The National Insurance Board (NIB) needs to focus on its investment portfolio which has the potential to generate higher rates of return. This is one way it can prevent the pension fund from going broke in the next 13 years.
Lecturer in banking and finance Prakash Ramlakhan said the basic premise is that the fund is not properly managed and the response to the global economic environment is very slow.
“They are operating the fund using a dinosaur policy in a fast-paced environment. You cannot manage the fund using a 2000 approach. You need to be current and give the investment committee a lot more resources and authority to make the changes.”
Ramlakhan was responding to last week’s revelation that by 2030 funds will be “completely depleted” if the NIB does not implement reform.
He said “the pension problem” was identified a long time ago and in five years’ time, if nothing is done, we are going to reach “crisis proportion”.
“In five years if nothing is done, that is eight years before it goes broke...are we going to wait until we reach crisis for it to hit home?
“It is already at our door step. We need to embrace it.”
NIB depends on political direction from Govt
He said the NIB needed to address the percentage it can invest offshore. It is currently allowed to invest up to 20 per cent of its total assets outside of the country, he told the Sunday Guardian.
He said about three years ago, under former minister Larry Howai, it was at ten per cent but increased to 20 per cent. Increasing it to 30 per cent should be done, he suggested.
He said, “I think they may need to increase it by another ten per cent to 30 per cent because if you have so much TT dollars sitting in bank accounts and they cannot get attractive investments in Trinidad, then they should look at investment opportunities outside of Trinidad.”
He said the NIB was prohibited from investing “a lot” outside and so funds were kept at home to develop the country.
However, he said if there are not any development projects, why should money sit at banks generating no rates of returns when it can get at least six per cent elsewhere.
Ramlakhan said pension funds in general were facing significant challenges, however the NIB was slow to respond to the environment and economic changes relative to private pension funds simply because of the bureaucracy and political will to make the change.
“That has been the problem with NIB; it has been very slow to respond. Another issue is that the board that is responsible for it doesn’t have the capacity and competence to really drive the process. The management of the NIB depends on the political direction from the Government...apart from just the financial leadership, we have not been getting that for over ten years.”
People losing jobs, less will contribute
Ramlakhan said the NIB (pension fund) has two streams of revenue—contributions and the return on investment.
He suggested that NIB needed to look at ways of getting more to the fund by having more people contribute. However, with people losing their jobs, less people will contribute to the fund.
Another issue was that companies were not replacing workers very quickly as a result of automation, mechanisation and computerisation.
Ramlakhan said those who are under 50 are at risk of “getting nothing” from the fund when they retire.
“By the time you retire, you have about three years before the fund goes broke. So the fund is at high risk to people in the mid-career stage or mid-profession...those in upper 30s and mid-40s.”
He said the life span has increased. For example, someone retiring tomorrow is expected to live another 13 years up top 73 to 75 years.
Ramlakhan said, “As people retire, you have to pay out and as they live longer you have to pay out for a longer time. The plan is significantly under strain.”
Internationally, he said interest rates were at an all-time low and investments portfolios were not performing as well as they did eight to ten years ago.
“NIB probably has billions of dollars in banks earning very little interest rates, perhaps one per cent or less a year. So the funds are not generating enough money to provide the cash to pay out the benefits so what they are doing is starting to sell off some of the assets to get cash to pay the beneficiaries. That is what they have been doing and if they don’t generate sufficient revenue in the form of additional or higher contributions from the stock and bond market, then they will be forced to sell assets to pay benefits, which means the plan will begin to shrink even at a faster rate.”
Ramlakhan said a look at the global financial market was not promising at this time.
“We expect interest rates to remain low for the medium term which means that pension funds will continue to face investment challenges in getting high returns.”
