Notes Of A Native Son

Introduction: Barbadians are now coming to terms with the urgent need for fiscal discipline. But the recent public spat between Sir Hilary Beckles and Professor Michael Howard regarding Mr Howard’s call for a cut-back in student numbers at Cave Hill and Sir Hilary’s rejection of this as ‘anti-intellectual’ are arguments that are interesting, but both wide of the mark. First, by definition, it suggests that Professor Howard does not share his leader’s call for a graduate in every home. If that is the case, then he should make that clear. At most, Sir Hilary’s call is aspirational and not based on any strategic thinking since an overall increase in the number of university graduates in itself cannot be a good thing. There must be more to being a graduate than having a bit of paper. What is needed is a clear analysis of the quality of those graduates and their eventual contribution to the development of the nation. But even this is putting the cart before the horse since the first discussion should be on the role of a university in a developing society. As a teaching institution UWI has a long way to go; as a research body it is still at home base. It is this, rather than providing a growing number of semi-educated young people with worthless qualifications, that UWI should be concentrating on. Sir Hilary should put all his teaching staff on new contracts, which should include having peer-reviewed extended essays published annually, and a book at least every five years. In simple terms, many of the dons at Cave Hill are as under-educated as the students. Professor Howard is right on one thing, that the massive expansion of Cave Hill has nothing whatsoever to do with spread of education to young Barbadians and Eastern Caribbean people, but it is more a monument to vanity. If it is true that people can get in to UWI on GCSEs/CXCs alone, and without A levels or their equivalent, then that is scandalous. But the problem goes much deeper. It goes right to the heart of the need for radical reform of the educational system in Barbados. Why should a university have a top rate restaurant? Why is the cricket ground at Cave Hill a much better site than the National Stadium? More importantly, why is the bookshop at our only university so poorly served? Having not studied there, but being a former bookshop owner, and a regular visitor to the UWI bookshop, I can say with a certain amount of authority that the bookshop at Cave Hill is one of the poorest academic bookshops I have ever visited. And, much more, if it is a reflection of what is going on in the lecture halls, then we are in serious trouble. Once we have cleared the air on that, then of course we have to look at the cost of education as a percentage of GDP. At present we spend about 7 per cent of GDP on education; I believe if the long-term, post-independence objective is to grow our knowledge-base, then this is far too small. Government should commit itself to a gradual increase in overall spending every financial year to a reachable target of about 16 per cent of GDP. Which brings us back to the original question of fiscal discipline: the reality is that Barbados cannot afford to send 50 per cent of its school leavers to university, while at the same time develop the university to a top 1000 standard over ten years on the Shanghai rating, which is the very least demand the funding authorities should impose on it. The only way round this is by abandoning the idea of free higher education and introducing a policy of tuition fees. Two good models are the US and UK: fees paid by the state while the young person is studying and on graduating and getting a job then a steady repayment of that money. If that money is hypothecated, then it could be turned back in to education, funding future generations of students. Those young people who want to join the brain drain and work outside Caricom should be compelled to repay – or make proper arrangements to repay – the loan before leaving the country. This will leave the taxpayer contribution to education free to fund from pre-school to school-leaving age, improving the quality and re-arranging the management structure and curricula. So, while Professor Howard might be wrong on calling for broad restrictions on the expansion of higher education, Sir Hilary is equally wrong for suggestion the call is driven by an ‘anti-intellectualism’. Mr Howard’s idea is just bad social policy and macro-economics. By the way, what about a UWI research campus in London? This would be very attractive to London students interested in doing Caribbean-focused research degrees. Fiscal Discipline: I have said before, this government, indeed all the Caricom governments, seem to be sleep-walking in to an irreversible economic disaster the like of which we have not seen since Europeans wiped out the indigenous peoples of the New world. Despite the worst economic recession since the 1930s and may be even since the discovery of the joint stock company, and despite being unable to pay its bills, the government (and the leading corporates) still seem to be acting as if there will always be the Barbados we know and love. At some point, sometime soon, someone must convince the government that it must start cutting back on its exorbitant spending and hording hotels and land as if it is the only guardian of these assets. By now the government should have had a programme of a sustainable long-term deficit reduction, which should have at its heard the shedding of most, if not all, of those assets peripheral to carrying out the role of government and offering citizens a high-quality service. Anything else is a humbug. The great fear is that, like previous administrations, this government would be selling the family silver. But that is narrow thinking. The governments ought to think of new and inventive ways of dispersing of its unwanted assets, such as through workers’ cooperatives, social enterprises, worker-ownerships, the number of models are endless. The reality is that to reduce the mammoth public sector deficit the government must cut spending, increase taxation or generate inflation – or a combination of the three. It should also give serious consideration to decoupling the Barbados dollar from the greenback and allow the currency to float. While on the point, Barbados should campaign for a Caricom-wide single currency – the Caribe – thereby simplifying parity and making the money markets understandable for all Citizens. Government should also review its attitude to turning the 17 or 18 existing post offices in to basic retail banks, dealing with on-balance sheet savings, investments, mortgages, life and pensions and credit cards. Rolling out such a proposition could be done by providing office by office training with a ‘soft’ launch. With a cautious risk-management policy and a product development strategy, along with a sharp eye on capital, liquidity and leverage an independent post office bank will provide a service for small businesses that is not at present available. All this could be funded by selling the government’s shares in the moribund BNB. The reason for this, apart from the fact that it makes good commercial sense, given the geographical reach of the post offices and the simplicity of just installing up-to-date back office technology, is that if all the commercial banks on the island are answerable to Port of Spain or Toronto head offices, then they focus will not be on the Barbados economy and the needs of the local business sector, but the next memo or email from the suits at head office. Government should also impose tough new tax increases on alcohol, tobacco, unhealthy food stuffs such as sweet drinks, and motor vehicles, incentivising those vehicles which are environmentally friendly such as electric cars and imposing punitive taxes on 4X4 and other gas-guzzling vehicles. On the environment, the country is crying out for a massive recycling policy – a space that could be occupied by the NIS or BIDC - and an environmental protection programme. Churches and charities should be brought in from the cold and compelled to account for all their collections and other income and have it invested in a tax-free ethical investment fund. Government should also widen the savings and investments market through fiscal mechanisms such as tax-free periods or reduced taxation on certain products. For example, to encourage the development of a venture capital and business angel sector, government could introduce a tax structure for such approved enterprises based on the investment of taxed income, tax-free growth and tax-free drawdown of dividends for the first five years. Such a fiscal framework would encourage high net-worth Barbadians to work collectively to set up venture capital/business angel firms, thereby creating funding opportunities for small businesses and entrepreneurs and, in so doing, widen the job possibilities. Finally: One of the big public discussions in Barbados at present is the freezing of wages. But, like most things, it is only half baked. What the government should have done within days of coming to power was to freeze both wages and prices. Instead, it gave the civil servants a whopping pay rise, which they neither expected nor deserved, and then allowed the utilities to increase prices way above the rate of inflation. At the same time, supermarkets were raising the price of basic food stuff – most of it imported, of course - at dartboard prices. The result is that the impact on the poor has been frightening. So much so that those of us visiting the island – black and white - have wondered how local people could afford such prices. Had the government frozen prices on coming to power it would have been more just. And, as a bonus, by the time of the next election voters would have forgotten.
Hal Austin, London Feb 17

