Gov't advances pension reform as current method 'unsustainable'
Premier and Minister of Finance Dr the Honourable Natalio D Wheatley (R7), addressing the House of Assembly on February 13, 2025, conceded the urgency of pension reform, revealing that pension expenditure has surged significantly in recent years.
“The most recent actuarial study conducted in 2009 by Pricewaterhouse and Coopers (PwC) reported an unfunded liability of $201.2 million. Since then, pension expenditures have increased significantly, with the 2023 pension outlay amounting to $27 million. In 2024, pension and gratuity payments totalled $29.6 million.”
According to the Premier, the 2025 budget anticipates a further 10.3 percent increase in pension payments, bringing the total to $32.7 million, reiterating,“...this is not sustainable.”
Phased implementation
According to the Premier, the government has embarked on a structured approach to implement the new Contributory Pension Scheme, with a Pension Reform Steering Committee, co-chaired by the Deputy Governor and the Financial Secretary, established in September 2023 to guide the transition.
Premier Wheatley also detailed various measures being undertaken, including stakeholder engagement, legislative and policy reviews, actuarial assessment and technical assistance and benchmarking, among other areas of focus.
The government, he said, had already sought technical assistance from the Government of the Turks and Caicos Islands, which successfully transitioned to a Contributory Scheme in 2022 and 2023.
With this in mind, he disclosed that the administration is working diligently towards implementing these changes, with a detailed plan already advanced to the Cabinet on February 12, 2025.
“Given the complexities involved, the Government aims to finalise the framework for the Contributory Pension Scheme by the end of 2025; Subject to stakeholder consultations and legislative amendments, phased implementation is expected to commence in 2026, with full transition targeted for completion within a medium-term timeframe.”
The transition to a Contributory Scheme is expected to yield significant long-term savings by reducing the government’s pension liability, and according to Premier Wheatley, preliminary estimates suggest that annual pension expenditures could be reduced by at least 20 percent over the next decade, however, precise figures will be determined following the completion of the actuarial study.
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15 Responses to “Gov't advances pension reform as current method 'unsustainable'”
Propose mises, or promises, why one is true. Remember, Premier, cash in hand is far more beneficial than well sounding promises.
In God we trust, all others quickly give our own money.
“Generally, pension funds (plans) are pre-funded by employees and employer contributing to a retirement fund during an employees working career. These contributions are, in turn, invested to generate earnings to provide employees a pension at retirement. An unfunded liability or funding gap occurs when benefit obligations for current and future retirees exceed assets. For example, if pay out obligations are $500M and there is only $300M in the fund, there is a funding gap of $200M or for every $1 pay out for future benefits there is only $0.60 available. The fund is 60% funded. Many pension experts are comfortable with an 80% funding level or a 20% unfunded liability or funding gap. What is the funding gap of the VI Civil Service pension fund?
Research for this article revealed that VI Civil Servants do not contribute to and do not have a separate and dedicated pension fund. Government pays pension benefits (approximately $8.2M in 2014) each year out of current revenue. The pension plan is a pay as you go plan. A pre-funded plan results in the cost of benefits accrued today are being paid by current workers; whereas, the pay as you plan transfers today’s retirees cost to future generations. The current pension scheme is not just underfunded it is unfunded; it has a 100% funding gap that is approaching or may have already exceeded $300M. Is this funding gap sustainable and can it pose a problem for current and future retirees? What are some contributing causes to an unfunded liability or a funding gap?
Funding gaps can be caused by downturns in the economy or insufficient contributions to a pension fund. Furthermore, without a dedicated pension plan, a sharp decline in government revenue will force government to prioritize spending and retiree pensions could be adversely impacted. What can be done to enhance the certainty of retiree pensions?
Moreover, in underfunded plans, the gap can be closed or wiped out by amortizing the gap over time, i.e., 30, 20 years. An actuary calculates the annual required contribution (ARC) to built up the assets and make the plan healthy. In the VI’s case with a 100% funding gap, reducing the approximate $300M gap will be a major challenge. Nonetheless, the pension system is on life support and needs urgent attention.
Fixing the pension system will require grandfathering current retirees and some current employees; government and current taxpayers will bear the cost for these retirees. Going forward, non-grandfathered and new employees will have to contribute to a pension plan. The pension system needs fixing before it collapses under its own weight. The following is a suggested plan of action(s) that is not in any priority order:
• Pass pension legislation;
• Hire consultant to fleshout plan of action;
• Government contributes some seed money to the plan, i.e., $50-100M;
• Engage an actuary to determine the annual required contribution for both government and employee;
• Create a sinking fund; and
• Establish a public education and outreach programme……….”
The current scheme operates on the same principles as a ponzi scheme.
A ponzi scheme works fine until there is a shortage of new members joining the scheme to pay for benefits to those entitled to them.
The Virgin Islands has almost as few 0-4 year olds today as it had in 1970. Very few children are being born. It has a dramatically larger population and even more dramatically larger and rapidly growing number of retirees. The workforce will shrink or at least not grow at the same rate as the number of retirees. It's the same the western world over as we collectively face into demographic winter; it has been generations now since VI women gave birth to enough children to sustain the population. It might not feel like that yet, but that's the position.