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Hal Austin

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In the continuing story of the impotence of our policymakers, as the economic crisis beats down on us like a thunderstorm, it is time we took a long, hard look at the National Insurance Board. The nation is running the risk of paying a heavy price as the post-war baby boomers come up to retirement. Basically, ours is a pay-as-you-go pension scheme. That means that National Insurance contributions from the current cohort of workers go to pay the pensions for retirees. But, with historic global demographic changes, with older people increasingly outnumbering younger ones in many jurisdictions, the system is not sustainable. There are two broad, if basic, elements of the National Insurance strategic investment principles: on the upside, the assets and returns on investments; and on the downside, the liabilities – the greatest of which is longevity risks. People all over the developed world are living longer due to a number of factors, including improvements in medical science and lifestyle changes. Diseases and illnesses that would have meant death a few decades ago are now no more than a day procedure in the better staffed and equipped hospitals. Although it is good in real terms for society, it introduces a number of other medical and welfare problems, such as new diseases and pensioner poverty. However, on neither of these broad macro-issues is the National Insurance Board showing that it has a handle on what is going on. On investments, though many of its senior managers and some politicians claim a transparency, not even on its website does it spell out its policies. If investment returns are too low, below the costs of the fund, it means the scheme will be in deficit and will at some point run out. The key therefore is the scheme’s asset allocation policies and how the funds are managed and who by. Are they active or passive? And what is the total expense ratio? What we can safely say is that building a white elephant of an office in Warrens is a bad investment. The main client is going to be the Government which will default on its rents. On the liability side, there is very little evidence that the National Insurance Scheme has undertaken appropriate longevity assumptions; that is, a serious actuarial study of the risks associated with living longer. The other key risk on the liability side of course is inflation, both wage and general, which is the dark cloud behind every long-term pension fund, especially those who increase benefits in line with inflation. To offload this liability the National Insurance Scheme can do a number of things, such as entering the mortality swap market by agreeing to pay a counterparty a fixed amount of cash flow in return for its paying the actual pensions to the retired. The risk is that if people die before the assumed mortality, then the counterparty will benefit; if they live longer, then the pension fund will benefit. What it does is remove the uncertainty from the balance sheet and allow managers to plan for the future with certainty. Alternatively, there is no reason why the Government could not enter the pensions buyout market to offset its longevity liabilities, using the capital to invest in future generations of pensioners. In the final analysis, a state-organised defined contribution fund, with all the regulatory bells and whistles, will grow the Barbados capital market, providing alternative funding to the foreign-owned banks, and contribute handsomely to national financial literacy, along with meeting its benefit obligations.  • Hal Austin is an award-winning journalist with the Financial Times. He is Barbadian and may be reached at [email protected]