Keeping an Eye on the People’s Business: The National Insurance Scheme and the Public Debt

Sandra Ferguson

by Sandra C A Ferguson

We the people have been aware for the longest while that the National Insurance Scheme (NIS) had become a sort of piggy bank to successive political administrations.

The recently concluded Structural Adjustment Programme has sharpened our awareness of how much central government may have been presiding over the pauperisation of the NIS and other state-owned entities. Most of we the people never took a keen interest in the operations of the NIS. Every time, the central government was in a ‘jam,’ NIS ‘helped out’ by ‘investing’ in government paper. Since the NIS has never failed to meet its obligations of paying the people’s modest benefits in a timely manner, we really did not pay attention. However, when the ‘authorities’ announced that NIS was one of the creditors from which it would be seeking a debt ‘haircut,’ we the people not only sat up and took notice but let our voices be heard on the matter.

  1. NIS and the Structural Adjustment Programme:

Proposed Haircut:

A debt haircut was seen as an essential measure both by the IMF and the Government of Grenada (GoG) to achieve progress in reducing Grenada’s debt – GDP ratio to 60% by 2020. The Government of Grenada, supported by the IMF, was seeking a 50 to 60% haircut from its various creditors. This proposal caused a furore among the Grenadian public. The IMF officials explained that there had to be creditor equity. Since international creditors were being asked to take a haircut, domestic creditors were also expected to accept a haircut. The people replied that the NIS was NOT a credit institution. It was a Social Security scheme.

What is the NIS?

The National Insurance Scheme is a Social Security provision which came into force on the 4 April 1983 by NIS Law 14 of 1983. According to its website[1]

  • NIS is ‘the protection provided for its members, against economic and social distress caused by the stoppage or substantial reduction of earnings resulting from occurrences such as sickness, employment injury, invalidity, childbirth, retirement or death.’
  • The mission of the NIS is ‘to provide for the efficient payment of relevant benefits to contributors in a customer-focused environment through effective collection of contributions and prudent management of funds with highly trained staff using innovative technology.’

There is a 4% contribution from the employee and a 5% contribution from the employer. The self-employed pay the 9% contribution. The mandatory retirement age is 60 years and the maximum replacement value under NIS is 60% of the 5 highest years of earnings

  1. IMF Staff Report July 2014:

The following information extracted from the July 2014 IMF Staff Report Annex IV. Grenada: Impact of the Debt Restructuring is worthy of note:

NIS Financial Position:

Income and Assets:

  • Contributions: Two-thirds, approximately 66%, of the annual income of the National Insurance Scheme comes from employer-employee contributions.
  • Non-financial Assets: The remaining income comes from NIS investments. These investments are mostly non-financial assets such as real estate.
  • Government Paper: The income derived from government paper was ‘relatively small’ but had increased from less than EC$2 million in 2008, to almost EC$5 million in 2013 (18% of total income).
  • Assets: NIS exposure to central government papers stood at EC$186.8 million (8.5% of GDP or 25% of its assets) at end-2012, of which EC$92 million were holdings of the EC$ 2025 bond issued in the 2005 restructuring.
    • Central Government Paper: the total exposure to the central government is EC$175 million (8% of GDP or 23% of assets).
    • Other Statutory Bodies: In addition, NIS had exposure to various statutory bodies totaling EC$58.5 million 2.7% of GDP).

Cash Position:

  • Narrowing of Operational Surplus: The NIS has been running an operational surplus, which narrowed during the downturn of 2009-11, as unemployment increased and the contribution base shrunk.
  • Decline in Revenue Growth: Growth in revenue slowed from an average of 10% per year during 2000–08 to about zero thereafter.
  • Impact of Exposure to BAICO and CLICO: In addition to its weaker earnings, NIS had to provide for losses arising from its investment in British American Insurance Company and Colonial Life Insurance Company.

The 2009 Actuarial Review:

  • Actuarial reviews are done every 3 years. The last review was done in 2009 and the next review was expected to be completed by June 2014.
  • 2017, Expenditures Greater than Contributions: The 2009 actuarial review forecasted that expenditures would exceed contributions by 2017.
  • 2029, Operational Deficit: It also forecasted that expenditures would exceed total income by 2029.
  • 2042, Depletion of Reserves: The operational deficit would continue to increase after 2029 and the reserve would have to be used. Reserves would be completely depleted by 2042.

Recommendations: The main recommendations of the actuarial review were to:

  • Increase Retirement Age: increase the retirement age from 60 to 65;
  • Increase Contributions: increase the contribution rates to 11% (5% employee + 6% employer) from the current rate of 9% (4% employee + 5% employer);
  • Increase Insurable Limit: increase the insurable limit gradually given that current limits were very small for high income brackets. Contributions were based on a maximum insurance limit of $3,000.

Impact of Debt Restructuring on the NIS Position:

  • No Debt Restructuring Scenario: Assuming no debt restructuring under the framework of the Structural Adjustment Programme, the projected cash flow position for 2014–2042 was one similar to the one projected by the 2009 Actuarial Review – operational deficits beginning in 2028 and depletion of reserves by 2042.
  • Debt Restructuring: Debt restricting would have a negative impact on the financial position of the NIS. A 50/60% haircut on government paper that was being restructured would hasten the operational deficit and depletion of reserves as follows:
    • 2022/2023, Operational Deficit: The onset of the operational deficits would commence earlier, forecasted for 2022/23.
    • 2036/2037, Depletion of Reserves: Similarly, the depletion of reserves would occur earlier, 2036/37.
    • Reforms for Long Term: NIS would continue to run operational surpluses over the medium term and address the longer-term challenges through recommended reforms.
    • NIS Loss vs Central Government Gain: While the debt restructuring would have a negative impact on the financial position of the NIS, this loss would be fully offset by the gain in the central government’s position for public sector for the public sector as a whole.
  1. NIS and Debt Restructuring:

The issue of haircut, a 50/60% reduction in the face value of the debt, was taken off the table. The restructuring agreements with NIS reduced interest rates and provided for longer maturity dates.