Notes from a Native Son - Reply to Dr Justin Robinson regarding the NIS

Dear All,
In my Notes dated February 5, a number of leading politicians and public servants have questioned my remarks on the National Insurance Scheme. Some of them are questions of fact, such as the internal structure of the NIS and its decision-making, which I am prepared to accept the person who informed me was not fully conversant with. My reply is based on the information supplied by Dr Justin Robinson, the deputy chairman and head of the department of management studies at the UWI, Cave Hill. The NIS board is made up of three members appointed by the Minister of Finance, and one each from the BWU, the NUPW, the BHTA, the Barbados Employers Confederation, along with ex officio members from the ministries of finance and labour. The investment committee is made up of a chairman (at present a retired banker??), a deputy (Dr Justin Robinson), a union representative, a private sector representative and a nominee from the central bank. Although all these people may be good ‘bankers’, academics, trade unionists, businesspeople and financial regulators, there is no obvious investment expertise. I should start by stating who and what experience I consider to be investment expertise. I am talking of someone, no matter what their academic training, has undergone investment training and, post qualifying, has worked professionally as a fund manager or investment consultant. Who I do not mean are people who have done undergraduate or even post graduate courses in investment principles but have not had any professional experience in the industry. As such, to my mind, the only globally qualified person with any practical investment expertise is the Chartered Financial Analyst representing the central bank. To my mind, and that of any objective person, just being a ‘retired banker’ is no qualification to be chairman of an investment committee, unless that person was an investment banker; a PhD in finance is no qualification unless the qualification was in investment and then there must be practical experience and not just academic; and being an economist is no qualification to be an investment ‘expert’. In other words, the board is under qualified as I suggested. Those in the past do not make any difference. To my knowledge Sir Henry Forde is no investment expert, but an outstanding lawyer; Prof Frank Alleyne is a professor of economics and a former central bank regulator, not an investment expert; and the late Stephen Alleyne was an insurance actuary, not an investment specialist. To answer the other points: I was not casting aspersions on the board or the investment committee, but rather was pointing out that the combined expertise, in my view, was not good enough to provide the thought leadership of a pay-as-you-go retirement benefit system on which future generations will depend. I note that the NIS carries out a triennial assessment from independent actuaries, then make these reports public property. Further, who is the consultant actuary who carries out the regular reviews between the triennial reports? More so, what are the longevity assumptions and what plans does the scheme have to meet its future liabilities? Dr Robinson claims that ‘every independent expert’ who has reviewed the scheme has claimed it is on a sound and sustainable footing, but he does not provide any evidence. What I am saying is that the scheme as presently structured and managed is not sustainable. That it should be ring-fenced from government and other statutory bodies borrowing from it, with the exception of legitimate investments. I am also saying that as it is presently structured, it would not be in a position to meet the retirement benefit liabilities of future generations, given the growing life expectancy of the current population and of future growth. His claims that Barbados is widely acclaimed around the world for its pension scheme is rhetoric meant for local consumption. I work every day with experts in pensions from the UK, Australia, the US and other jurisdictions and not once have I heard anyone talk about Barbados as being at the cutting edge of Caribbean pensions – nor have I seen any reports from any of the regional development banks or governments suggesting this. Equally, if the NIS is packed with such high-level experts, why spent money hiring fund managers? By the way, I note no mention is made of how the fund managers' management charges. NIB Investment Policies and Portfolio: The asset allocation policy, as outlined by Dr Robinson, is: Money market instruments (10 per cent) – whatever is meant by that term; domestic and regional equities (10 per cent), international equities (10 per cent), fixed income investments (65 per cent) and real estate (5) per cent. I suggest this is a highly volatile asset allocation policy. I suggest a more cautious policy which is likely to make a better return is: Barbados (15 per cent, including real estate and equities), this is based on creating jobs at home for the people who own the schemes; Caricom (10 per cent), based on our regional