Ministerial Statements by the Deputy Premier and Minister of Finance, The Hon. E. T. Richards, JP, MP.
Mr. Speaker, in accordance with section 35 of the Contributory Pensions Act 1970, I am pleased to table the Contributory Pension Fund (CPF or the Fund) Actuarial Report as at August 1st, 2014.
The main purpose of the 2014 Actuarial Review was to consider the implications for future contribution rates of maintaining benefits at their present levels in real terms and to consider the long-term sustainability of the Fund. The review includes projections of contribution income and expenditure (on benefits and administration), projections of the Fund balance (allowing for an assumed rate of investment return), and projections of the number of years’ outgo secured by the Fund.
Mr. Speaker, the Contributory Pension scheme plays an important role in Bermuda’s pension arrangements, providing a first tier or basic pension to more than 10,693 seniors and other beneficiaries the majority of whom live in Bermuda. There are also disability pensions, and non-contributory benefits. The maximum benefit is currently about $1,399.14 per month. Altogether, some 12,365 persons currently receive benefits under the Act.
Mr. Speaker, I am pleased to inform honorable Members that the financial performance of the Fund over the three year review period was better than expected due to higher investment returns, lower administrative and investment expenses, lower levels of inflation and lower net benefit / contribution cash outflow.
Mr. Speaker, even though the actuarial review is an excellent tool in overall pension management, it is important to recognise that the financial projections for future years are based on reasonable assumptions and they should not be taken as forecasts of the outcome. The projections should be updated at successive actuarial reviews in light of the latest information available.
The main findings of the actuarial review are as follows:
- Since the last review the Fund’s contributor base fell by 3.0% due to the downturn in the economy;
- Both the benefit and contribution rates remained unchanged during the 3-year review period 2012 to 2014 except contribution rates were increased in August 2012;
- Based on the population projection figures, the pensioner support ratio has declined marginally since the last review. The ratio was 4.4 in 2011 versus 3.9 in 2014. The ratio is projected to decline to 1.5 over the next 50 years. The comparative ratio using the actual contributors and beneficiaries of the Fund declined by 11.8% from 3.4 in 2011 to 3.0 in 2014. This was due to the decline in the number of contributors as a result of high unemployment in the 2010/2011 period.
- Contribution income ($107.4 million) decreased by 8% and benefit expenditure ($133.7 million) increased by 16% over the three years since the last review.
- Total expenses for the three years averaged 0.52% of the average Fund, down from 0.66% over the previous 3 years. Pure administrative expenses averaged 0.24% of the average Fund over the 3 years and were 0.19% of the average Fund at the Review Date. As a percentage of contribution income, total expenses have been relatively stable over the last 10 years at 7.7%.
- The net assets of the Fund grew 18% over the three years from $1,532.8 million to $1,802.3 million. This was 2.9% above the projected value from the previous review.
- The Fund earned a nominal rate of return of 7.2% per annum and a real rate of return of 5.0% per annum over the three years since the last review (6.6% and 4.4% respectively if investment and administrative expenses are excluded). This compares with the real rate of return assumption of 3.5% per annum.
- The Asset / Expenditure ratio is a static measure of the size of the Fund to annual expenditure or the number of years cover provided by the Fund based on the current annual expenditure. This ratio increased over the three years from 12.3 years to 12.6 years. Compared with 14 other regional social security schemes in a 2013 study, Bermuda’s ratio is better than 9 of these countries (average 7.5 years). By comparison, the ratio for the Canada Pension Plan in 2013 was 4.98 years.
Mr. Speaker, the viability of the Fund in the short to medium term is good with the Fund being able to cover at least 12 years of the current expenditure and being positive for the next 25 years. However, recognizing the long-term challenges of the Fund the Ministry will continue to closely monitor the performance of the Fund.
It should also be noted that the funding policy for the Fund is not based on full actuarial funding but based on sustainable funding. That is, contributions plus investment income should cover benefits and administration expenses on an annual basis while the fund builds up sufficient reserves to cover several years of benefits and expenses to withstand future adverse circumstances.
Despite the encouraging short to medium term outlook on the Fund, what is clearly evident from this latest review is that Bermuda, like most of the developed world, is faced with the challenges associated with the growth of an ageing population. During the next fifty years the number of people over pension age (65) are expected to increase from 10,484 to 17,665 an increase of 7,181 or 68%. This increase in our seniors will obviously place a greater strain on the country’s pension system.
Honorable Members should note that in order to improve the projected financial position of the Fund in the long term the Ministry will carefully consider alternate scenarios included in the report. Following this review the Ministry, in conjunction with the Pension and Benefits Working Group will propose changes to the Fund to ensure its sustainability in the long-term.
honorable Members will recall that in the 2016/17 Budget, I advised that pension benefits under the CPF were last increased by 3.0 per cent in August 2011 and this was causing some difficulties for some of our seniors as other expenditures have been rising. I also announced that I would consider providing an increase in benefits after reviewing the CPF 2014 Actuary Report.
After carefully reviewing the Contributory Pension Fund 2014 Actuary Report, I propose to increase CPF benefits and contributions by 5% and 7.5% respectively, effective August 2016, when benefits under the plan are traditionally amended.
Honourable Members are advised that based on the Consumer Price Index, the cost of living has increased by 7.9% since August 2011, when the last increase was granted. Although the benefit increase does not fully cover the prevailing rate of inflation, the Government is of the view that this increase should meet the important policy objective to assist our seniors and strikes the right balance between fiscal and social responsibility.
The 7.5% increase in the contribution rate is based on actuarial advice and is intended to maintain the long-term viability of the Contributory Pension Fund. The current policy is to increase contributions by 2.5% more than any benefit increase awarded. The 7.5% increase represents a rise in contributions of $2.40 per week payable by the employee and an increase of $2.40 payable by the employer. The employer would be responsible for submitting the total weekly increase in contributions of $4.80 and would have the authority to deduct up to $2.40 from each employee. As at 31 March 2016, the Fund had total assets of over $1.623 billion, representing approximately 11.7 times the annual value of benefits paid in the 2014/15 fiscal year.
Honorable Members are advised that the next actuary review of the Contributory Pension Fund is scheduled for the period ending July 31, 2017.
Mr. Speaker, in closing I wish to assure members, and more importantly, current and future pensioners that the Government is sensitive to the challenges facing pension plans of this nature and will endeavor to take the appropriate steps to enhance the benefits paid from the Scheme as well as ensure the Fund has the ongoing ability to pay for such benefits.
Thank you Mr. Speaker.