Caution: Bridge Company helping to sink leaking NIS

Recently the NIS has made news on two scores: the first that it will not receive any dividends on its investment in preference shares in the Berbice Bridge Company Inc., and the second that there are more than 1,500,000 contributions which have not been credited to the workers’ account.

I was disappointed rather than shocked when I saw Ms. Doreen Nelson, General Manager of the NIS, sitting passively next to her Chairman Dr. Roger Luncheon announcing that persons were not coming forward to help clear up the contribution mess in the NIS. Ms. Nelson knows that his statement contradicts the experiences of many contributors who try, sometimes for years, to persuade the NIS that the contributions recorded in its records are less, sometimes significantly so, than the actual contributions they have made over their decades of working life and contributions.

A client has been engaged in frustrating correspondence for more than four years persuading the management of the Scheme that his entitlement is a pension rather than an Old Age grant. I myself have had fifteen telephone calls to Ms. Nelson over the matter and all I hear is that the NIS is looking into it. Frustrated with the delay, the poor fellow travelled to Guyana from the USA over the Christmas holidays only to be told that it was Christmas time and the matter would have to wait until the holidays were over!

I reported this to the General Manager several weeks ago. She said that was not good.
Continue reading Caution: Bridge Company helping to sink leaking NIS

Forty-four years of the NIS

September marked forty-four years since the National Insurance Scheme was launched by Prime Minister Forbes Burnham’s Government. It also marked twenty-one years of the control of the NIS by the PPP/C Government and the Chairmanship of another Forbes, this time bearing the surname Luncheon. The latter and a hard core of directors have led the NIS into a state where the Pension Reserves are now being used up by about two billion dollars per year. The saving grace for the reserves is that short-term and industrial benefits paid out annually are generating surpluses that help to compensate for the reductions in the Pension reserves.

The NIS was established as an actuarial scheme, i.e. one that seeks to balance out its long-term liabilities against its assets and revenues. The way this is achieved is by way of periodic – usually five yearly – evaluations carried out by external independent actuaries. The process is very scientific and involves a review all the data on active and past contributors, past and projected future income and expenses – of which pension benefits are always the more significant item – leading to recommendations generally designed to maintain/restore the actuarial balance of the Scheme.
Continue reading Forty-four years of the NIS

Clico and immunity

Perhaps it is the constant stream of news coming out of Trinidad about Commissions of Enquiry, referring files to the Director of Public Prosecution or about police investigations in that country. Or perhaps it is the knowledge that Clico Guyana is partly responsible for the sorry state in which the NIS finds itself, or that the individual who directly contributed to the loss to this country of close to seven billion Guyana dollars walks free, or the unsatisfactory conduct of the liquidation of the company, or the fact that so far my request to the courts for access to relevant files has come up with nought.

Then we have the rounds of telephone interviews being given by politicians to the newspapers and speeches made at hugely expensive dinners in which words like crisis at the NIS or the resolution of the Clico debacle are regarded as taboo. After all, the self-employed could not care two hoots about whether the NIS sinks or swims or whether anyone is held responsible for the failure in which so many authorities are in an incestuous game to protect each other.

To square the circle we have the political opposition which has spent inordinate energy on the “symbol” of Rohee. It is now close to four years since I wrote an open piece in which I said that the parliament must do something about Clico and suggested a number of measures they should consider.

In that call I noted that the National Insurance Scheme (NIS) alone is exposed to Clico for well in excess of six billion dollars or more than 20% of the funds accumulated by the NIS over its forty years of existence. I pointed out that members of Parliament ought to be aware that under the National Insurance Scheme Act any temporary insufficiency in the assets of the (NIS) Fund to meet its liabilities has to be met from appropriations by Parliament. In other words, they would have to approve the money to be funded by taxpayers. The politicians’ response has been less than adequate.

Red ink
Shortly before the call on the National Assembly, I had written about the widening financial instability enveloping Guyana as a result of Clico and Stanford and wrote that when the dust settles, the taxpayers, NIS contributors and beneficiaries, members of pension and medical schemes and depositors in Clico and potentially in Hand-in-Hand Trust (HIHT) and the New Building Society could lose collectively several billions from the fall-out in the financial sector. Of these only the NBS came out largely unscathed since its own $70 million loss had nothing to do with the Clico or Stanford.

