Dr Roger Luncheon, Chairman of the National Insurance Scheme (NIS) and chief spokesperson for the Government is denying the reality of the parlous state of the NIS. His amazing comments and pretended reassurance that “the scheme is healthy… I intend to draw pension for a good lil while,” seems to be a reaction to the findings of the independent actuaries as contained in the Eighth Actuarial Report of the National Insurance Scheme (NIS). By law, the NIS is subject to a five-yearly review by actuaries whose principal task is to determine whether the Scheme is operating on sound financial and actuarial bases and whether it provides adequate and affordable levels of income protection. Such reports invariably include recommendations on steps required, where necessary, to bring the Scheme back to viability, or where its assets and income far exceed its actual and actuarial liabilities, to reduce the over-funding by a reduction of rates.
This applies to all schemes – private and public – and the recommendations of the actuaries are taken seriously and acted upon promptly. Not so with the NIS under Dr Luncheon.
The responsibility for the failure to deal with the recommendations arising out of the 6th and 7th actuarial reports at December 31, 2001 and 2006 has been murky and confusing. In each of their annual reports since 2004 the directors have admitted to being “in the process of reviewing and implementing the recommendations.” So when Dr Luncheon tells the press that “The board was rather selective with regards to the recommendations [in the 2001 and 2006 actuarial reports] that it endorsed and implemented,” he is more disingenuous than dishonest.
Duplicity and its consequences
The truth is that the decision to implement or not the recommendations of the actuaries lies not with the directors but with Cabinet. Indeed Dr Luncheon gave a hint of this when he added to his comments that “the government is also exploring a new intervention, such as putting to parliament sustainable measures, to keep the NIS from failing.”
But such duplicity and delay have consequences. As Ram & McRae wrote in their Focus on Budget 2012, the actuaries became so frustrated about the failure to implement their 2001 recommendations that they felt it necessary to restrict a full menu of recommendations, given the outlook of the Fund and the concerns regarding some benefit provisions.
They added that if the limited recommendations were implemented, “then other changes may be considered later.” Ram & McRae concluded that that huge warning signal was missed by the entire Board of the NIS.
Dr Luncheon’s denial is not the only dangerous absurdity to have emanated from him. He actually found it possible to say that his government considers any decision on the Scheme in the same manner as it considers same-sex marriage or the decision on the death penalty!
The Government can choose to tolerate this level of banality in its midst but clearly Dr Luncheon is very bad news for the NIS in particular and ought to have been removed years ago.
Deficit sooner rather than later
One of the reasons for acting promptly on recommendations made by the actuaries is that delay prolongs the underlying problems and exacerbates their consequences to the point that when a solution is finally accepted, the medicine is much bitterer than it might otherwise have been.
A painful example of such a situation is evident in the warning contained in the 2006 Actuarial Report which had projected that total expenditure in 2014 would exceed total income for the first time in the scheme’s forty years, and that unless contribution rates are increased, the Scheme’s reserves would be exhausted by 2022.
But Luncheon and his mindless men and a few women went merrily along their do-nothing path, the result of which is that we are now confronted with the revelation by the actuaries that the NIS experienced just such a deficit ($371 million) in 2011, and is facing an even larger deficit in 2012.
This means that something has gone dramatically wrong in the past couple of years to make a bad situation egregiously worse. And that thing is the NIS’s failed investment in CLICO of close to six billion. Even after the unlawful transaction involving the CLICO head office in Camp Street Georgetownm the NIS is left with a $5 billion hole in its balance sheet and no income from more than 20% of its investment.
The painful medicine
The actuaries are now recommending strong measures that would hurt the beneficiaries of the Scheme who are mainly persons over the age of sixty and who would otherwise be expecting to receive a pension after decades of contributing to the Scheme. Here are the principal measures recommended and my comments thereon:
1. Increase the contribution rate from 13% to 15% no later than January next year.
Some of the relevant considerations are whether the increase should be borne in the same ratio between employers and employees or some other ratio; whether the two percentage point increase should take place at once or staggered; or whether there should be any increase at this time.
