Wednesday, February 17, 2010
Notes Of A Native Son
Hal Austin, London Feb 17
Tuesday, February 9, 2010
Notes from a Native Son - Reply to Dr Justin Robinson regarding the NIS
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
Monday, February 8, 2010
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
Brent Shuffler, 231-4480; 428-9295
Sunday, February 7, 2010
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