Let me briefly fast-forward to today. As of now, while several pension funds and the NIS are still holding anywhere between six and seven billion dollars of worthless paper, the majority of Guyanese including the several politicians have quietly recovered most of their money and some of them began counting their blessings around this time last year. They are not going to open their mouths, while when they do it amounts to nothing, and the private sector is only willing to repeat all kinds of platitudes or safe criticisms sent with signals to the government that this is for show only.

Part of the problem with Clico is that the approach to Clico from the very beginning has been without resort to facts, a point made ad nauseam over the years. Some of it was clearly carelessness or laziness. For example, when the President assured the nation on February 5, 2009 shortly after the collapse began that Clico’s assets were sufficient to meet its liabilities he was repeating a company line without having read the December 31, 2007 analysis showing that 81% of the company’s assets was invested in related parties, all of which were under various degrees of threat (SN February 7; Business Page Feb 8 2009).

Collective failure
But it was partly skin-saving as well since Clico was a collective failure of a number of institutions and individuals. In transactions that came under the supervisory lens of both the Commissioner of Insurance and the Bank of Guyana, no one it appeared noticed or felt competent to deal with a company that issued “insurance policies” with premiums running into billions of dollars having a statutory fund of less than fifty million dollars. As pressure mounted on the President and on those with direct responsibility for the sector, the President in his typical style threatened prosecution against the directors and management of Clico if fraud were found. That threat could not be serious for the simple reason that the President knew that the sole Guyanese director and officer was the company’s CEO who would have been the decider over who should be favoured in getting their money back from the fast sinking ship. That is one secret that never saw daylight.

We knew from the newspapers here that the government of Trinidad and Tobago had moved against CEO Lawrence Duprey and finance specialist Andre Monteil for civil and/or criminal conduct in the collapse of the insurance giant Clico and its parent CL Financial. I reported that a civil lawsuit was brought by Trinidad’s Central Bank and Clico against Duprey and Monteil for alleged mismanagement and misappropriation of Clico assets and that Attorney General Anand Ramlogan had directed that all files coming out of the probe into the collapse of insurance giant Clico should be forwarded to Director of Public Prosecutions (DPP) Roger Gaspard to determine if criminal charges should be laid against Duprey and Monteil.

The story is different in Guyana because of the political and personal relationships that control Guyana. The key players in the Clico saga three years ago were President Jagdeo, Finance Minister Dr Ashni Singh, Clico’s CEO Ms Geeta Singh-Knight all of whom currently hold and enjoy various forms of public office, and Ms Maria Van Beek, former Commissioner of Insurance who left the country following an attempt on her life.

They all knew but did nothing about the company breaching the provisions of the Insurance Act and compounded its unlawful conduct by failure to comply with a demand/request by the regulator to repatriate the Statutory Fund. They did nothing of consequence.

It is not as if there are no penalties. Section 19 of the Insurance Act provides that any person who contravenes any provision of the Act, or any of its regulations or any direction or requirement made by the Commissioner of Insurance, is guilty of an offence. Unlike the normal presumption in law where the prosecution has the burden of proving beyond reasonable doubt the guilt of the accused, the Insurance Act shifts the burden to the “person” to prove that s/he did not knowingly commit the offence of omission or commission.

In what in normal circumstances would be real noose-tightening, the law goes on to provide that where an offence is committed by a company – in this case Clico – and the offence is proved to have been committed with the consent or connivance of, or to have been facilitated by any neglect on the part of, any director, principal officer, or other officer or an actuary or auditor of the company, he, as well as the company, shall be deemed to be guilty of the offence. Ms Singh-Knight was both a director and principal officer of the local company and most certainly it would have been to Ms Singh-Knight that the Commissioner of Insurance would have been addressing correspondence and directions.

