Actuary warns legislators to ‘act now’ on pension reform or face bigger risks later

PHILIPSBURG--Curaçao-based actuary Laurens Keesen of Keesen Actuarissen warned Members of Parliament (MPs) on Tuesday to “act now” to reform the civil service pension system or face bigger risks later on.
 
  However, some legislators were critical of aspects of the proposed reform, noting that while focus is being placed on raising the pension age from 62 to 65, for example, sufficient focus is not placed on the underperforming General Pension Fund and making efforts to increase its returns on investments.
 
  Some MPs also believe that the blanket measure of having all civil servants retire at age at 65 is unfair to some categories of workers and find it unfair to compare St. Maarten to other larger and economically better countries in this process.
 
  The discussions were held in a meeting of the Central Committee of Parliament to discuss the national ordinance amending the National Ordinance on pension for civil servants, amending the national ordinance on the age limit for civil servants, and repealing the long-term allowance regulation pensioners of 1943.
 
  Chairperson of Parliament William Marlin said the draft aims to increase the retirement age from 62 to 65 and to change the unconditional indexation obligation into a conditional indexation obligation, as it is necessary to secure the progress of the structure and payment of civil servants’ pensions for the future and to reduce the premium pressure for government.
 
  The draft also aims to amend the National Ordinance on the age limit for civil servants and the redundancy pay regulation for government officials, and to retract the long-term allowance regulation for pensioners 1943.
 
  “I strongly believe that St. Maarten should act now. You should not postpone this a few more years, because the ripple effect will be bigger in a few more years and you will not be able to handle it anymore. You have to act now,” Keesen said during a presentation to MPs.
 
  In painting a picture of the current civil service pension system Keesen said the funding ratio of the pension fund had plummeted from 103 per cent to 97.6 per cent in 2018; the premiums currently received are insufficient to cover cost, particularly when salaries increase and the returns on investment are relatively low due to market circumstances. APS Manager Nadya Croes-van Putten said later in the meeting that the current coverage ratio is 101.3 per cent.
 
  Keesen said also that people live longer and, as a result, pension funds around the world have to pay out for a longer time. He said for example, that while the fund pays out 100 per cent pension to persons, its ratio is below 100 per cent. “This will worsen the situation until there is no money left to pay out,” he said. “At this pace, by 2037 no pensions can be paid out anymore.”
 
  Premiums in St. Maarten currently stand at 25 per cent, which represents NAf. 39 million per year, which Keesen said is not affordable in the long run. He stressed that no employer has such an expensive pension plan anymore, noting that money spent on pension for government workers cannot be spent on other things to benefit the entire population. The continuity of the present system is under heavy pressure, as “people are afraid” that they will receive either a lower or no pension at all. 
 
  The only solution for a long-term sustainable pension plan is to inject more money into the pension plan by either increasing premiums, having a higher return on investments, paying out lower pension amounts, giving fewer pension increases, or starting to pay out pensions later, he said.
 
  As higher premiums are not feasible for St. Maarten, higher returns on investment without taking high risks are not realistic in the present local and international market, and lower pension amounts are not desirable and will lead to resistance, the best solution is starting the pension pay-out at age 65 instead of age 62.
 
  Part of the funds saved from this will be used to increase the accrued pension by 10 per cent and the remainder will be used to improve the financial position of APS. This will be coupled with less increase of the pension by moving from the final-pay system to the average-pay system, as well as the conditional indexation of pension only if APS has the financial means to do so.
 
  In explaining the final-pay and average-pay systems, Keesen said that in the final-pay system the pension increases retroactively when the person’s salary increases. In both systems the pension increases with a salary increase, but this is more evident in the final-pay system than the average-pay system.
 
  For members with a lot of future salary increases, the final pay-system is better, but more expensive, and a lot will have to be paid to everyone. Additionally, persons with no salary increases will carry the burden for those who have increases, which Keesen sees as unfair.
 
  The objective of conditional indexation is to maintain the pensioner’s purchasing power after retirement.
 
  In the current system, there is automatic indexation – if the salaries of government workers are indexed, so is the pension. However, this has not happened since 2012. For members before 1998, this cost is borne by government, while for members after 1998, the cost is borne by APS. In the new system, indexation will only occur if APS has the financial means to do so, if its funding ratio is more than 105 per cent. The cost will also be borne by APS.
 
  According to the proposal, if the pension age is increased from 62 to 65, accrued pension can be increased by 10 per cent and the APS funding ratio will improve substantially. Keesen stressed the importance of acting now on the proposed changes.
 
  “Doing nothing is not an option,” he stressed adding that not acting will result in the premiums becoming unaffordable, deficits growing, increasing the cost of unfunded benefits, and “the system will jam.” 
 
  “If you don’t take measures now, in a few years it will be too late to take reasonable measures and you will have to take drastic measures,” he warned. “Nothing is certain in the world, but in this case I am quite certain that if you don’t do anything the system will jam.”
 
  Caretaker General Affairs Minister Wycliffe Smith had made a presentation earlier in the meeting about the national ordinances and the history of meetings to handle this issue.
 
  MPs posed several questions and expressed a number of concerns about the draft, some of which Smith, Keesen and Croes-van Putten answered.
 
  In addressing some of the MPs’ concerns, Croes-van Putten said that at a certain point the fund cannot take more risks. The fund needs to look at amount of risks it is taking because if something goes wrong, the fund will not just lose funds, it will also lose its ability to pay out pensions. “When we lose money we lose pension money. We don’t just lose personal funds. So, we cannot take the same risk as a shark investor or someone with a lot of funds on the bank,” she said.
 
  Smith requested some time to get all answers in writing and the meeting was adjourned and is expected to continue at a later date.
 
 
 
History
 
  A Central Committee meeting on the national ordinance was held and culminated on December 13, 2018. A report was made on the deliberations in the Central Committee meeting and was sent to government. Government submitted a Memorandum of Modification to the draft national ordinance.
 
  A public meeting was scheduled for March 8, was held and was adjourned after the Minister gave a presentation and MPs posed their questions in the first round. In early March of this year it became clear that MPs had received the wrong version of the draft national ordinance.
 
  The reason for this is that when Parliament received the dossier, there were two copies in it that seemed identical. The secretariat proceeded with the usual scanning and numbering of the draft without knowing that there was a reason for government to send two copies.
 
  It later became clear that since the ruling in the case of the Integrity Chamber ordinance by the Constitutional Court, government sends two copies to Parliament: one copy as it was sent to the Council of Advice and one copy after changes have been made to the draft due to comments by that Council. The copy the Members of Parliament received was the one as submitted to the Council of Advice.
 
  Government resubmitted the correct version and the handling of this draft in a public meeting was continued with the correct version of the draft national ordinance on May 23, 2019. Based on the discussions during the continuation of the public meeting and the request from MPs for additional documentation on this matter, it was proposed to either add a third round of discussions to the public meeting or to send the draft national ordinance back to the Central Committee.
 
  In the end, it was decided to send this draft national ordinance back to the Central Committee, resulting in Tuesday’s meeting, Marlin explained.
 
The Daily Herald

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