obligations; US (15), as the leading economy in the world; global ex US (10 per cent), so as to provide counter-cyclical weight to the portfolio; 40 per cent fixed income; 5 per cent Barbados venture capital; and 5 per cent cash. I suggest this is a more balanced portfolio, leaving the fund managers to pick the stocks as they are the real experts. At present, according to Dr Robinson, only 13 per cent of the fund is invested in equities – against a recommendation of 20 per cent - but he does not say if this is local, regional or global. In any case, this is far too low, just as to my mind the 63.6 (or even 65) per cent in fixed income is too high. More frighteningly, that 50 per cent of that fixed income has to be invested in Barbados Government bonds borders on the irresponsible. To make matters worse, currently 56 per cent of the portfolio is invested in Barbados Government and statutory corporation debt. This IS the NIS acting as a piggy bank. Whose decision was it to invest this amount of money in government bonds? If nothing else, this alone justifies my original claim that the NIS is mis-managed. Dr Robinson also claims that inspite of the guidelines, which recommend that only 10 per cent should be invested in money market instruments, at present 19.71 per cent is. Why is this? And what are these instruments? This is the language one would use in a lecture hall, not in the money markets. Do they mean they very instruments which led to the global banking crisis? Are they talking about inter-bank lending? Or is it hedge funds and private equity? Why is the NIS involved in this market? It brings to mind the saying about little children and sharp edged tools. More than that, of the 19.71 per cent in so-called money market instruments, 16.67 per cent is invested in the form of deposits in a variety of financial institutions in Barbados and 3.04 per cent in treasury bills. But in the real world of investments this 3.04 per cent should be added to the 50 per cent in government and statutory corporation debt. In other words, over half the fund is being used as a government – and statutory corporation - piggy bank. What I find puzzling is this paragraph from Dr Robinson: “The overweighting of the money market portfolio is largely due to a shortage of investments that both meet the statutory requirements and the actuarially required rate of return.” What is this actuarially required rate of return? In plain language, this means the fund has been underperforming and the decision-makers went in to the commercial market to borrow money to meet its obligations. This is incredible. The system is a pay-as-you-go system. What this means is that the current generation of employees have their national insurance deducted from their salaries and that money goes towards paying the pensions of the current generation of retirees. Is he therefore suggesting that the NIS intake is not enough to meet its outgoings? So, in simple words, the NIS is bankrupt? I am sure this is a mis-understanding. About real estate investing, I am awre the NIS does not invest in social housing. But I am suggesting that if it did it would perform a socially useful role while at the same time diversifying its property portfolio. Dr Robinson also states that the NIS has clients for its commercial property in Warrens, which was never in dispute. What I suggested was that the market for commercial property in Barbados was limited and that any clients they got in Warrens, apart from the government, would be at the expense of other commercial areas, such as Bridgetown. Finally, Dr Robinson suggests that my reference to the fund managers is mis-informed and could generate ‘unnecessary fears.’ But he has failed to make a case of my being mis-informed, apart from the internal structure of the NIS, which I got from a staff member on the telephone in November. The issue of the central bank imposing a foreign exchange limit on NIS investments say two things. First, the Act needs amending and, second, you cannot on the one hand claim to be linked in to the global financial markets while at the same time creating a protective barrier around your own financial markets. But I go back to my original question: are these funds to be actively or passively managed? What are these professionally developed benchmarks, since benchmarks can and do vary? Are these benchmarks set by a recognised professional association such as the Investment Managers’ Association? As to the asset allocation, I have already said that is bogus. The bottom line is that the NIS as presently structured is unlikely to provide retirement incomes for future generations of Barbadian retirees unless it is radically overhauled. Hal Austin, London

RESPONSE FROM DR. JUSTIN ROBINSON - Deputy Chair of the National Insurance Board

As Deputy Chair of the National Insurance Board I found this email. most interesting. Mr. Austin’s comments are interesting and include some suggestions worthy of consideration. I also found the comments to be riddled with errors as well. I hope interested readers will take the time to read my comments.

