Speaker.

The Premier rather petulantly released the full statement to the media in any event:

“Persons will tell you that people are being forced to use their savings — or that I am going to decide what to do with their savings, nothing can be farther from the truth. If you like your savings where they are right now, then you can leave them there; this government will not force you to do anything you don't want to do.

“But if you have a need and desire to access your savings to put a down payment on a house, or to purchase an asset to start a small business, or to pool your savings with like-minded Bermudians to put together a medium-sized business to challenge existing players in the local economy, then I consider it our responsibility to make that a reality. We cannot give people the training and then not give them the tools; capital is what is needed for many Bermudians to unlock their potential, and we will unlock that capital.

“Finally, Mr Speaker, there has been much comment on my encouragement of persons to use their capital to form their own co-operative enterprises, including those that can reduce the cost of food to Bermudians. Persons whose mind is stuck in the past decide to bring up old models without realising that we are in 2019 and not 1979.

“Mr Speaker, technology has transformed what can be done when it comes to using collective buying power. The Bermudians who are now in our coding boot camp won't need to rent a building to provide cheaper food; they can design an app that will consolidate orders from Bermudians so they can purchase food cooperatively, eliminating the middlemen and saving Bermudian families money.”

So Mr Burt walked back his statements at least a little. Gone is the phrase “government-backed companies”, at least for now.

Mr Burt does dangle the attractive idea of a collective food company whose owners can use an app to buy food overseas and ship it to Bermuda together. This can already be done, but the devil is in the details. The reality is that the cost savings to be achieved are less substantial than people may think when they see what something is being sold for at a Walmart, before the cost of transport and duty are added to the mix. Savings can indeed be achieved, but it is much harder to create a viable business out of this than Mr Burt may think, technology or no technology.

Finding ways to increase equity funding in Bermuda is crucial. Ensuring that entrepreneurs can get funding for good ideas, especially when they might have been deprived of capital in the past as a result of discrimination, is also important. But huge care needs to be taken to ensure that people do not end up becoming burdens of the state in their old age because of an ill-judged financial foray years earlier, or because they bought into a government-backed idea that failed.

At a time when Bermuda already faces a ballooning financial burden from an ageing population, making it worse would be disastrous and a stain on this government's record.

Of course, creating the conditions in which the economy can grow faster than 0.5 per cent a year would also solve many of these problems. Mr Burt and his government should focus on that first.

Pension plan: David Burt, the Premier, framed his proposal as part of his assault on the “status quo” (File photograph by Akil Simmons)

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Published December 23, 2019 at 8:00 am (Updated December 23, 2019 at 7:44 am)

Safeguarding pensions

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