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NIB planning for pension bomb

Real estate, foreign equity to shore up national insurance fund
Sunday, August 3, 2014
NIB staff register members of the public for their Pension Ready packages.

From 2015 to 2020, 127,000 people between the ages of 55 to 59 will become eligible for pensions under the National Insurance (NI) system. This is in addition to the 77,000 that are already in receipt of the benefit. The National Insurance Board (NIB)—which provided the preceding figures—is aware that these are part of a wider demographic shift which will see the those receiving pensions from the state burgeon while the numbers supporting this aging population will decrease.

In it eighth actuarial review, published in September 2012, the NIB projected that the population of this country will grow from 1,317,714 (2010) to 1,431,642 by 2036, a percentage increase of 8.6 per cent. Thereafter, it is expected to decline to 1,341,694 by 2060. The review said, while those 60 and over will number 412,423 in 2060, or 30 per cent of the population, those between 16 and 59, who form the support base of the NI system, will decrease by 18 per cent to 712, 184, down from 871,487 in 2010.

The scheme’s contribution income will also be outstripped by its expenditure from the year 2012. There was also a shortfall in assets by $3.3 billion in financial year 2011-2012. However, the review said NIB’s assets will continue to increase, but only until the year 2026-27. 

Subsequently, the review forecasted that if nothing was done, the NI system funds would be completely depleted by 2039-40, a fact confirmed by chairman, Adrian Bharath in an April 2013 interview with the Business Guardian.

The review proposed an increase in the rate of contributions to cover short-term costs, with calls for a long-term plan for instituting the rate increases.

The public has already experienced the first of these rates adjustments with contribution rates moving from 11.4 per cent to 11.7 per cent of insurable income in 2013 and a further 0.3 per cent to make it 12 per cent in 2014.

Bharath also said that he wanted to “increase the institution’s investment in property and diversify its portfolio to include more foreign investments. He also spoke about a “rebrand” of the NIB, to make it more “transparent, open and accountable to the public.”

It has been more than a year since these statements were made. 

The Judges Salary and Pensions and the Legislative Retiring Allowances bills, shelved last week, have brought the issue of the adequacy of pension coverage for the general public back to the forefront.

Executive director of the National Insurance Board, Karen Gopaul, and executive manager, investments, Navin Rajkumar, sat down with the Sunday BG to discuss where the organisation is at with reaching the objectives as set out by the chairman as well as how the NIB intends to ensure the survivability of the fund.

Not out of the woods yet

One of the first items it has been able to accomplish on this list is to increase its level of foreign investment. 

Gopaul said last year, the NIB received permission to increase its level of foreign investment from 10 to 20 per cent. Most of this has been placed in equities. Gopaul said that in addition to improving the diversity of the NIB’s portfolio, the move helps them get around the problem of the low-interest environment for fixed-income instruments locally.

In the last actuarial review, the actual long-term rate of return was 4.4 per cent, Rajkumar said that over the last financial year, the rate of returns on both local and foreign equities has aided the overall portfolio in achieving a rate of return of 10 per cent thus far.

“If you look at the All Trinidad Index, this increased by 17.7 per cent. The return on the S&P 500 was 29.6. Given that the majority of the portfolio resides in equities, it resulted in an upswing in the portfolio.”

However, the NIB’s executive director does not think they are out of the woods yet. 

Referring to the $3.3 billion-shortfall assets mentioned in the actuarial review, Gopaul said the institution was at a place where its ratio of assets to debt was 1:1, but there was still work to be done.

“We have made headway but I won’t say that we’ve recovered because things could shift in the market, and you could lose value.”

Any such shift could be eroded in ninth actuarial review, the figures of which are being compiled, for the end of the stipulated five year period in 2015.

“Based on the fact that we have a lot in equities, RBC did well, Republic Bank did well, Neal and Massy (the group has recently undergone a rebrand) did well. Those companies did well. That is why we are looking good now. We are now extracting the data and then the actuaries will crunch their numbers and then we will see.”

Rajkumar emphasised the point, “if it reverses this year, then we are back to where we were two years ago.”

Currently, local and foreign equities make up 42.1 per cent of the NIB’s investment portfolio.

NIB has shares in 12 local companies, while foreign managers handle the foreign stocks. The allocation changes monthly.

