PHILIPSBURG–The General Pension Fund St. Maarten APS was under its coverage ratio for the third consecutive year, according to the 2016 Financial Statements recently reviewed by the General Audit Chamber and highlighted in a compliance audit submitted to Parliament on Tuesday.
Although APS ended 2016 with a positive financial result of NAf.. 41.8 million, the General Audit Chamber concluded that its financial status is “not ideal.”
“Critical issues such as the sub-optimal coverage ratio, the increased uncertainty regarding the value of outstanding claims, as well as the questionable reliability of the participant administration, are cause for concern,” said Audit Chamber.
The coverage ratio is the relationship between the pension fund’s capital and the pensions obligation provision. At the end of 2016, the coverage ratio of APS was 99.6 per cent. The coverage ratio for 2016 represents the third consecutive year that APS’ coverage ratio is under the minimum limit of 100 per cent, said the Audit Chamber in a press statement.
A coverage ratio of 100 per cent means that APS is just able to meet its future pension obligations. However, with a coverage ratio of 100 per cent, the pension fund cannot withstand general and financial risks, cited the report. A minimum coverage ratio is needed to prevent this situation. APS’ policy stipulates a minimum coverage ratio of 105 per cent.
The report explained that the increase of the coverage ratio from 92.6 per cent in 2015 to 99.6 per cent in 2016 is mainly due to the adjustment of the retirement age from 60 to 62 years. Due to the change of the retirement age, the accrued entitlement (built-up pension) of the APS participant who has not yet retired is reduced by approximately 11 per cent.
The two-year postponement of the obligation to pay pension to the participants, and not increasing their accrued benefits, resulted in a considerable improvement of APS’ financial position at the end of 2016.
Conversely, the position of the participants deteriorated; they are required to work two more years, while the accrued benefit remains unchanged. The value of the not-yet-retired participants’ benefits has therefore been reduced by approximately 11 per cent. This means that a participant’s accrued benefits that were valued at NAf.. 10,000 are now worth approximately NAf.. 8,900.
The report’s preamble states that based on the proposed pension reform, the retirement age will increase to 65 years. The adjustment of the retirement age will again “positively influence” the coverage ratio, because the period of benefit will be shorter while premiums will be paid for a longer time.
“We hope that APS is able to improve the coverage ratio in the near future, by means other than a change to the pension scheme that is burdensome to the participant,” stated Audit Chamber Chairman Ronald Halman in the report’s preamble.
No consultation
Given the opportunity to respond to the Audit Chamber’s findings, APS, in its response which was included in the compliance report, is of the opinion that the preamble is “unflattering” to the Fund.
APS further indicated that it was not involved in the amendment of the law to change the retirement age from 60 to 62 years, which substantially improved APS’ financial position while reducing the participant’s position, at the end of 2016.
The government “effectuated this change without consulting APS” while APS “tried to prevent the aforementioned with the new pension reform, by actively taking the lead in the pension reform work group and, due to the lack of funds, lack of proper expertise and lack of capacity in the government, paid for the legislative lawyer.”
Financial uncertainty
Uncertainty regarding the valuation of the outstanding claims has increased by 43.8 per cent as compared to the previous year, according to the report. At the end of 2016, outstanding claims equalling NAf. 37.1 million, “remain uncertain.”
The financial situation at APS is “troubling,” stated the report. At the end of 2016, outstanding claims total NAf. 172.4 million (in 2015 it was NAf. 153.3 million). The largest outstanding claim is against government totalling NAf. 102.7 million.
In addition, there is increased uncertainty regarding the valuation of claims, specifically NAf. 37.1 million (2015: NAf. 25.8 million). In this regard, the report stated the uncertain claim against government is the largest: NAf. 19.1 million. In addition, the settlement date of a NAf. 20.2 million claim against government (based on the debt payment basic agreement), is uncertain.
The Audit Chamber also highlighted the adequacy of the internal control measures used in APS’ application and amendment process as relates to participant information.
In the Audit Chamber’s opinion, APS needs to improve its internal control measures for the application and amendment process of participant information. This is necessary to improve the reliability of the participant administration. The reliability of the participant administration is a recurring concern.
In 2016, APS “failed to comply with all stipulations” of the ordinance regulating the Fund, because the board was not complete, there was no deputy chairman, the budget adopted by the board was not submitted to the Minister of Finance on time, and no screening was carried out prior to hiring a (co-)policymaker.
At the time of the writing of this report, the General Audit Chamber determined that APS took action that resolved the first three legal deficiencies in 2017.
Recommendations
The Audit Chamber determined that its previous recommendations on past financial reports “have not been fully met” by APS. Those recommendations included drafting and implementing a phased plan (hereinafter: recovery plan), securing certainty regarding outstanding claims, and improving confidence in the accuracy and comprehensiveness of the participant administration.
“There is still no recovery plan in 2018, although the intention for drafting a plan exists. Moreover, the size of uncertain claims has increased, and the participant administration is, in our opinion, not yet reliable,” stated the report.
Based on the Audit Chamber’s findings and conclusions, it recommends APS prepare and implement a realistic recovery plan for achieving a coverage ratio of at least 105 per cent before December 31, 2018, and to ensure that prior to that day an agreement is reached regarding the uncertain claims against government, the other participating organisations, and the General Pension Fund Curaçao.
In addition, the recommendations call for APS to assure that the Fund takes action to financially settle the claims as quickly as possible and to make sure that the participant administration is reviewed at an (individual) participant level before December 31, 2018, to increase confidence in the accuracy of the administration.
APS is to evaluate the descriptions of the application and amendment process for participants before December 31, 2018, and identify the measures necessary to safeguard the reliability of the participant administration; to ensure that prior to December 31, 2018, a policy regarding the method of rounding off the actuarial rate has been adopted; to investigate whether the mortality rates used are still suitable; to complete the risk management process before December 31, 2018; and to ensure that the board regulation comes into force by national decree.
The Audit Chamber has recommended that the Minister of Finance reach agreement with APS, prior to December 31, 2018, regarding government’s debt to APS, and settle all outstanding debt and decide on APS’ personnel regulations prior to December 31, 2018.
The minister is also called to ensure that in the future, APS’ approved budgets are submitted to Parliament in compliance with the statutory date, make sure that the financial statements and the annual report are presented to Parliament shortly after their adoption, and take steps, going forward, to have a copy of the annual report of the Central Bank of Curaçao and St. Maarten regarding supervision of the Fund sent to APS.
The compliance report addresses findings and conclusions of the review of the pension fund’s financial statement. The report is published in both English and Dutch and is available on the website of the General Audit Chamber
www.arsxm.org .
Source: The Daily Herald https://www.thedailyherald.sx/islands/80047-aps-under-coverage-ratio-for-3rd-consecutive-year-as-of-2016
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