Dr. Justin Robinson

STRUCTURE and EXPERTISE OF THE NATIONAL INSURANCE SCHEME

In conducting any discussion about the National Insurance Scheme of Barbados (NIB), its policies and practices and the nature of its investments, I think it would be useful to start by outlining the structure and investment decision making process of the NIB. The Investments Unit at the NIB evaluates investment opportunities and proposals, and prepares recommendations in the form of a board paper which is discussed by the NIB’s “Investment Committee.” The Investment Committee makes recommendations on each proposed investment, which then go to the Board of Directors for ratification or rejection. In light of this structure let us then look at the composition of the board and the investment committee.

The Board of the NIB is Tripartite in nature with the Minister of Finance appointing three (3) members, the Chair, Deputy Chair and one other board member. The two main trade unions on the island, the National Union of Public Workers and the Barbados Workers Union, and the two largest private sector bodies, the Barbados Hotel and Tourism Authority and the Barbados Employers Confederation, each appoint a representative to the board. The Ministries of Finance and Labor are also represented on the board. The investment committee is comprised of the Chair, Deputy Chair, a union representative, a private sector representative and a nominee from the Barbados Central Bank.

Interested parties should note that the government appointees are outnumbered on the board and the investment committee. The structure of the Board of Directors and the Investment Committee hardly makes for a partisan body filled with uncritical lovers of this or any administration, likely to rubber stamp government requests for funding. Since I have been on the board a number of requests for funding from Statutory Corporations have been turned down at the investment committee and the recommendation upheld by the board. To date the Minister of Finance has accepted every decision of the board.

In terms of investment expertise, the current Chair is a retired bank manager, the Deputy Chair holds a PhD in Finance, the Central Bank representative is a Chartered Financial Analyst and the Ministry of Finance’s representative is an Economist. In the past, persons of the ilk and investment expertise of Sir Henry Forde, Prof Frank Alleyne and the late Stephen Alleyne have been leaders at the NIB. I find it strange that anyone would cast aspersions on the expertise of the staff of the investment unit at the NIB. It is widely known that the unit is staffed with highly qualified and experienced professionals in the area of investments.

In terms of actuarial expertise the NIB follows global best practices. As is standard with Social Security Schemes around the world, the NIB undertakes an independent actuarial review every three years. In between reviews, the NIB utilizes the services of a consultant actuary. It is therefore inaccurate to suggest that the NIB is underserved in the area of actuarial services. These independent experts are regularly reviewing the demographic and other trends that may impact on the viability of the scheme and advising the NIB as to appropriate courses of action. In fact, as a result of these reviews a national consultation on the scheme was undertaken in 2002, and many recommendations including those suggested by Mr. Austin were considered. As a result of the national consultation a number of reforms were undertaken which have put the scheme on a sound and sustainable footing according to every independent expert that has reviewed the scheme. In fact Barbados is widely commended around the world for having taken early and decisive action to address the concerns raised by some of the demographic trends that Mr. Austin refers to.

NIB’s INVESTMENT POLICIES and PORTFOLIO

In terms of the actual structure of the NIB’s investment portfolio, decisions are guided by the actuarially determined required rate of return on investments and a set of investment guidelines. One of the key outputs of the actuarial review referred to earlier is an estimate of the minimum required rate of return on investments if the NIB is to meet its obligations to the citizens of Barbados. With this in mind a set of investment guidelines are drawn up to guide investment decisions. The current investment guidelines are as follows: Money Market Instruments (10%), Domestic and Regional Equities (10%), International Equities (10%), Fixed Income Investments (65%) and Real Estate (5%).

Currently 13.09% of the portfolio is invested in equities compared to the recommended 20%. This is largely due to the relatively scarce supply of local and regional equities and the foreign exchange limitations imposed by the Barbados Central Bank, which limit the amounts available for investment in international equities.

Fixed Income investments currently comprise 63.6% of the portfolio compared to the recommended 65%. The investment guidelines suggest that 50% of the fixed income portfolio should be in Barbados government and statutory corporation debt. Currently 56% of the fixed income portfolio is invested in Barbados government and statutory corporation debt. This percentage has been relatively consistent over the last two decades, and the data does not suggest any significant increase in the percentage of the NIB’s investment portfolio held in the form of government debt. The figures simply do not bear out the notion of the NIB as a government piggy bank.

The most significant departure from the investment guidelines currently occurs in the area of money market investments. While the investment guidelines suggest that 10% of the portfolio should be held in money market instruments they currently constitute 19.71% of the portfolio. Of this 19.71%, 16.67% is in the forms of deposits in variety of private financial institutions in Barbados and 3.04% in Barbados government treasury bills. Can this distribution be said to reflect a “government piggy bank?” The overweighting of the money market portfolio is largely due to a shortage of investments that both meet the statutory requirements and the actuarially required rate of return. In essence, where there are no investments that meet the statutory requirements or provide the required rate of return, the funds are kept on deposit in the local financial system until suitable investments can be found.

