On the Line:National Insurance Scheme Annual Report 2007

The column on March 29, 2009 featured the National Insurance Scheme (NIS) along with the New Building Society in a supporting role to Clico Guyana in which the NIS stands to lose several billions of dollars worth of investments. Today’s column is entirely on the NIS and specifically its Annual Report for 2007 which recently became available, well outside the statutory deadline, a recurring feature of just about every public body. Yet, the 120-page report is a rich minefield of statistical, demographic and economic information of potential importance and relevance to those engaged in policy formulation.

Some of the data seem inconsistent with the statistics provided by the Finance Minister in his 2008 Budget presentation, particularly as they relate to sectoral growth and labour participation. I will refer to some of those apparent inconsistencies later but now offer a review of the operating performance of the scheme for the year and compare it with the preceding three years.

Source: NIS Annual Reports 2004-2007

Before discussing these numbers we need to be clear: Dr Roger Luncheon who has been Chairman of the Board since 1992 is incorrect in stating that the audited statements prove that the NIS is sound. The soundness of an entity, such as the NIS, that provides long-term benefits is determined, not by the auditors but by an actuarial examination which, using a range of data and assumptions, projects into the future. In fact the auditors draw specific attention to the report by the actuaries while the financial statements devote a full two pages to the recommendations of the actuary. Those, like the recommendations for the 2001 examination, are still being “reviewed” by the directors. Among the actuary’s many recommendations is the immediate need to address a shortfall of 7.1% in the contribution rate − hardly a sign of financial soundness. The problem for Dr Luncheon is that he seems unable to distinguish when he should speak as a politician, or as a director with fiduciary obligations or as a key policymaker responsible for oversight.

Income over the period 2004 to 2007 has increased by 24.6% while expenditure has increased by 38.4%. Expressed another way expenditure as a percentage of income has moved within the short period of three years from 80.7% to 89.5%, a significant increase indeed. On the other hand, the composition of expenditure between Benefits and Administrative Costs has remained − as the Table shows − extremely constant. The significance and danger of the increase is best seen when compared with say the average of the five years 1997 to 2001 when it was below 60%. The warnings to the decision-makers about the growth of expenditure relative to income are not new and have been as consistently made as they have been consistently ignored.

With over 80% of its expenditure being in long-term benefits, the scheme should be concerned primarily about its actuarial viability which automatically takes care of its financial soundness, to use Dr Luncheon’s word. But to make up for the unwillingness of the government to raise the rates of contributions to levels that would meet actuarial sustainability, the scheme has become involved in investments that could seriously undermine both its actuarial and financial viability.

The 2006 Actuarial Report projected that total expenditure would, in 2014, exceed total income for the first time in the scheme’s forty years and unless contribution rates are increased the scheme’s reserves would be exhausted by 2022. With the (temporary?) loss of its capital and income in Clico investments and the inaction of the government and the board, including in addition to Dr Luncheon, PPP/C fixtures like trade unionist Komal Chand and Chitraykha Dass, it is possible that the actuary’s fears about expenditure exceeding income may happen sooner rather than later.

Blame the employers
Much of the problems of the Scheme are attributed to delinquent employers not paying over their contributions. As the logic goes the scheme would have been able to invest those monies and earn investment income. However there is nothing to indicate that investments are managed any better than contributions. According to Dr Luncheon the scheme’s investments are made based on a Prudential Investment Progamme which was “baptised by cabinet.” It is therefore surprising that the President recently criticized investments made under that programme when he is the head of the cabinet.

Dr Luncheon correctly states that the law governs the NIS and its investments (particularly those outside government paper) but does not recognise or acknowledge that the report and recommendations underlying that programme did not once mention the restrictions which the law places on the type of investments which the scheme can make.

There is increasing evidence that many of the scheme’s investments are not authorised by law and are not as profitable as they may appear. We will look more closely at the question of the investments under Balance Sheet but with respect to investment income, while $1.492B appears in the income statement, some $790M is shown as investment income receivable. The level was likely to be the same when Clico was put under judicial management and there is still uncertainty as to whether the government would cover accrued interest in its bailout of that entity. The possible infringement of the law, the high risks being undertaken in the search for high returns and the apparent delay in the receipt of investment income would cause even ordinary persons serious migraine. It is therefore very surprising that this does not seem to trouble the board which includes Messrs Maurice Solomon and Paul Cheong who have been on the board for several years and who would be fully aware of the concerns of the actuary about the viability of the scheme.

