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Premier promises civil servants pension fund freeze will only be for a year

Parliamentarians last night approved a bill allowing Government to withhold its contributions into the civil servants pension fund for a period of one year. The measure frees up $31 million to be applied to the Government’s spending needs during the next fiscal year. The Opposition One Bermuda Alliance argued that it was wrong in principle to “interfere” with the pension fund. But they agreed with the Premier’s account of how the pension fund was handled from inception that actuarial advice was not followed and that had impacted the size of its unfunded liabilities. In introducing the Public Service Superannuation Temporary Amendment Act 2012, Premier and Finance Minister Paula Cox said that the money will be returned to the fund in the future and that Government had pumped $87 million into the fund in recent years. She assured pensioners that, by law, should the Fund not have enough money to pay pensions, the shortfall has to be made up from the Consolidated Fund. And she said that the suspension of Government’s contributions for a year would have no impact on benefits to be paid out to retirees. “Also it should be noted that the one year Government suspension will be made up in the future and has no material impact on the funding ratio moving forward,” Ms Cox said. She said Government had taken steps to address inherited problems of the Fund such as increasing contributions to eight percent and 9.5 percent from five percent. The pension fund, she said, had an unfunded liability since inception. “I am pleased to report that due to the above-mentioned increases in PSSF contributions the cash position for the fiscal year ending March 31, 2012 will remain positive. “This compares to a cash deficit of about $11 million for the fiscal year-end March 2006, before the increased contributions were implemented,” the Premier said. Ms Cox added: “The increase in pension contributions was only the first step in fixing this inherited problem and Government must still address the unfunded liability incurred from prior non-contributory service and prior inadequate contributions. Government contributions in excess of the matching contribution may be required.” Government will continue its policy of reducing the “inherited unfunded liability” of the fund “through a series of special contributions and a sound investment strategy”. She took the opportunity to specify the “long-standing” issues which had impacted the financial status of the Fund. “Unfunded liabilities of the PSSF have arisen for a combination of reasons dating back to 1982 when the Fund was first established. “These include, the service prior to 1978 in respect of which no pension contributions were made to the Fund that were integrated under the PSSF, and service between 1978 and 1982 when the rate of contribution was clearly inadequate while it was built up, year by year, from one percent to five percent of earnings. “Also on the basis of the Actuary’s assumption, five percent contributions were inadequate, which has added to the liability since 1982. Also the decision to pay pensions from the Fund commencing 1st April 1986, against the recommendations of the Actuary who advised that pensions be paid from the Consolidated Fund until 1991, thereafter from the PSSF, further compounded this problem.” Ms Cox said that preliminary results of the latest actuary report show that the funded ratio of the PSSF is 33.3 percent, unchanged for the last four years. But, she noted that the Fund’s unfunded liability now stood at $778 million, an $84 million increase from 2010. “The growth in the unfunded liability of the PSSF is concerning and in 2012; the Ministry will commission an actuarial review of the PSSF to ensure the future sustainability of the Fund. During this review the Actuary will perform financial projections to consider the following: n The contribution rates required to sustain various funded ratios of the Plan; n The contributions required if the Plan was closed to new entrants; n Consider the impact that changes to the benefits provided under the Plan would have on the long-term sustainability of the Fund; n The level of benefits required to sustain the Fund at the current contribution levels. Government will take necessary actions to ensure the sustainability of the Fund following the review, she added. She continued: “It is also important to note that for sustainable solvency, it is not necessary that all accrued benefits be fully funded. “Research of the funding statuses of regional and international public service pension plans indicate that there is no internationally prescribed funding level. “In fact, most of the Caribbean Community (CARICOM) countries and the UK generally are pay-as-you-go plans and paid out of the Consolidated Funds of the respective governments. “Accordingly, they are unfunded. In contrast, various government-sponsored occupational pension plans of Canadian provinces are either fully funded or close to fully funded.” Bob Richards, the Shadow Finance Minister said he accepted the Premier’s reasons why the Fund is underfunded “in totality” but the issue was suspending contributions to the Fund. He said the phrase “fiscal space”, the Premier’s preferred term for freeing up money, is a “wonderful turn of phrase” but all it meant was that the Government does not have enough money. “On principle we feel that pension funds should not be interfered with because of a lack of funds,” he said. He said in the corporate world, diversion of pension funds would lead to lawsuits. “The funds belong to the members, it doesn’t belong to the Government.” The United Bermuda Party’s Kim Swan reiterated his party’s view that Government should save for a rainy day during good times. He said Government had not taken the advice and found itself in its current financial position. He said the UBP supports the measure but urged the Government not to dismiss advice from the Opposition in the future. “When the opportunity presents itself to put away for a rainy day, do so,” he said. “When the opportunity to operate with income over expenditure is available, do so.” Patricia Gordon-Pamplin also accepted that in the early days of the Fund, pensions were paid from the PSSF earlier than recommended by the actuaries which had led to an increased unfunded liability. And she sought clarification that members’ contributions will continue to be made to the Fund. Shadow Education Minister Grant Gibbons said that the OBA understood that the Premier was “in a difficult place” and was looking for money where she could find it. But he said: “You can’t have it both ways. You can’t go back to late 1980s or early 1970s and complain that former governments did not put as much money in or they started to pay benefits before they should have and then fast forward to 2012 and say I recognise it’s underfunded but still I’m going to borrow $31 million that I should be putting into it and use it for other things.”

Premier Paula Cox (right) at the post-Budget press conference with Education Minister Dame Jennifer Smith.