Confidence in pension fund management at a staggering low
Given all the latest local financial news on the economy, whether it be the concerned reaction from international business at the Premier’s 2023-24 pre-Budget breakfast meeting, the Government’s final Budget presentation in the House of Assembly or the Opposition’s (confusing) official Reply to the Budget, there is a dust storm of critical fiscal information swirling in the air at present. Almost overwhelming, actually.
We’ve got a population demographic crisis, a debt crisis — it is three times our annual revenues — a plethora of government guarantees, a cost-of-living crisis, an employment crisis, and the list goes on.
One item that seems to be getting more attention these days is the state of our underfunded pension funds — in particular, the Contributory Pension Fund. I have written about this before, but I think it is worth revisiting. You all know that the Contributory Pension Fund is the fund into which the Bermuda public and private-sector workers pay and from which they expect to receive a pension. The CPF is Bermuda’s social insurance scheme, providing some income to all residents during their retirement. It is also the pension of last resort for residents who have no other means of income at retirement.
Our economic wizards have recently told us that it is and has been severely underfunded, and unless we do something different with its management and structure, it will be completely exhausted by 2044. Empty. Zero. So, right now, anyone who is 45 years or younger, should not count on it for their retirement income.
Let’s go back in time to the 2013 Spending and Government Efficiency Report. That report revealed even back then that the CPF was seriously underfunded to the tune of more than $2 billion, it would run out in 2047 and, incredibly, that it had not had a financial statement audit since 2005!
Recommendations for changes to the CPF contribution rates and urgent action to bring the fund financials up to date were specifically outlined in the Sage Report. It is clear that little progress has been made in this regard.
One distinguishing fact about the CPF is that it does not have any legitimate access to the Government’s Consolidated Fund — our general checking account — to “assist” its funding. However, both the government employee Public Service Superannuation Fund and Ministers and Members of the Legislation Public Fund have ultimate recourse to that Consolidated Fund to meet any unfunded/urgent obligations. What this means is that the Government cannot rely on the Consolidated Fund to meet any CPF pension obligations and, therefore, it is imperative that it be well managed.
Let’s look at its management today, in 2023. On the Auditor-General's website, under the “Our Universe” — “work completed” heading, you can see that the last completed financial statement audit for our CPF was in 2012. So, readers, this means that in addition to the Government's continuing and egregiously late standards of financial reporting, it is also relying on 11-year-old data to make future decisions on the management of our CPF. Considering that all of our economic advisers have been warning us that this fund will now run out completely by 2044, one would think that there would be some serious “pressure” for the government administration to, at the very least, bring the financial reporting on this fund up to date. Astonishingly, there hasn’t been.
Now, contrast this ongoing delinquency of government administration accountability with that of the private sector. All Bermuda companies must comply with the rules and regulations of the The Companies Act and be registered with the Registrar of Companies. In addition, the Bermuda Monetary Authority approves and regulates all Bermuda’s exempt — non-Bermudian — companies. Legislation requires that companies must submit annual, up-to-date financial statements for public access. Failure to adhere to the regulations in the Companies Act will result in various fines and in some cases licence revocation.
Our sole financial services regulator, the BMA, also has its own strict enforcement guide for exempt companies. This guide gives a detailed list of its broad powers, requiring companies to comply with our statutory and regulatory requirements, and it also states penalties for noncompliance. It is quite ironic to me that the first item on the list of the BMA’s 12 principles of enforcement is: “1, Enforcement action will be taken to protect customers from harm”.
Now there is a reassuring thought. Looking out for the customer's interest. Oh, but wait, this is for the private-sector customer. Apparently, Bermuda Government Inc does not follow these sorts of rules and protection guidelines for its own pension-paying and taxpaying “customers”.
Getting back to those outdated, 2012 audited financials of the noncompliant CPF, during her term, the late Auditor-General Heather Jacob Mathews wrote in one of her related reports as follows:
“Due to serious deficiencies in the accounting records of the Contributory Pension Fund and in the system of internal controls, I was not able to satisfy myself that all assets, liabilities, revenues and expenses of the Contributory Pension Fund had been reflected, nor was I able to satisfy myself that recorded transactions represented valid transactions of the Contributory Pension Fund for the year then ended. As a result, I was unable to determine whether adjustments were required in respect to recorded or unrecorded assets, recorded or unrecorded liabilities and the components making up the statement of financial position and the statements of changes in net assets available for benefits and changes in pension obligations.”
Fast forward to our present 2023 Auditor-General, Heather Thomas, who writes in her latest report:
“It is inexcusable that the CPF has not produced financial statements since 2012. Government should take immediate steps to ensure that the Accountant-General has the financial resources to recruit staff to bring the CPF financial statements up to date. To not bring the financial statements up to date should not be an option”.
I don’t know about you, but my confidence level in the Government's management of our money in general — and, in particular, its “care, custody and control” of our CPF — is very low.
Milton Friedman, an American economist and statistician, pretty much summed all of this up when he once said: “Most of the energy of political work is correcting the effects of mismanagement of government”.
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