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Big Payday: Bermuda can’t afford to continue on this path

In 2011, when our economists were still telling Bermuda residents that Bermuda was recovering from the recession, Moneywise saw things very differently - having lived (and painfully observed friends, neighbours, and clients’ difficult financial struggles) though an earlier recession in the United States.

The cost drag of a lengthy recession on Government coffers coupled with impending civil service underfunded pension liabilities loomed ominously closer.

Moneywise wrote a three-part retirement and pension planning “white paper” illustrating two gentlemen in the Bermuda workforce: the “plentiful pension situation of the civil servant’s superannuation retirement plan versus the depletion plight of the gentleman’s retirement under the Bermuda National Pension Scheme provided to an employee in private commercial business in Bermuda. The articles, discussing their constructed personal profiles, their impending retirement goals and concerns, were featured in The Royal Gazette as follows:

Part 1 - Defined contributions versus benefits plans, December 03, 2011 http://www.royalgazette.com/article/20111203/COLUMN07/712039963

Part 2 - Annuity or drawdown: Do you know the distribution choices for your pension? December 17, 2011 http://www.royalgazette.com/article/20111217/COL UMN07/712179928

Part 3 - Retirement: Defined contribution vs benefit plans - how do they compare? January 07, 2012. http://www.royalgazette.com/article/20120107/COLUMN07/701079978

Two years later, those illustrative hypothetical situations are becoming a reality with the announced retirement of a prominent civil servant last week here in Bermuda.

This news, correlating with serious concerns about insufficient government funds to pay active working civil servants, certainly got people’s attention.

Why? The monthly pension liability ($8,703) that Bermuda taxpayers’ face, just for one single civil service employee’s retirement is very generous. Retiring at age 60, using an actuarially determined mortality table of 21.27 years (extrapolating the monthly pension payment -- $8,700 - calculations from Larry Burchall’s excellent detail in his article of last week) means total payments (without the imputed cost-of-living increase) in the vicinity of $2.23 million dollars over the next twenty years.

That estimated number does not include the discounted cost of the civil servant’s health insurance for two people, the individual and his spouse.

Walk away cash - the real reality. Here is another little known fact: Bermuda civil service employees at retirement also can take up to 25% of their Superannuation retirement package in cash. That is correct, in cash. A lump sum.

Up front, as they walk out the door.

The civil servant discussed above soon-to-be retired can elect to take up to an estimated $250,000 in cash (based on the Estimated of Final Benefits Pension Entitlement Calculation), along with a monthly pension benefit (reduced) of $6,500 for his actuarially-determined life.

According to the SAGE Commission’s preliminary report, more than 400+ Bermuda civil service employees are at, or due to retire, in the next year.

That is 400+ civil servants who will no longer be working, but collecting pensions - paid for by the Bermuda private sector & working employees.

It was a commonly held perception (possibly) the world over that having a civil service government job meant lower wages, smaller benefits (i.e. read no offerings of the deluxe medical benefits, company stock option plans, housing allowance plans and the like) than the private sector, but at the end of the day when one retires, the retirement payday will be more than worth it - a pension for the rest of one’s actuarially determined life (even if you outlive that number).

Now, this is not always the case that civil servants earn less than their private sector counterparts as studies across the North Atlantic pond cite higher wages and benefits for qualified civil servants, “Federal Workers earning double their private counterparts, USA today, 13 Aug 2010;

“Canadian civil servants are 30% better off,” Toby Barrett, MPP for Haldiman-Norfolk, Ontario, 11 October, 2013; “Public Sector workers earn £4,00 a year more premium pay.” MailOnline, 24 November 2011.

In Bermuda, as has been publicly stated by various representatives, civil service jobs are generally held for life. Compensation is competitive with private business sector jobs.

The working week hours are less and enforced with compulsory overtime pay, if necessary.

There are benefits: extended sick pay, accrued vacations, health insurance provided at a discount to commercial private business employee plans, and as an added benefit, the health insurance is carried (self-pay) through one’s retirement years, including one’s spouse even if he/she is not employed by government. When the pension choices - in the white papers (Defined Contribution Versus Defined Benefit Plans) listed above - of the two hypothetical employee (one in civil service, one employed in private business) were compared - for those of you who don’t have time to read the white paper, these are the estimated results, based upon an average ending salary for both individuals of $80,000 per year.

Summary of choices for George, the civil servant:

1. Pension distribution of $3,100 for his natural life increasing with inflation, or

2. Lump sum distribution at retirement estimated at $107,000 and a monthly benefit of $2,300 increasing with inflation.

3. Old Age contributory pension

4. Reduced rate GEHI - health insurance for himself and his spouse.

George has far fewer concerns for funding his retirement. He will never run completely out of money. The entire responsibility for maintaining his retirement benefit is placed squarely on the Bermuda Government.

Summary of choices for John, the private sector employee:

1. Pension distribution of $800 for his natural life. If he chooses another term certain annuity option, he could run out of money

2. No lump distribution option

3. Old Age contributory pension

4. John must self fund his health insurance on an individual more costly basis.

John has primary responsibility for funding his retirement. If he runs out of money, it is his problem.

John won’t be retiring anytime soon. Further, annuity choices for retirement monthly distributions upon retirement are severely limited to an annuity or drawdown vehicles from several local pension provider companies, hardly a competitive environment.

I encourage you to revisit the white papers. These are serious concerns. Bermuda cannot afford to continue on this path.

The Three part series in The Royal Gazette are listed above.

The articles also will be posted on the Moneywise www.marthamyron.com website under Financial Fundamentals: Retirement, Pensions and Benefits. If you do not have access to a computer, ask a friend to print them out for you.

Martha Harris Myron JP CPA PFS CFP is a Bermudian journalist and a cross border financial planning specialist focused on offshore financial perspectives for international citizens living, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle: United States, Canada, United Kingdom, Europe, and the island of Bermuda, the premier international finance centre. President of Pondstraddler Life™ Consultancy.