PENSION REFORM

Mr Speaker, we now come to Pension Reform.

In common with many developed nations Barbados is experiencing fundamental demographic change. Improvements in infant mortality in the 1950's, then falling fertility rates brought about by Family Planning initiatives from 1975 and improved medical care leading to better mortality all spell out a success story that now presents us with a new challenge, that of a rapidly ageing population.

The National Insurance Scheme is on the soundest footing it has achieved over the 35 years of its existence. The Scheme's assets currently exceed 1.5 billion and its Reserve Ratio, ( the ratio of its reserves to annual expenditure, including administrative expenses ) is 5 to 1 and will continue to grow in the medium term. So the management of the Fund has thus far fulfilled its mandate of maintaining growth and financial viability. However this mandate handed to the managers of Social Security systems the world over does not merely concern itself with current financial viability but also is framed to look considerably into the future and to ensure similar security and viability for the current working population and the nation's children.

The Ninth and Tenth Actuarial Reviews of the National Insurance Scheme indicated that the changing demographics of the Barbadian population meant that unless there is change to the Scheme, the Scheme's currently healthy assets will ultimately be eroded completely - the latter Review indicating the year of complete erosion to be 2032. To illustrate the impact of future circumstances on the Scheme in another manner, the estimated rates of contribution to the National Insurance Fund as a percentage of earnings such that contribution income equals benefit expenditure in the year will have to move from the current 12.9% to 41.5% in 2059 assuming indexation of all benefits.

I must stress at this point that this eventuality is driven only to a limited extent by economic and financial influences, but is almost exclusively due to the current demographic metamorphosis our nation is undergoing. To illustrate the point graphically, today in Barbados there are 3.4 contributors to our National Insurance Scheme for every one of our treasured senior citizens drawing a pension. In the year 2060, based on our current population projections, there are expected to be only 1.3 contributors to the Scheme for every person receiving pension. Mr. Speaker Sir, because of the absolutely vital role our National Insurance Scheme plays in the lives of practically every one of our nation's citizens, this transformation requires considered, early and radical action. And for those who may feel that 2060 is too far off to worry about, pause a moment and reflect that a person reaching pensionable age in that year, is already in primary school .

Mr Speaker as this chamber is aware, the National Insurance Board responded to the challenges I have outlined by establishing a Sub-Committee to research and recommend the best course to ensure the long term financial viability of this vital national asset. The approach taken by the Board involved detailed actuarial analysis of the current state and future prospects for the Fund, wide dissemination of information about the status of the Scheme and various options for Pension Reform and an extensive consultative process which gave the opportunity for every Barbadian and representative group to contribute to fashioning a solution.

There is one element of the debate on Pension Reform about which I wish to comment. After studying the experiences of several countries, including the oft quoted Chilean Model, the Sub-Committee came to the conclusion, with which we in government readily concur, that Privatisation was not the way for Barbados. Mr Speaker, the route of privatisation and the consequent creation of individual accounts (with its lack of guarantees and safety nets and potential for tragically wrong choices by citizens left to be their own financial advisers) amounts to a reversal of the spirit of solidarity so long and carefully nurtured in this country and a spirit which has been concretised by the series of tripartite protocols. Apart from this philosophical departure the experiences of those countries which have followed this route of social insurance have by no means been such as to commend this approach to Barbados at this stage of our social and economic development.
The Options ultimately put to debate were reduced to three:

i Maintaining the existing benefit structure with a substantial increase in contributions;
ii A significant reduction in benefits while leaving contributions unchanged, and
iii An increase in retirement age combined with a smaller increase in contributions.

In deciding which option to pursue the committee was guided by a desire to ensure that the Scheme maintained a ratio of reserves to actual expenditure of 5 to 1; that is, the size of the Fund should equal at least five times annual pension expenditure at the chosen projection year of 2030.

The National Consultation held earlier this year has given rise to a consensus on pension reform which I wish to commend to the House to take effect, except where otherwise stated, from January 1st, 2003:

i Increase the NIS contribution rate by 1% of insurable earnings each year for four years shared equally between employees and employers. The new resulting rate will remain in effect and take us to the year 2030;
ii Increase the standard NIS retirement age from 65 to 67. This process will start in 2006 by allowing the retirement age to be increased by 6 months for every 4 years thereafter until the new standard retirement age of 67 is reached in the year 2018;
iii the introduction of some flexibility in retirement age by permitting retirement between the ages of 60 and 70. Persons who opt for retirement prior to the standard retirement age will be given an actuarially reduced pension, while those who retire later will get an increased pension;
iv For early retirement the person requesting it must have actually retired from regular employment to qualify. Early retirement will be allowed from age 64 only next year, with the intention of gradually reducing that age each year. This phased introduction will allow monitoring of the early retirement experience in order to protect the Fund's finances. Late retirement up to the limit of age 70 will be allowed immediately.

