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Warnings expressed over pension freeze deal and a Government ‘living beyond its means’

Government pensions cannot withstand a freeze in contributions proposed to workers as part of a Government deal for pay cuts.

That is the assertion of Chamber of Commerce economics committee head Peter Everson, who called the pension fund “hopelessly underfunded”.

A general meeting of the Trade Union Congress is planned for today to debate the deal, which would see Government employees taking an eight percent pay cut in return for a year’s freeze on payments into the pension system.

Premier Paula Cox has reportedly told unions she was contemplating a pay cut of her own, although last night the Ministry of Finance declined to comment further while negotiations were still underway.

Saying he found it encouraging that Government is “finally acknowledging that the wage bill is unaffordable”, Mr Everson called the eight percent cut in civil servants’ wages “too timid a step, having ruled out redundancies”.

The offer was floated by Ms Cox last week, during negotiations with unions over a new collective bargaining agreement for Government workers.

Civil servants who pay into the Public Service Superannuation Fund (PSSF) give up an equivalent amount, eight percent of their salary, to pay for their pensions.

But Mr Everson said the gap between pay and affordability for Government wages was “of the order of 30 to 50 percent”.

He said: “In recent years, the Government has been borrowing from banks each year to pay the excess wage bill.

“This proposal is to borrow from our children, i.e., the next generation. From a moral perspective, they should be consulted first.”

For Shadow Finance Minister Bob Richards, the proposal to freeze PSSF payments amounts to “a $64 million question”.

“Both the employee and the employer pay into the fund,” he said. “If both are paying eight percent, that means a 16 percent shortfall. It’s in the region of $64 million, if we consider that the total salaries paid out by Government is around $400 million.”

As Government workers retire, Mr Richards argued, the fund will require constant topping up.

“It’s already underfunded,” he said. “It will be underfunded more by this action. While the employee will see approximately the same take-home pay, they’re not going to get the same actual benefit as before. Having a pension is a benefit that was negotiated by the unions, and by this they’re going to be short changed by 16 percent.”

Charging that Government is “living beyond its means”, he said the proposal didn’t solve any problems.

“I don’t think this arrangement is going to pay for all the shortfall that Government is going to experience. I think they will have to borrow more money. I think the public should expect Government to go right back to these pension funds for more. I would expect them to actually borrow money from the pension funds.”

Saying that the money for the PSSF has traditionally been invested outside the Island, Mr Richards said he believed Government intended to issue bonds and have the public funds buy those bonds, as a means of raising more money.

“That’s an issue that needs to be addressed,” he said, adding: “I would be happy to be wrong. But I have a sense that that’s where they are going.”

Economist Craig Simmons, meanwhile, said the proposal now being considered “exploits a trade-off between income lost today versus income lost at retirement”.

He said: “Humans tend to be shortsighted, so income lost today hurts more than income lost 20 years from now. The proposal, therefore, hurts younger workers less than older workers.”

As far as what’s available is the PSSF, Mr Simmons said: “The pot isn’t fixed. The amount in the pot depends on two factors: pension contributions, and tax dollars diverted from current needs.

“The amount coming out of the pot depends on how fast retirees die and they haven’t been dying fast enough, which means that the young will have to cover the shortfall. Defined benefit plans weren’t designed to provide over 20 years’ worth of benefits. In many ways, it’s a Ponzi or pyramid scheme: most of the participants cannot expect to receive any benefits. The young may consider this an intergenerational injustice, and choose not to honour all of government’s pension obligations.”

Asked for her thoughts following a recent series of articles on Bermuda pensions, finance columnist Martha Myron said: “When is a pay cut not a pay cut? It appears there is no effect on the workers’ salaries.”

She said more information was needed on how the proposed reduction would apply to the fund, which is paid out to civil servants upon their retirement.

“Government workers are in the Superannuation Fund, which is a defined benefit plan based upon, generally, an average of the last two or three years retiree’s salary,” Ms Myron said. “Defined benefit plans are the responsibility of the employer.”

Saying that “there appears to be no effect to the workers either way, if no pension deduction is taken from workers’ salary this year”, Ms Myron added: “The issue affecting workers’ future retirement benefit is not clear. For most individuals in the workforce, their pension may be the largest asset they hope to have, next to owning a home.”

She questioned whether the current eight percent employer pension contribution, which Government would normally match, will be reallocated for another purpose, such as paying down debt.

“Concerns on the horizon too are whether Government is considering a complete change in pension structure, such as switching to a defined contribution plan where the workers have to fund their pension with their own contributions, rather than a defined benefit plan that is based on an estimated percentage of a civil servant’s final salary at retirement,” she said.

“Another possibility may be to offer Bermuda dollar bonds as part of a pension investment allocation, thereby allowing Government to use the foreign cash to pay down foreign debt.”

Peter Everson

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Published February 08, 2012 at 9:00 am (Updated February 08, 2012 at 9:03 am)

Warnings expressed over pension freeze deal and a Government ‘living beyond its means’

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