Source: NIS Annual Reports 2004-2007

Included in Current Assets for 2007 is an amount of $197M as sundry receivables (2006-$207M) and prepayments of $62M (2006-$2M). Neither of these amounts is explained for the poor contributor, a key stakeholder. Included as well is an amount of $790M (2006-$753M) described as Accrued income, ie income recognised but not received. Nothing would be wrong with such accounting unless the entities in which the investments are made do not have the cash resources to pay the interest. Other than Treasury Bills the scheme’s principal investments are the Berbice Bridge Company Inc $1.560B; Clico $5.195B; Hand-in-Hand Trust Corp Inc $2.465B; a 25-year US$4M loan to the Government of Guyana for the construction of the Caricom Headquarters and Laparkan Holdings Limited $276M. From a concentration perspective, directly and indirectly the NIS is dangerously exposed with the Berbice Bridge.

With one exception (Laparkan), the private sector entities have recently been subject to public scrutiny − mostly negative – which can impact on their own profitability and their debt service capability. Clico is an immediate and major problem for the NIS. The Berbice Bridge can become another if its cash flows do not pick up significantly to allow it to meet its huge annual interest obligations. Hand-In-Hand Trust (HIHT) has just lost almost its entire reserves with its Stanford investment and as a consequence, a major income stream.

At more than $10B, NIS investments and accrued income in Clico, the Bridge and HIHT account for about 35% of the reserves of the scheme. A significant portion of the $10B is already impaired. The loss has implications not only for the balance sheet and therefore its reserves but annual income as well. It has been estimated that the income the NIS is losing on a daily basis on the Clico investment alone is more than $1M. When the actuary predicted the evaporation of the scheme’s reserves, he did not contemplate the kind of man-made, governance-created misfortunes we are now experiencing. Employees and employers better prepare for what can be a rough and costly ride.

Some statistics
2007 was the year of the World Cup, the biggest sporting extravaganza ever hosted by Guyana. According to Dr Singh there was 5.4% real growth in the economy with increased contributions by sugar (2.7%); mining and quarrying (22.7%); engineering and construction (5.7%) and transportation and communication (9%). Inflation grew by 14% and the minimum wage in the public sector grew by 14.5%. These significant numbers and impressive statistics however are not matched by growth in contribution income (8.01%) or registrations of employers by industry types (Table A of the report) which disclose that not a single sector had a new employer registrant with over 100 employees, and only three had between 51 and 100 employees. These were Transport, Community and Business Services and Personal Services, an interesting and eclectic mix indeed.

Women registrants in the Employed Persons category are fast catching up with their male counterparts and in 2007 for every 100 males there were 87 females. In the self-employed category the ratio is about 2:1. Compared with the gender mix of pensioners (more than 3 males for every 1 female) there is a dramatic transformation in the workforce, even as women still carry the burden of the work to be done at home. Only in the age group 41-45 do women come anywhere close to men in the number of self-employed registrants in 2007. Table G of the report indicates that some sixty-five persons in receipt of Old Age Pension are aged 98 and a surprising 389 are 95 years and older. With such numbers we should have far more centenarians than our newspapers consider worthy of celebration. We need to make sure that there are no phantom pensioners.

One other significant gender difference appears in Table N which presents the number of sickness spells by diagnosis and sector. Here women seem to do very badly. Diseases of the female genital organs accounted for 880 sickness spells, the fourth highest. Complications arising from pregnancy and childbirth account for 845 sickness spells, the fifth highest. Such statistics should impress both our Ministers of Health, and the Ministers of Labour and Human Services. While the statistics are not significantly different from preceding years it is yet hoped that we will see some policy initiatives to address them.

The state of the NIS confronts the government with a real dilemma. The government seems to have an insatiable appetite for spending which it finances mainly through direct taxes (Income and Corporation Tax) and indirect taxes (VAT, Excise and Customs) borne mainly by the workers and the lower income group. As a result Guyana is now among the most taxed countries in the world. In public finance, NIS contributions are a tax. Except that in a contributions-based scheme such as ours, the contributor can get back benefits in proportion to contributions. Even without the Clico debacle and the other challenges, contributions should have been increased. Based on the recommendations of the actuary the required contribution rate (without Clico) should be around 20% instead of 13% but the government’s reluctance to increase the rate may reflect its own recognition that increased NIS contributions are already too high for the overtaxed Guyanese.

While the NIS inherited by the government in 1992 was not as healthy as one would like, its condition is now much worse. The expenditure to income ratio was already 67% in 1992. It is now 89%. Failure by the government over the years to act promptly on successive actuarial recommendations has aggravated the situation. This however does not exonerate the directors of the NIS who have sat back and done precious little to stem the drift.