At present the insurable earnings limit on which the payment of pensions and other benefits is based is adjusted by the Minister. There will however, now be a formula for the adjustment of the insurable earnings limit and the payment of increases in line with the National Average wage increases. Pensions and Maternity and Funeral benefits will be increased by a formula which will take into account the lesser of the average wage increase and the average price increase over a three year period. The actual increase granted will however be subject to actuarial advice on the maximum increase which may be granted to maintain the target Reserve Ratio of 5 times pension expenditure, through to the year 2030. The latter increases will commence with effect from January 1st, 2004.

Mr. Speaker, there are further changes of a more detailed and technical nature which will also form part of Reform. These are itemised as follows:

Currently a person is able to receive a pension of 40% of insurable earnings after only 10 years. This represents an accrual rate of 4% per annum. Persons can abuse the system by contributing for only the last 10 years of their working life and receive a relatively high pension. It is therefore proposed to change the rate of accrual of pensions to 2% per year of "final insurable earnings" for the first 20 years, thus ensuring that a pension of 40% of "final insurable earnings" will be paid for the first 20 years of contributions. Thereafter the rate of accrual will be 1.25% per year of "final insurable earnings" with the maximum pension remaining at 60%.
This new arrangement will be phased in gradually. Insured persons within 10 years of the existing NIS standard retirement age will see no change. For those who are between 10 and 20 years to retirement age, 50% of pension benefit will be based on the new basis and 50% on the old. Only those with more than 20 years to go to the new NIS retirement age will now earn pension on the new basis entirely.

The definition of final insurable earnings will be amended to be the average of the best 5 years' insurable earnings instead of the best three as at present.

Mr Speaker, we would like to take the opportunity to announce a new initiative. We have noted during the Pension Reform consultation that several requests were made for the NIS to provide for persons to make voluntary additional contributions with a view to increasing their pension entitlement beyond that which the State normally provides. I believe that the National Insurance Board, should be in a position to honour the request of interested individuals to allow them to contribute on a voluntary basis in this manner.

The Management of the NIS has set in train a study to work out the details of an appropriate vehicle to give effect to this expressed need/desire.

I have dealt with the changes that are necessary to be made to the National Insurance Scheme to keep it in a healthy state for the next thirty years or so. I will now focus my attention on the structure and management of the Fund. As managers of the single largest pool of funds in Barbados, I deem it absolutely essential that the National Insurance Board should have at its disposal all the resources necessary for the efficient management of those funds.

The Board currently controls its own finances, but exercises no control over its human resources. It is serviced by a department of government whose staff are recruited by the Public Service Commission and its structure determined by the Ministry of the Civil Service. This state of affairs does not provide the Board with the flexibility needed to satisfy the vision identified.

The Board has expressed the view that it should be in a position to recruit and retain the talent necessary to properly carry out its mandate. In that regard, it has commissioned an Institutional Strengthening Study and listed among its objectives the achievement of an optimal organizational and operational structure that supports NIS's vision. On receiving the recommendations of the consultants, I would be willing to work with the Board, the workers' representatives and the management to ensure that the NIB evolve into a fully autonomous and professionally run financial institution without placing the workers in any less favourable position than they currently are in.
Mr. Speaker I also want to announce my Government's intention to enshrine in legislation the tripartite tradition and practice which has attended the composition of the Board of the National Insurance Scheme. This approach to corporate governance has served the Scheme well in the past and we feel it is time that it now be elevated from the level of discretionary to that of compulsory. At a time when sister Social Security Schemes in the region and elsewhere have floundered upon the rock of inappropriate political intervention to the extent of compromising the very existence of these Schemes, we feel that the Barbados National Insurance Scheme must be protected for all time from any such fate. We therefore intend to include in the amending legislation to the National Insurance Act which we will bring to this House provisions to codify the current Board membership comprising membership representative of Government, the Unions and the Private Sector.

Mr. Speaker in coming to the decisions which my Government has reached we set in train a comprehensive consultative process which included inputs from the entire social partnership, the Leader of the Opposition and the woman and man in the street. It is my view that the debate has truly engaged the society in a genuine and interactive manner, which is entirely appropriate for a national asset in which we all have a stake. And while it is clearly impossible for every single view to be accommodated in the ultimate outcome, I am satisfied that these measures represent as far as humanly discernible the will of the people in the matter of the future development of the National Insurance Scheme. I wish to place on record our gratitude to all those who managed and participated in the consultation for the spirit that has allowed us to reach a national consensus on a matter that has such far-reaching but potential divisive implications.

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