In recent years the NIB’s real estate portfolio has increased beyond the 5% suggested by the investment guidelines as the NIB has sought to diversify its portfolio and seek stable returns to fund its commitments. One of the major lessons in investments over the last decade is the value of diversifying across asset classes and the stabilizing effect of what are termed “alternative Investments” on the volatility of the returns on a portfolio. Barbadian real estate has been and remains one of the best investments in the world and the NIB has in my view correctly increased its investments in this area. The most recent commercial real estate investments by the NIB have in fact been in the Warrens area suggested by Mr. Austin and there are commercial clients for the properties. The NIB does not invest in residential real estate directly, but invests indirectly through its financing of credit unions and other mortgage lenders. The NIB may well consider some expansion into this area in the future.

I hope Mr. Austin will forgive those who have mis-informed him, but his comments on the international component of the NIB’s investments are riddled with errors and misinformation. The NIB has had international money mangers since the 1990s, this is not a recent phenomenon as suggested by Mr. Austin. The current money managers Merrill Lynch, Oppenheimer and Kovack were selected from a pool of applicants who made presentations as to their suitability for the job (a so called beauty contest). Contrary to Mr. Austin’s assertion the fund managers are provided with clear guidelines as to asset allocation and they are evaluated against professionally developed benchmarks reflecting the investment strategy imposed by the NIB. Fund managers continuously report on their performance relative to the benchmark and are required to appear before the board for a quarterly review of their performance. The asset allocation requirements the NIB imposes on the different fund managers provides the portfolio significant diversification to a variety of investments in a variety of countries including China and other rapidly developing economies. The NIB recognizes the value of, and is committed to international diversification of the investment portfolio. However, such investment must be consistent with the prudent management of Barbados’s foreign exchange reserves and the preservation of the fixed exchange rate.

The NIB is one of the most important institutions in Barbados and persons are right to be concerned about the management of this institution. However, it is important that comments reflecting ones concerns be accurate and not serve to mis-inform and generate unnecessary fears.

Dr. Justin Robinson

Head, Department of Management Studies UWI Cave Hill and Deputy Chair NI

COMMENTARY RE NATIONAL INSURANCE SCHEME Re: Notes From a Native Son - Feb 5, 10

Subject: COMMENTARY RE NATIONAL INSURANCE SCHEME Re: Notes From a Native Son - Feb 5, 10

Dear Hal et alia,

Your essay on the National Insurance Scheme is engaging and reflects an impressive vocabulary of investing knowledge. I wish to share with you some very recent information as well as some general comments that address several of the queries and issues that you have posed.

[1] RE "The national insurance scheme has inadvertently confirmed what I have long suspected – that its investment policy, or what passed for one, was in danger of leaving future generations of pensioners broke.":

This statement certainly applies to the Social Security system of the U.S.A. and a number of other countries that continue to avoid making necessary reforms of their pension-systems. In Barbados, however, the N.I.S. was reformed more than a decade ago to prevent the fraud that some citizens were perpetrating upon it: working, earning, not contributing and then seeking a national pension. Since 1997, persons who have worked will not be eligible for a non-contributory (Old Age) pension. To claim a contributory pension, one must have contributed for 500 weeks or approximately 10 years.

Next, a major reformation of the N.I.S. took place in 2004/2005 after extensive national consultations to which all citizens were invited to contribute in writing, online and in person at various discussions. This was one of the most important achievements in our post-Independence history because it affects all of us and it was done very well and decades before the anticipated date, under the previous format of the N.I.S., that actuaries predicted it would begin to experience negative cashflows. The key elements of these amendments were:

[a] contributions to N.I.S. were increased by 0.5% per year for four consecutive years on the part of the employee and on the part of the employer; this was a very small rate of change at any point in time but, at the end of four years, the total contribution-rate had increased by 400 basis-points at the level of the N.I.S.!

[b] the monthly ceiling of insurable earnings, which had been fixed at $3,100 for many years was indexed to the rate of domestic wage-inflation and, in just the past 6 years, has increased steadily to $3,900 as of January, 2010.

[c] the pensionable age was made very flexible so that citizens could retire as early as their 60th birthday or as late as their 70th birthday with commensurately increased or decreased pensions (the adjustment is equal to 0.5% of pension per month of increment or decrement).

[d] the standard age for full N.I.S. pension was increased at the rate of 6 months every 4 years for the next 16 years, commencing with the first increment to 65.5 years of age in January, 2006, followed by the second increment to 66 years of age in January, 2010. For most of us, therefore, the standard age for full pension will 67 years.

The cumulative affect of these very small, gradual adjustments at the individual level aggregates to major improvements at the level of the N.I.S. and greatly extends the actuarial life of the national pension-fund. The percentage of increase in contribution-rates is of tremendous significance actuarially. E.g. an increase from 4% per employee and per employer to 6% per each side over four years would actually represent a 50% increase in contributions on the existing base. When you superimpose on this wonderful improvement the benefit of annual indexation of insurable earnings, the effect is compounded. This means a double increase in contribution-dollars to the fund: the rate per dollar of earnings has increased and the number of dollars insurable has been increased. All of this is happening during a period that the rate of employment has reached all-time highs and this further maximises inflows to the N.I.S. pension-fund beyond anything anticipated 10 to 15 years ago when the preparatory actuarial work for reforming the N.I.S. was being done.

