Private pension funds in The Bahamas continue to expand

Private pension funds in The Bahamas continue to expand

Pension assets grew by over three percent to $1.17 billion

NASSAU, BAHAMAS – Private pension funds in The Bahamas continued to expand in 2016 and 2017, reflecting a modest improvement in domestic economic and employment conditions, according to the Central Bank of The Bahamas.

In its Quarterly Economic Review, the bank projected that overall, the total value of assets held by private pension fund schemes in the nation rose by a projected 3.1 percent to $1.12 billion in 2016.

Further growth of 3.9 percent was realized the following year, raising the total fund holdings to approximately $1.17 billion at the end of December 2017.

“A disaggregation of assets by sector, revealed that plans in the communications and utilities sector comprised the largest share (33 percent), while holdings of the hotel and restaurant, financial and transportation sectors, accounted for 26.8 percent, 22.4 percent and 10.7 percent, respectively,” the report said.

“Sponsored pension schemes for all other sectors collectively constituted the remaining 7.1 percent of total pension assets.”

The benefits for retirees typically consist of funds received from private schemes, supplemented by benefits from the National Insurance Board (NIB), and individual personal savings from insurance annuity products.

The government has long been advised by several international financial sector regulators to increase Bahamians’ contributions to NIB in order to shore up the lifeline of the fund, which has been threatened by large financial obligations from pension liabilities.

According to the review, contribution rates to defined benefit plans by employees commonly ranged between zero and six percent, while input from employers were comparatively higher — between five percent to 19 percent.

Defined benefit plans account for over 75 percent of aggregate private pension fund assets.

In 2016, private pension funds rose by 1,403 to 50,876 and a further 1,487 in 2017 to 52,363.

These private pension scheme participants accounted for 25.7 percent of the labour force in 2017.

At the end of 2017, the total asset portfolio for these types of plans stood at $884.7 million, an increase of four percent over the previous year.

The tourism sector’s pension plans, which comprises mainly hotels and restaurants, account for the second largest percentage of total investments – 26.8 percent.

As of 2017, those plans collectively held a slightly enlarged fraction of government securities compared to the previous year.

“Although defined benefit schemes continued to dominate the industry, and remain well-represented across sectors — as higher employer contribution rates account for the bulk of total asset accumulation due to steep funding costs it is expected that a movement towards the implementation of more sustainable defined contribution schemes will become commonplace in the future,” the report noted.

“The low survey response rate nevertheless underscores the importance of concluding and activating the regulatory framework for private schemes.

“Currently, the draft bill for pension fund regulation — the Employees Pension Fund Protection Act 2012 — is still pending approval prior to implementation.

“The bill would permit more comprehensive monitoring of activities, especially as it relates to smaller plans.

“As contemplated, the regulatory framework for private pension plans would also reinforce mandates for prudent management practices within private schemes.”

The bank said its review was in part based on a survey sent to around 140 existing and potential plan sponsors in The Bahamas.

Responses were received from 49 companies.

 

Conservative

An analysis of assets holdings, showed that pension fund managers remained relatively risk averse, investing heavily in government securities, particularly long-term government debt securities’ holdings.

These investments dominated pension fund managers’ portfolios — 44.7 percent of $524 million — in 2017.

Bank deposits as a share of total fund assets steadied at 12.5 percent ($147 million of the total investment portfolio in 2017, after declining to 9.9 percent in 2015.

The bank noted that some private pension schemes also provided loans to their participants as a means of generating higher returned, but these accounted for 3.4 percent — just $40.5 million — on the total assets in 2017.

According to the Central Bank, investment strategies remained skewed towards domestic assets, though recent exchange control liberalization measures, which focus on increasing access to international markets by local investors, could lead to an expansion in foreign investments over time.

 

Foreign currency

Over the two-year review period, holdings of foreign currency denominated assets grew by 11.8 percent to $165.3 million in 2017.

This represents 14.1 percent of the aggregate portfolio of fund investments.

In terms of the major sector, foreign investments within the hotel and restaurant centered schemes, accounted for a “moderately increased” share of 78.3 percent of $129.5 million of those holdings.

The financial sector’s plans claimed just 13.4 percent or $22.1 million.