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