The following table, NIS Holding of Domestic Debt at 31 December 2016 [2] summarises the central government debt held by the National Insurance Scheme at 31 December 2016.

NIS Holding of Domestic Debt at 31 December 2016

DESCRIPTION AMOUNT (XCD m) REMARKS
Total Debt 2,146,952,120 Includes contingent liabilities of $93.77
External Debt 1,554,272,024
Domestic Debt of which 592,680, 102
Treasury Bills 296,269,500
Bonds 214,801,349

NATIONAL INSURANCE SCHEME HOLDING OF DOMESTIC DEBT

Treasury Bills 20,000,000 Issued at 6%; 365 days
Treasury Bills 12,000,000 Issued at 5%; 365 days
Treasury Bills 8,000,000 Issued at 5%; 365 days
Total Treasury Bills 40,000,000  

BONDS

2040 NIS – GoG private placement , formerly 2014/2016 Serial Bond 25,287,556 restructured 2014/2016 serial bond – (23.2 m); with a 25-year term, 10-year grace period and a 3%interest rate
2040 NIS GoG EC Bond Exchanges (100.9 m 2015-2040) 100,930,530 restructured 2025 bond – interest rate 3%; maturity 15.11.40; restructured into a new bond with a 25-year term, 10-year grace period and a 3%interest rate, with expected Net Present Value savings to the government of 73%.

 

DESCRIPTION AMOUNT (XCD m) REMARKS
GoG – NIS 2022 (NIS private placement) 20,869,144

restructured treasury bills $19.66m to Nov. 2015; interest rate 3%; payable June & November;

Treasury bill was restructured into a 7-year bond with a 2-year grace period and an interest rate of 3% with expected Net Present Value savings of 31%.

GoG Housing Authority Guarantee 6,721,000 restructured HAG guaranteed loan now Central Govt. debt; – interest 3% – payable 2016-2040;
Total Bonds 153,808,230  
National Insurance Board  24,927,287

Restructuring of contributions arrears to October 2015. – 3% interest; payable March 2016 – 21 December 2020;

restructured into a 5-year bond with an interest rate of 3%, for total expected Net Present Value savings of 19%.

Total Contribution Arrears 24,927,287  
Total Debt to NIS 218,735,517  

The following is noted:

  • Domestic Debt: Based on the information from the 2017 Budget Estimates, the NIS is the holder of 37% of the total domestic debt.
  • Central Government Guarantee re Loan to Airport: In the Budget Estimates, it is not apparent how the government guaranteed debt owed to NIS has been treated by the Airport Authority.
  • 2025 EC Bond: In respect of this bond held by international bond holders, it has been restructured as follows – interest rate 7%, repayment 12 May 2015 – 12 May 2030. Compare the terms for NIS: 25-year term, 10-year grace period and a 3% interest rate; maturity date 15 November 2040. Haircut or no haircut for the NIS?
  • Contribution Arrears: Contribution arrears account for about 12% of the domestic debt. According to the 4th Review Report of May 2016[3], ‘During restructuring negotiations with the NIS in late 2015, the government became aware of previously unrecorded contribution arrears amounting to EC$14.5 million, or 0.6% of GDP.” These arrears were included in the restructuring.
  • Actuarial Review: Has a recent actuarial review been done and what are its findings and recommendations?
  1. IMF Sixth Review:

A footnote in the IMF Sixth Report makes the following reference to the National Insurance Scheme:[4] ‘The National Insurance Scheme (NIS) is due for reform. Recent actuarial reviews show that current revenues are not sufficient to pay for benefits going forward and assets will be depleted by 2035.’

This note on the NIS was made in the context of comments on potential risks to Grenada’s economic outlook. Among the downside risks identified were the ‘unforeseen costs related to the reform of the public-sector pension system and the introduction of a national health insurance scheme.’ We the people have noted that there are various statements coming from ‘the authorities’ about the establishment of national health insurance without any specific facts and details about exactly what is intended. Exactly, how does the National Insurance Scheme fit into this scheme of things? The one thing that we have concluded is that legislation will be passed to provide for deductions from the (meagre) salaries of those fortunate enough to be employed.

This comment in the final IMF Report is another signal to we the people that we need to take a keen interest in the affairs of the NIS. Has a recent actuarial review been done? What are its findings and recommendations? What exactly are the government’s proposals in respect of the the NIS and the National Insurance Scheme?  What are the costs? What are the benefits?  What are the credentials and competencies of the person(s) driving this process on behalf of the government?

We need to know! We want to know!


[1] http://www.nisgrenada.org/about

[2] based on information extracted from: 2017 Budget Estimates of Revenue and Expenditure, Appendix F: Debt Outstanding as at 31 December 2016, pp139-140 & May 2016, Report of Fourth IMF Review, IMF Country Report No 16/133, pp 59-61

[3] IMF Country Report No. 16/133, May 2016, pg. 9-10

[4]  IMF Country Report No. 17/131, May 2017, pp – para. 24, pp.13

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