Playing a supporting role then was the Central Bank Governor who failed to appreciate the nature of the product that Clico was offering and the Bank’s responsibility to regulate it.

One big happy family
Now we have moved on to phase 2 in a liquidation that breaks many of the rules, some players have changed. Ms Van Beek has gone and her place has been taken by a lawyer Ms Tracy Gibson whose supervisory responsibility of the insurance sector is conflicting with her unlawful role as an assistant to the liquidator. Mr Jagdeo is busy with his accolades and ventures while Dr Singh remains as Minister. The Bank of Guyana has seen its Governor appointed liquidator over a company to the demise of which his Bank contributed in no small measure. Ms Singh-Knight has been promoted and for all practical purposes granted a pardon, Chartered Accountant Mr Maurice Solomon is another unlawful assistant liquidator to Mr Williams while Senior Counsel Ashton Chase is the attorney. Mr Solomon in turn has been appointed a liquidator of Caribbean Resources Limited, one of Clico’s big debtors. Given that tens of millions of dollars of fees are being paid out by cheques signed by Mr Solomon and Ms Gibson one might have expected some better accounting with the reporting of the transactions under the liquidation and compliance with the Companies Act.

It is not that some people are receiving moneys outside of the law that bothers me. It is that a responsible and competent liquidator has a duty to look for wrongdoings by the company prior to the order for liquidation. Mr Williams is an extremely decent man in the best tradition of that word. But inexperience alone does not explain his unwillingness to date to have pre-liquidation transactions and conduct reopened for examination.

I am sure our private sector leaders read the regional pages of the Stabroek News. The news coming out of Trinidad and Tobago must surely suggest to them that an enquiry into Clico for possible criminal conduct is long overdue. We have been duped before by President Jagdeo who responded to calls for action on Clico by insisting on a similar investigation into Globe Trust. When his bluff was called he changed tack – no investigation into Clico in consideration for no investigation into Globe Trust. What a clever deed!

Let us hope that the next leader of the private sector to speak at a function will at least recognise the twin issues of Clico and the NIS.

Things we have not noticed

Following, but not as a result of last week’s column addressing the parlous state to which Cabinet Secretary Dr Roger Luncheon has brought the National Insurance Scheme, I had two very interesting conversations, one with a business leader and the other with an MP. In advance of consultations to be held with the actuary on his draft report on the eighth five-yearly actuarial report on the NIS, they both wanted to know my thoughts on the report’s findings and recommendations. Both seemed not to be in the least bit uncomfortable to admit that while they had last week’s Sunday Stabroek they did not get around to reading the newspaper or the full-page column on precisely that topic. We can only guess about their contribution to a consultation for which they would have been so hopelessly unprepared on a matter of such grave national importance, a matter that has been the subject of several articles over a recent two-week period.

It is even worse. By now we all should have been aware that the government of which Dr Roger Luncheon is the Cabinet Secretary and the Board of the NIS of which he is the Chairman, did not implement the recommendations contained in the sixth and the seventh actuarial reports on the Scheme at December 31, 2001 and 2006. But the two persons I spoke with apparently did not know about the parlous state of the Scheme, while my politician friend was bold enough to ask seriously but rhetorically, how did we “allow that?” Perhaps our politicians have been reading too much Lewis Carroll.

A second issue on the NIS is the location of the consultation. Now you would expect that anyone consulting with the actuary would want to meet with him outside of the framework of the NIS Board or its chairman. But that kind of liberal and rational thinking would in Dr Luncheon’s eyes be too dangerous. The consultation had to take place with Dr Luncheon, whose leadership of the Scheme is not insignificantly responsible for its parlous state, at Luncheon’s office and under his chairmanship. Dr Luncheon may strike many as a bumbling incompetent but he remains a dangerous practitioner of artful politics. The idea to hold the consultations on his turf and in his presence was clearly designed to control any criticisms of his government’s abominable management of the Scheme, now facing its worst crisis in 42 years.

Even as we ponder the serious medicine prescribed by the actuary to address the crisis the NIS faces, my hope is that the media would now ask the private sector as well as the political parties and the trade unions in particular, for a report on the consultations. As I indicated last week, I am particularly concerned that if the recommendations are accepted the burden of the adjustments would be felt mainly by the workers of the country.

