The government of St. Vincent and the Grenadines will announce in the 2024 Budget the options for reform of the nation’s social security system, including pensions.
“The intention of the government is to implement NIS and pension reform beginning in budget year 2024. That’s next year,” Minister of Finance, Camillo Gonsalves told Parliament on Thursday.
He briefed lawmakers on the finding of the 11th actuarial review of the National Insurance Services (NIS) and an independent analysis of the actuarial review, conducted by the World Bank’s Reserve Advisory and Management Partnership (RAMP).
The NIS’ reserves are projected to be depleted by 2034 if reform is not undertaken.
And Executive Director of the NIS, Stuart Haynes, citing external actuaries, has said that changes will have to take place by 2024 if “draconian changes”, such as increasing contribution rates by 10 percentage points are to be avoided.
Gonsalves told Parliament that in light of the projected depletion of NIS reserves by 2034, the 11th actuarial review makes 11 specific recommendations to ensure that the NIS is financially sound.
These changes, he said, would allow the social security agency to be able to continue providing its essential services to the people of St. Vincent and the Grenadines, “thereby avoiding last minute draconian changes or fiscally imprudent government interventions”.
The finance minister said that among the “high-priority recommendations” put forward by the actuarial review are an increase in the contribution rate to at least 15% — up from 10% — progressively over the next 10 years and making NIS registration and payment contributions mandatory for all self-employed and informal sector workers.
The actuarial reviews also suggest considering a number of options to reduce long-term old age pension costs, including consideration of continuing the increase of the pensionable age until age 67 by the year 2032.
The review also suggests reducing the maximum old age pension replacement rate from 60% to 55%, meaning that rather than receiving 60% of their salary, pensioners would receive 55%.
It also recommends that the NIS discourages “the take up of early retirement pensions through adjusted benefit calculations or making the pension formula more progressive. That is, instituting a slightly lower pension rate for those at higher income levels”.
The finance minister quoted the World Bank’s RAMP as saying the NIS “must address the imbalances underlined by the actuarial report. The mission team highly recommends that the NIS follow the actuaries’ recommendations”.
“Importantly, the ramp team goes on to calculate that ‘the recommended reforms of increasing the contribution rate from 10 to 15% between 2024 and 2030, together with pension benefit reform, as detailed in the 11th actuarial report would postpone the depletion date of the reserves by another 15 years and that would be to 2051’”.
The finance minister further said:
“The unvarnished analysis before us establishes that a gradual contribution rate increase from 10 to 15% over a 10 year period 2024 to 2033, a change in pension formula to reduce new average pension amounts by reducing the maximum total accrual rate from 60 to 55%, a shift from age pension where pensions are received at a specific age to a retirement pension where pension are paid when you are substantially retired, and a mandatory coverage of self-employed persons would extend the date of reserve depletion from 2034 to 2051.”
He said that as such, these potential reforms “are explicitly on the table for discussion, debate and decision.
“So, too, are reforms of the public pension system to enhance harmonisation with the NIS arrangements, including consideration of measures to: (1) introduce a mandatory contribution rate for employees; (2) aligning the retirement age of civil servants, with the NIS pensionable age; and (3) limiting the maximum replacement rate from 127% of your pre-retirement salary to about 85% by considering a top up on the NIS pensions.”
Currently, some public servants qualify for an NIS pension, to which they contribute, as well as a non-contributory pension from the central government.
Some of these public servants retire with a pension that is 127% of their salary.
The government is proposing that they receive a pension amounting to a maximum of 80-85% of their salary.
This means that if the NIS gives 60% as pension, the government would contribute a further 20 or 25% from the public pension system.
“This is in line with best practice, and similar to designs existing already in St. Vincent and the Grenadines in the private sector, including many banks and retail organisations,” Gonsalves said.
“These measures would apply to new entrants into the civil service, and could significantly enhance the long-term sustainability of the public pension system.,” he told lawmakers.
“Over the next four months, the NIS and the government will continue internal consultations and public outreach with a view to finalizing a list of concrete and impactful proposals,” Gonsalves said.
He said the NIS’ finances improved somewhat in the first quarter of 2023, with net losses falling from EC$10.7 million to EC$1.07 million.
“The improved financial performance was attributed to an increase in contribution income, stronger investment performance, slower growth in benefits and reduced administration costs,” the finance minister said.
He said contribution income for the first quarter of 2023 rose from EC$14.4 million to EC$16.1 million, year-on-year, on the back of strong private sector growth, led by increases in construction, of 7%, transport and storage, of 7%, accommodation, of 5%, wholesale and retail, of 5%, and manufacturing, of 5%.
Gonsalves said NIS investment income rose from EC$600,000 to EC$4.5 million in that quarter, largely due to the partial recovery of the international equity sub portfolio from negative EC$3.3 million to EC$700,000.
“Further, cost containment measures reduced administrative expenses at the NIS from $3.1 million to $2.7 million,” he said, adding that the asset class diversity remains roughly the same as the first quarter of 2022 and roughly in line with the period under the actuarial review, with 28% in cash, 24% in bonds, 9% in loans, 25% in equities and 14% in real estate.
“NIS exposure to the central government is only 11%, well below the prudential limit of 20%. This is also a reduction from the 13% recorded in the 11th actuarial review,” he said, adding, “this limited exposure to the central government is a stubbornly Inconvenient truth or those seeking to craft a false narrative about the government raiding and is coffers it is simply not true.
“Nonetheless, despite improving finances relative to the height of the COVID pandemic, the actuarial review is correct in its assessment that improved investment performance by itself cannot outweigh the drag caused by changing demographics and generous design. Reform is an urgent and unavoidable imperative,” Gonsalves said.