Given that the current generation of baby-boomers is the biggest generation in the history of Mankind, the timing of these amendments to our N.I.S. pension-funding will ensure the biggest possible inflows as this generation enjoys its peak of lifetime earnings prior to retirement. In turn, the number of new retirees in each future decade will tend to decline compared with this generation. That extends the power of this large surge of current contributions to support future generations of pensioners.

[2] RE "I also understand there is no, or was not, an expert investment committee. In any case, the recent announcement that the NIS has now created an investment arm to focus on international investing is a serious indictment of past governments – BLP and DLP. What have they been doing with workers’ contributions to national insurance over the years, apart from allowing it to be used as a piggy bank for spendthrift governments?":

To the credit of the N.I.S., there has long been both a Board and an Investment Committee as well as a professional Investment Manager. Thus, the N.I.S. has three key levels of oversight for investments. One of the key additions to this structure of governance in recent times has been Dr. Justin Robinson, who is Head of the Department of Management Studies at U.W.I., Cave Hill; his research-focus has been investments, markets and such like.

The creation of an investment-arm to focus on international investing is not a matter of the year 2010 only, for the N.I.S. has been investing locally, regionally and extra-regionally for several years. What has been happening is exactly in line with your thinking: diversification plus professional management. The National Insurance Board has retained experts in foreign markets with clear mandates for investing in line with the N.I.S. strategic objectives. The addition of a dedicated "arm" is simply another stage in the evolution and maturing of the N.I.S.'s strategic approach to investments. The key benchmark for all investments is achieving the lowest risk while meeting or exceeding the actuarially determined breakeven rate of return for the long-term viability of the fund. That is, in my view, the simplest statement of the optimal strategy.

This also means that the Government has not been using the N.I.S. as a piggy-bank or slush fund. It is an autonomously governed entity with clear guidelines for all investments. It is actually the opposite: the N.I.S.'s Investment Committee advises the N.I.S.'s Board, which then makes recommendations to the Minister of Finance, who has never failed to approve the decisions of the Board. On more than one occasion, requests from statutory corporations and various segments of the Government have been declined by the Investment Committee. We can easily understand how this would arise: several branches of the Government are not economically operated and/or would not provide a rate of return exceeding the hurdle-rate fo the N.I.S.'s Board. I have seen no evidence, therefore, of political interference as some seem to be insinuating. This is very good news for all citizens: the fund is well managed and conservatively invested for the best matching of the long-term returns with the long-term needs of the contributors to the N.I.S. pension-fund.

[3] RE "The reality is that that money should have been carefully invested, with asset allocation diversified across a number of different sectors and business and economic cycles to reduce risk....Therefore a substantial amount of that investment should be in bonds, mainly government but also corporate, and, given the needs of its members, significantly invested in long-term local and regional assets such as commercial and residential property and small and medium enterprises.":

This is exactly the approach that the N.I.S.'s Investment Committee has been taking. The ideal framework of the Committee for portfolio-management and asset-allocation is:

[a] 10% cash, cash-equivalents and money-market funds [= LIQUIDITY];

[b] 10% local equities and regional equities [= GROWTH];

[c] 10% global equities (e.g. through the big names that you have mentioned) [= GROWTH];

[d] 65% bonds [= INCOME]

[e] 5% real estate [= GROWTH & INCOME]

The actual profile of the fund is largely in line with these allocations e.g. fixed-income is about 63.6% versus target maximum of 65%. Liquidity is above the target-level because equity-investments of suitable risk-return profile have been limited. A major example of innovation and calculated risk-taking by the N.I.S.'s Board is the recent private placement with Sagicor Financial Corporation (a hemispherically diversified holding company); this increased both its own stake in that firm and, strategically, materially increased the percentage of shares owned by Barbadians. In turn, the N.I.S.'s Board is disproportionately well represented in the Board of Sagicor Financial Corporation.

[4] RE "The decision to invest Bds$55m of taxpayers’ money in a ten-storey office block at a time when there is no market for commercial property, apart from the government, seems like carelessness. Where is the demand for such office space and what yield does the NIS expect to get from rents? Is there a total return objective? Further, assuming that corporates would be moving out of the Bridgetown area to re-locate in Warrens – since it is unlikely the market will grow - what would this mean for the nation’s commercial centre, already gridlocked by a number of under-performing retail stores? Broad Street is a ghost town with some of the best known stores making a minimum profit per square foot. I often wonder why one well-known store is allowed to exist in its present form. A much better investment for the NIS, and one that would have been more socially useful, would have been if the state-run body had invested in residential rental stock, which would have made a great contribution to the acute housing shortage and, at the same time, would have formed a key part of a long-term diversified portfolio. More so, if this residential property investment was out of the usual Bridgetown/South coast/Warrens beltway and in an area such as Six Roads in St Phillip or Belleplaine in St Andrews. Such a strategic investment would have served the dual purpose of moving traffic out of the main congestion areas while at the same time commercialising areas that are ripe for development. ":

