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Pensions policy is dangerous

With its 2012-2013 Budget, the Government of Bermuda has made clear its belief that fiscal austerity has not worked elsewhere and it is not the preferred solution to Bermuda’s current fiscal woes.

Keynesian Economics “advocates active policy responses by the public sector and fiscal policy actions by the government to stabilise output over the business cycle.” This policy was first introduced during the Great Depression but the theory of government spending money in tough times and saving in the good times has been around for centuries. As stated in the Premier’s Budget Statement, Europe’s experiment of enforcing austerity during tough economic times has its risks. Many countries are currently in Bermuda’s unenviable position of witnessing their economy contracting and it is fruitless to pass blame on actions taken in the past. The crucial question is: “Does the current budget put the Island on firmer ground looking forward?”

While we believe that the government should play a role during these difficult times, the size of the government needs to reflect the reality of the “New Bermuda Economy”. It may take over a decade for the Bermuda economy to return to the levels of output witnessed in 2007. Both local and international businesses are being forced to become leaner to compete and many jobs that have left our shores may never return due to globalisation. The Government needs to recognise that we can no longer afford $1 billion in annual expenditures and they should make the difficult choices that many in the private sector are making.

We also have several concerns with the sections of the Budget Statement relating to pensions. It is our opinion that reducing payments to an already underfunded Government pension program in order to reduce Government spending this year is dangerous as the policy simply increases a silent future debt obligation.

“During the year, Government will commission an actuarial review of the PSSF to ensure its future sustainability,” and we believe that any changes to contributions should be undertaken after the review. Moreover, international rating agencies now examine future liabilities related to entitlement programmes such as pension obligation when rating sovereign debt. This policy may lead to a further downgrade of Bermuda’s credit rating which would increase the cost of funding the budget deficit.

Furthermore, with private companies, Government proposes to amend the Occupational Pension Act to allow for a voluntary suspension of employee and employer contributions for a period of one year beginning in 2012. While saving the employee and employer some money this year, the policy is simply taking money from future retiree savings, potentially creating a larger problem when those savings are really needed. Not to mention this decreases the employees’ total compensation by the amount contributed by the employer if the employer does not adjust the net pay.

While it is important to get Bermudians back to work, we believe Bermuda’s immigration policy should focus on making it more attractive for new companies to set up and thrive in Bermuda. If government wishes to attract insurance and investment management organisations to the island, they need to create an immigration policy that is appealing to business formation. It is our opinion that they should give work permit exemptions to the key players and their spouses in those businesses which are essential to Bermuda’s future growth. While Government has begun to ease some of the work permit rules a more aggressive stance is needed.

Jeffrey Brewer and James Peniston are the president and compliance manager respectively of Anchor Investment Management Ltd

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Published February 25, 2012 at 7:50 am (Updated February 25, 2012 at 7:50 am)

Pensions policy is dangerous

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