Now you see it, now you don’t
Today’s subject seeks to raise questions on other matters we may not have noticed. It touches on the disproportionate sharing of the benefits and burdens of the taxation system and the inequality it has spawned in the vast disparity of wealth among those who are part of the power structure and those outside of it. This column has addressed such disparity time and time again and for emphasis captioned a column on January 29 of this year drawing attention to the US system under the topic, “If Mitt Romney was in Guyana, his 13.9% tax rate would have been lower.” The reason is that our tax system favours the employers, those with capital over the workers, who often struggle to make ends meet and who at the end of their working lives which the actuary now says should be extended to sixty-five have nothing but an NIS pension to look forward to. I will deal with that disproportionality next week and look at how different types of income are taxed differently in Guyana.

For starters, let us look at the system of remission of duties granted by the government which was reported on each year in the annual report of the Auditor General up to 2005.

There is a lot to argue with on whether some of the figures do not defy the logic of the reported performance of the economy during the six years. The wild swings between 2003 and 2005 seem to make little sense, but that is really not relevant here, except perhaps to reflect the quality of some elements of the work done by the Audit Office. As for the revenues of the country and their impact on the resources available to spend on education, health, security and infrastructure, it matters little whether the authority to grant remission of duties since 2003 is vested solely in the Commissioner General as the Audit Office seems to think.

But even if the Audit Office is correct, and regardless of where the range of authority lies, there should surely be some formal manner in which the body vested with the powers of remission reports to taxpayers and the National Assembly on the extent and value of remissions granted. If the power is vested in someone else, the one person who should insist on the publication of the information is the Minister of Finance who has constitutional responsibility for the national budget. Any taxes required to meet public expenditure which are borne, if at all, at lower effective rates by one segment of the population, must inevitably be met by those who do pay. But coincidentally or otherwise, the Audit Office ceased to report on remissions from the time Dr Ashni Singh became Finance Minister.

Dr Singh and tax remissions
Dr Singh has been egregiously reckless on the expenditure side of the Budget, misdirecting public funds to NICIL of which he is the Chairman, making unlawful withdrawals from the Contingencies Fund for which he is solely responsible, and authorising the transfer of billions of dollars from the 2000 series bank accounts which requires statutory authority. Under the Jagdeo presidency – and quite possibly still – spending outside of the authority of an Appropriation Act became normal with not even a hint of protest from the Finance Minister. After his role in the unlawful granting of concessions to the former President’s friend, it is difficult for anyone to believe that he is any less careless with the country’s tax revenues than he is with its expenditure.

Yet, our laws give the Minister of Finance enormous powers to give away tax revenues, over what may appear to be a small range of taxes but which have substantial fiscal implications. We start with the first and perhaps best known concession, the tax holiday. Under the Income Tax (In Aid of Industry) Act, the Minister of Finance has discretionary powers to grant an exemption from corporation tax with respect to income from new economic activity of a developmental and risk-bearing nature, or from dozens of economic activities. Without putting too much of an emphasis on it, the ease with which Mr Jagdeo and Dr Singh amended the law for friends shows how elastic and discretionary the law is.

And bear in mind that in approving tax holidays, the Minister is also extending exemptions from Property Tax and the Capital Gains Tax act.

Here again there is a silence feeding the appetite of the conspiracy theorists. Tax holidays can extend from five to ten years and cost billions. So the law requires some accountability. Under the Investment Act the Audit Office is required to carry out annual audits of the tax holiday incentives granted by the Minister, but the Audit Office has failed in its obligations under section 38 of the Investment Act to have laid in the National Assembly such a report for any year. The deadline for this is six months after the end of each financial year.

I have repeatedly raised this omission with no reaction from anyone. Surely the Public Accounts Committee has a duty to deal with this blatant disregard for the law with the potential of massive cover-up of tax giveaways. All to the detriment of those who pay taxes.

To be continued

From recklessness to inanity: the state of the NIS

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.