[a] There continues to be a market for commercial real estate. The rationale for this real-estate investment by the N.I.S.'s Board is compelling. Firstly, the Government will increase productivity and efficiency by bringing into the same building or within walking distance of other offices in the same area (Warrens) multiple departments of the public sector currently scattered across the island. Secondly, morale will improve because workers have been complaining for many years about the condition of many of these existing office-buildings. Thirdly, the Government will reduce its rent expense to the private sector, while providing income to the N.I.S. (a double benefit for public finances). Fourthly, the Government is a first-class tenant that always pays its landlord's bills; this reduces the investment-risks to the N.I.S. in this case.

[b] Yes, a total return would be significant over the long-term (20 to 60 years) because real estate appreciates steadily in Barbados over long periods of time. Meanwhile, rental income will provide that vital cash-return to the N.I.S.'s investment in the underlying real estate and this flow would gradually increase over time. A comparable private-sector case-study is the Cable & Wireless campus at Wildey, St. Michael. The N.I.S., Life of Barbados Limited and the Fortress Property Fund co-invested to buy this real estate several years ago. The tenant is a first-class tenant by local standards. The rental income increases by 5% each year for the 15-year of the current lease-agreement. Independent valuations rise and fall from one year to another (e.g. the current environment tends to depress either growth-rates of market-values or to reduce the actual values altogether) but, over the course of an economic cycle (e.g. 2001 to 2008), the cumulative net appreciation is large. In essence, the total return is impressive and the cash-return is more than adequate.

[c] I agree with you that Bridgetown remains congested and that it is important to national development to nurture urban and suburban centres in other parishes beyond St. Michael. Warrens has become a fast growing urban centre and Six Roads is clearly very close to it in that respect. Nevertheless, one notices that Bridgetown continues to be the locus of major developments and redevelopments (e.g. Royal Bank rebuilt a majestic headquarters on Broad Street, C.O.B. Credit Union moved its headquarters to Broad Street around the year 2002 and now B.N.B. is consolidating all of its Bridgetown real estate in the amazing re-development of the former C.I.B.C. complex on Broad Street). So the quality of existing real estate continues to rise and to become more attractive to investors. Elsewhere in older urban Barbados, Holetown remains vibrant and the Chattel Village is constantly in high demand by existing and prospective tenants. All of these parallel enhancements of older areas and newer areas of the island lead me to conclude that the market for commercial real estate is growing and, even if the occasional recessionary environment reduced the pace or size of the construction-industry and the real-estate industry in any given year, it is clear that the long-term trajectory of real estate is continually upward and forward in Barbados.

[d] As for diversification and complementarity, one notices that tourism and related real estate are well served by high-net-worth investors e.g. Apes Hill, Royal Westmoreland, Sandy Lane, Crane Hotel, and Lion's Castle. It is not necessary for the N.I.S. to move into such a very competitive niche when other niches remain under-served and deserving of attention. Likewise, public investment in residential real estate remains the preserve of the National Housing Corporation. That entity has struggled for decades to collect rent from its tenants even though its rents are extremely low. Ultimately, in the past two years, the Government has resorted to converting tenants with at least 20 years of tenure to property-owners for little or no extra payment. This amounts to a gift rather than an investment from the perspective of public finances.

From personal research and experience, I can tell you that most residential real estate is public good requiring a dedicated social programme rather than an investment-programme. It is rare in my observation that residential rentals provide a satisfactory cash-return. E.g. I can tell you of a property independently valued at nearly $900,000 and the rental income has struggled to move from $3,000 to $3,500 to $4,000 over the past decade. With a mortgage-loan, it is clearly unprofitable as the rental income does not cover even the interest-component of mortgage-installments. Even without leverage, however, $48,000 on $900,000 (or even $800,000 or even $650,000) would be a very low rate of return in relation both to the investment involved and to the total risks (especially liquidity-risk). After adjusting for all necessary insurances, taxes, maintenance and other expenses, the effective rate of return would not justify the investment. That is why commerical real estate remains a much more suitable investment-class for the N.I.S.'s Investment Committee to consider.

[5] RE "The population in Barbados is about 300000 (this year’s census will give a definitive figure) and is projected to grow to about 450000 by 2050. If the rate of reproduction remains static, about 2.1 per cent, this 50 per cent growth will be an enormous burden on the future liabilities of the national insurance scheme. However, when immigration is factored in, the likelihood is that the majority of immigrants will be younger and at the prime of their reproductive years, so in reality, this projected 50 per cent growth may well be an underestimate.":

[A] The rate of reproduction might well be in the vicinity of 2% but the demographic growth-rate has been much less than that because fertility-rates are counter-balanced by mortality-rates. The impact of immigration warrants assessment, of course, but this also has counter-balancing factors. (E.g.emigration has been a major fact of life for the past 120 years of Barbadian history cf. the Panama Canal exodus of "Silver Men", the outflows and mortality associated to the two World Wars of the first half of the 20th Centurty and the major peace-time outflows in the 1950s and 1960s to Europe and to North America). Imputing a 1% demographic growth rate even over a very long period (e.g. 2010 to 2050 is 40 years) yields a population in the region of 415,000 rather than 450,000 and that is both absolutely and relatively significantly less.

