The Actuarial Review & Unfunded Liabilities -

The Trustee’s Side

Algernon CargillDirector, Bahamas National Insurance Board

Atlantic ConnectionJuly 11th, 2012

1

AGENDA

1. About NIB Bahamas

2. My introduction to Social Security

3. Good Governance

4. Working with your Actuary

5. Asset Liability Matching

2

ABOUT NIB BAHAMAS

• Started in 1974• Comprehensive income-replacement

benefits package • Contribution rate – 8.8% from 10/1974 to 5/2010– 9.8% from 6/2010 (when unemployment added)

• 96% of Investments local

RESERVES

19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

20110

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

1,800,000,000

INCOME & EXPENDITURE

19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

20110%

2%

4%

6%

8%

10%

12%

14%

Contribution Rate Expenditure Rate

RESERVE-EXPENDITURE RATIO

19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

2011 -

2

4

6

8

10

12

14

16

Expenditure > Contributions All years

Expenditure > Income 2019 to 2024

Reserves Depleted 2029 to 2035

General Average Premium15.2% to

19.0%

Pay-as-you-go 2066 25% to 32%

8TH ACTUARIAL REVIEW PROJECTION RESULTS

7

UNFUNDED LIABILITY

$7.9 billion

115% of GDP

In the private sector these would be awful numbers..……

but I have come to appreciate that social security is (or maybe?)

different!

REFLECTIVE QUESTIONS

• Does a financial deficit reflect poorly on trustees/management?

• Should we just live with a large unfunded liability?

• As a trustee and good steward, what can I do to make these numbers look better?

• What is the actuary thinking when he says “don’t increase the contribution rate just yet”?

11

ONLY ONE SOLUTION

Good Governance Practices

GOOD GOVERNANCE PRACTICES

1. Change the rules– Reduce benefits and/or increase contributions

• Adequate and affordable promises

2. Investments– Current Investment Policy Statement

3. Effective & Efficient Administration– Collect what is due, – Pay only the entitled, – With lean staff using available technology

GOOD GOVERNANCE PRACTICES

4. Everyone has their role:– The Minister– The Chairman– The Board– The Director– Executive Team

STEWARDING THE ACTUARIAL REVIEW• Actuarial Standards of Practice – Know what report should contain

• Assumptions– Have some input

• Scenarios– Ask for the “what ifs” you want to see

• Peer Review– 2nd opinions seldom hurt

THE ACTUARIAL REPORT

• Make it public – Don’t hide the facts, findings &

recommendations

• Build consensus behind key recommendations

• Be persistent with policymakers re need for reforms

• Fix the things you can

ASSET-LIABILITY ISSUES

• Difficult when investment options limited– Long-term liabilities– Few options for long-term assets

• Always balance Risk & Return • Keep Investment Policy current• Manage your investment managers

CONCLUSION

• Be a good Steward• Follow Good Governance Practices• Embrace actuarial review• Be transparent• Share information• Embrace reform