Giving a further breakdown, Rajkumar said the portfolio divided into four other categories in addition to equities, They are: fixed income, 26.05 per cent; real estate, 0.85 per cent; mutual funds, 3.65 per cent and cash and cash equivalents, 24.6 per cent.

He also did not see the reliance on equities continuing over the mid to long range.

“As interest rates start to rise, you would see a pull back on the equities side, as funds flow back into the bonds market,” he said.

Gopaul also said the NIB intends to continue adding to its real estate acquisitions as a long-term diversification strategy.

Both also expect that a merger between T&T Mortgage Finance and the Home Mortgage Bank will result in increased value for the NIB’s investment portfolio, as the value of the combined entity is expected to be significantly more than its separate parts. 

When it is finally approved by Cabinet, the new entity will be called the T&T Mortgage Bank.

But, will all of this be enough to stay ahead of inflation?

According to the NIB, its benefits are increased to reflect changes in the consumer price index (CPI). The actuarial review determined that the increase in CPI over the 2005 to 2010 period was 52.3 per cent. Meanwhile, from February 1, 2012, NI pensions increased by 50 per cent to $3,000 and on March 4, 2013 through to 2014, most of the remaining of NIB benefits, such maternity, funeral, survivor’s, death, invalidity and injury, went up by between 45 and 50 per cent. 

Currently, therefore, benefits, at 95 per cent of the CPI are almost keeping a pace of inflation.

Gopaul said the NIB is also guided by the stipulations of the ILO Convention: C102.

Under C102, a national pension operator is obligated to provide the service in “a manner which avoids hardship to persons of small means and takes into account the economic situation of the member and of the classes of persons protected.”

Defined benefit vs defined contribution

The executive director said other shifts were being considered to ensure the long-term sustainability of the NI system. The guiding philosophy behind the national pensions in T&T has always been to “ensure that people with a reasonable standard of living when they reached old age,” said Gopaul.

Expressing a personal opinion, she said that it may be “difficult” for some people to provide a pension on their own, or they may not be as “savvy” to monitor investments to provide themselves with pension income.

“Here you have a system that guarantees you a benefit, because it is a defined benefit system, once you meet the qualifying criteria. Because you can contribute, year after year after year, and you can earn a reasonable replacement rate for your funds.”

Gopaul admitted that during the last actuarial review, the possibility of introducing a defined contribution element to the NI system was considered—and shelved—at least for now.

“We want to keep the defined benefits. We want people to be safe and comfortable. When we look at what is going on in T&T, the fact that we have so many insurance companies and banks offering these facilities, we didn't think we would be able to get into the market. We already had this strong, established group of organisations. However, we kept looking. Every time we do a review, we look to see what we need to change and how to change it.”

Public interface

One of the changes is how the NIB interfaces with its public. 

A new initiative, “Pension Ready,” is seeking to solve the age-old problem of citizens taking years to access the pension benefit.

Before a Joint Select Committee in January 2014, chairman, Adrian Bharath, said there were 800 matters before the NIB’s appeal tribunal and hundreds of matters backlogged.

Gopaul explained that these issue stretched back to 1972, when the NI system was first introduced. 

“There was some resistance to the system, initially, and some of the older records are not that good. So if you are someone who started work from 1972, or were working when the system started, you may have some incomplete records. Since it was a new system, there would be issues on what to do, how to get it right.”

Gopaul also said incorrect filing of information on the part of the employer or employee could significantly delay payment.

Pension Ready is targeted to people 55 years and older. 

The key is to make sure that people are checking on the accuracy of their contribution record years before they are due for retirement. This way, any mistakes could be cleared up years ahead of time and the pre-retiree is able to check their level of contributions to see if they qualify.

According to Gopaul, it takes 14 ½ years of continuous work for monthly workers to make the 750 contributions that would entitle them to a pension. For daily and fortnightly paid, it could be as many as 20 continuous years.

Those who want to use the Pension Ready service are asked to fill out a pension ready form available at NIB offices and its Web site. Applicants are to provide one valid form of ID as well as their electronic birth certificate.

Applicants will receive a package containing a statement of their NIS contribution history as well as other critical information for they will have to verify. When these are at variance with records, the applicant will be able to submit to the NIB any employment related documentation in postage-paid, self-addressed envelopes included in the package.

The NIB also had several Pension Ready caravans at locations across T&T. 


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