Also keep in mind that the rate of indexation is in the range of 3% to 4% per annum for the insurable earnings on which N.I.S. contributions are computed. This far exceeds both the rate of fertility and the rate of demographic growth. You have only to do some basic future-value calculations in a financial computer or in Microsoft Excel to see the large long-term improvement that is attributable to each additional percentage-point of extra contributions over such growth-rates. Here is a hint: in six years, the monthly maximum of insurable earnings has risen from $3,100 to $3,900, a total of $800. Extrapolating for the next 30 years, this yields a simple forecast of $3,900 + [ $800 x ( 30 years divided by 6 years ) ] = $7,900. Total N.I.S. contributions are 21.35% of insurable earnings each month but the pension-benefit is only 40% to 60% of the contributors' insurable earnings over the best 5 years of their contribution-life. That maximum of 60% applies only to persons who contribute for at least 36 years; hence, many persons working a typical total of 40 to 50 years (given rising pensionable ages --- previously 65 years, currently 66 years and rising towards 70 years) will actually have over-contributed in relation to their effective benefits. So, in the Barbadian model, there is an additional benefit of over-contributions (especially by higher-wage contributors), which far exceed the value of imputed over-payments (i.e. the excess of the minimal contributory pension of roughly $671 per month over the basic pension-benefit of 40% of the insured incomes of those with low wages).

[B] We must also realise that most immigrants make contributions to N.I.S. but do not stay here long enough to claim from it. A large number of immigrants are ineligible for pensions because they do not contribute for enough years to be eligible and/or do not live here long enough to become claiming pensioners. To this extent, I argue that immigration INCREASES the total long-term inflows into the N.I.S. funds. E.g. I know many Guyanese professionals and non-professionals alike who contribute to the N.I.S. but their spouses and children are not nationals and have to pay full price for medical services and for schooling; they are not eligible for any N.I.S. benefits in many cases. We also witness the major inflows from the offshore sector from highly paid individuals who will later return to the countries from which they came to Barbados, leaving all of their contributions here while claiming none of its benefits. Remember that the minimal contributory period for an N.I.S. pension is 500 weeks and many expatriates on the island leave long before 10 years of residence here e.g. Intel, Caribbean Data Services, and PRT among the larger examples.

A useful proxy is the ratio of corporate income taxes from offshore companies to demestic companies' corporate income taxes: this is roughly 60:40. Even after adjusting for the transitory impact of economic recessions like this one, we can see that the absolute contributions from the offshore sector continually rise over the long term. It is also clear that a significant percentage of personal income taxes arise from the offshore sector, where senior skilled executives typically pay more in P.A.Y.E. (and N.I.S.) alone than the gross salary of most wage-earners in the domestic sector!

Moreover, the profile that you have painted of immigrants as being younger and productive augers well for the N.I.S. because the aforementioned reforms will capture a larger and larger portion of their contributions at a time when the pension-fund remains enormously in surplus. This will both extend the life of the national pension-fund and increase the projected annual surpluses beyond our lifetime. The rather stringent proposed amendments to the Immigration Act further amplify this point: even immigrants who become married to Barbadians will no longer automatically be accorded permanent status; they will earn this only after a minimum of 2 years of marriage. Such measures will continue to increase the contribution-base will reducing the projected numbers of ultimate beneficiaries --- a double benefit to the rest of us who contribute to the N.I.S. and will actually live here and retire here.

Yours sincerely,
Brent Shuffler, 231-4480; 428-9295

Notes of a Native Son - Response

“We need a balanced economy, not just a nation of bellhops and waitresses or even lawyers and doctors or economists..”

Hal Austin, London, February 5, 2010

Hal

I currently live in the parish of Jamaica. I am on the phone to Barbados at least 3-4 hours a day. I am currently undertaking a land development project in Barbados and I only go there when my presence is required. I am writing a series of memoirs including an extensive collection of Bajan traditional music and interviews with Bajans from all walks of life. Various Bajans in Barbados and North America are reading my manuscripts. I have a graphics artist in Barbados that is taking care of my publishing business.

Let me re-emphasize my point. I live in Jamaica just as you are in London and others who are all over the world.

I want to pose a few questions to all the recipients of this email. What are Barbados’ (the country and its people) strengths? What are the cultels (cultural elements) that are uniquely Bajan? Can we use these strengths and uniqueness to build, develop and market Barbados within the Caribbean and the World at large? Are there weaknesses in our society that can be corrected to achieve our objectives?

I read Rex Nettleford’s Mirror Mirror in 1970. There was a statement in that book resonated with me. It was “What we do for ourselves depends on what we know of ourselves and what we accept about ourselves” which I adopted as the motto for Yoruba Yard.

What do you know about us” Help me see if we can find common ground.

Elombe