We can expect a series of consultations with the business community of which one member has already come out against any increase, and the labour unions. It is unlikely that the sugar workers will agree to such an increase even as they battle the employer for more take-home pay.
The workers and their advisers should avoid being misled into believing that this is the maximum increase they may have to face over the next few years. Pages 32/33 set out two contribution scenarios to meet the funding objectives of the Scheme. In the first case the contribution rate goes up to 19% in 2019 and in the other the contribution rate is a more modest 16.5%.
From a purely financial perspective the government might welcome the immediate increase to 15% of insurable earnings. This will bring in new revenues with no immediate outflows in the form of pension or other benefits payments, particularly if it can cajole the unions to accept this and recommendation 2 below.
In any case, if we stick to form, do not expect this recommendation to be acted on before Budget 2013.
2. Increase the wage ceiling to $200,000 per month.
The increase is close to 40% of the current insurable earnings and again, will bring in additional cash inflows with very little immediate benefits to the contributors. For each employee who earns more than $200,000 per month, the increased contribution will be over $11,300 per month of which the employer will pay $6,800 and the employee $4,500 more per month, both assuming that the share of the contribution split remains at 7.8% for the employer and 5.2% for the employee.
3. Freeze pension increases for two years or until the contribution rate is increased and finances improve.
This recommendation is a three-edged sword in which the key players are the pensioner, the employee and the employer. The question is who decides that the finances have improved and what is the yardstick to measure that improvement.
The consequences of a freeze are enormous for those who rely solely on the NIS pension for survival. A freeze means that the pensioner might move from three meals per day to just two or even less.
4. Move up the pension age from 60 to 65 in a phased manner.
The situation gets worse. If this recommendation is accepted, the worker will now be working and contributing to the Scheme from the age of 16 to 65 – 49 years – and will receive pensions from the NIS for a mere few years – unless the life expectancy increases dramatically.
We have to wait and see what the 2012 census tells us but the 2002 census reported that while the numbers of those 65 years and over have risen proportionally, from 3.9 per cent in 1980 to 4.3 per cent in 2002, they are still small in number.
It is true that the census data do not correspond to NIS pensions, since these are also paid to persons no longer living in Guyana, but the numbers cannot be that large.
The financial and actuarial consequences of this increase will be a significant increase in contributions income over the life of every member of the Scheme corresponding with a similarly large decrease in pension payments to them.
And there will be other implications such as the compounding effect on public servants who now retire at 55 but have to wait another five years for their NIS pension. They will now have to wait ten years.
5. Make changes to old age benefit provisions such as:
The actuaries recommend a revision of the pension accrual rates so that the maximum 60% benefit is attained after 40 years of contributions instead of 35; lifting the number of years over which insurable wages are averaged for old age pension calculations from 3 to 5; and amending the basis for pension increases from the minimum public sector wage to price inflation with a limit.
Each of these will have the same kind of effect – increasing the contribution income to the Scheme and reducing the value of the lifetime benefits which the contributing worker will receive.
The actuaries do however make some recommendations of value to beneficiaries. They call for the equalization of the benefit rules for males and females where differences still subsist and for increasing the minimum survivor’s pension to 50% of the minimum old age pension and up the maternity grant to at least $5,000.
The workers of the country are being called upon to pay for the inertia, intransigence and, dare I say it, the stupidity of the government for more than ten years, aided by the perpetual breaches by the directors of their statutory and fiduciary obligations.
And amid all this the only private sector response I have heard so far is the shameless admission that the private sector will increase its evasion of their obligations under the NIS Act, as we witness with the VAT Act, the Income Tax Act and the Corporation Tax Act.
The failure to address the weaknesses in the NIS over the past ten years has guaranteed that there is no easy option. The workers will have to pay and suffer.
Those who are responsible such as the Finance Minister, the Chairman of the NIS Board and his band of directors are never going to be called upon to answer for their dereliction.
The NIS is a national tragedy. Let us now see how the unions and in particular the government-leaning Federation of Independent Trade Unions of Guyana (FITUG) respond.