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
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