WHAT MATTERS MOST: Righting CLICO wrong
Last week’s article stated that “the focus in the CLICO debacle ought to be on the way in which the policyholders’ funds were invested and not on the issue of the reserve fund which, by definition, is minor in terms of size. This is because policyholders are expecting a return on their investment, which is possible only if CLICO is allowed to invest most of the money wisely”.
The reality is that the more information revealed on this fiasco, the greater is the need to blame the executive management for the investment decision-making. Indeed, the forensic audit report noted that “the company is chronically short of the necessary assets required to cover its policyholder liabilities and as such the shareholders of the company have no residual equity interest”.
Based on the valuations of the assets, “it appears unlikely that the inter-company balances will be recovered in full”.
Public policy must kick in once there cannot be a full recovery of assets but it must have clarity of purpose, certainty of incidence, consistency and cost-effectiveness. Given the self-imposed fiscal crisis confronting the Government, it is important to carve out a role for the Government in the CLICO affair that satisfies the four Cs identified above.
The purpose for Government intervention is to bring hope to the investment climate because, historically, Barbadians have been unwilling to invest, and the CLICO affair has the potential to reverse the gains made in the last 20 years with respect to their attitude to investing, rather than simply depositing their savings. The clarity comes from a Government capable of seeing the bigger picture.
In this CLICO fiasco, it may be argued that private citizens and companies took the risks associated with the Executive Flexible Premium Annuities and so they should pay. This may be true but the bigger picture suggests that any Government must encourage private pension schemes to assist in preparing the ageing population for retirement; and so, not to respond to the medium-/long-term damage the fiasco will cause would be a major error of judgement.
Against all advice, Government has taken a decision to bail out the investment at Four Seasons. Imagine the potential damage – psychological, social and economic – of not finding a way to help people who bought life insurance and those who invested in pension plans and annuities in preparation for their retirement. Public policy requires consistency.
In this unfortunate case, the issue of cost-effectiveness has to be seen in the context of more than just the short-term fiscal issues confronting the Government, but rather in terms of the potential medium-/long-run financial distress of over 30 000 policyholders.
In this regard, the Opposition has put a policy initiative on the table after careful consideration of the tentative facts and circumstances surrounding the CLICO debacle. The initiative involves allowing affected policyholders to write off any shortfall of income associated with the recovery of assets against their tax liability with the Government over a five- to seven-year period.
This first requires that all the assets of CLICO Holdings Barbados Limited that rightfully belong to CLICO International Life (CIL) go back to that company. Once the full forensic audit has been done, the policyholders have to be classified along the lines of (1) type, (2) age and (3) amount invested, among others.
This classification will help to determine the vulnerability of each policyholder and therefore will provide the information to structure the nature of the tax instrument on the grounds of the most needy being helped most urgently. For example, a pensioner relying on the income from the insurance policy for basic survival may be seen as most urgent.
However, the size and scope of the policy initiative can only be finalized after full information becomes available. But suffice to say that the residual burden after the shortage of assets is known would be distributed over a period of years, without doing untold damage to the country’s fiscal condition.
The write-off will be against the policyholder’s income tax liability, property taxes or, in the case of a corporate citizen, corporation taxes. The period of the write-off will be determined by the size and scope of the recovery of assets, which must be deep and wide, personal and corporate and local and regional.