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Introduction

Last year this publication ran a story regarding a potential reform being considered by the National Insurance Scheme (NIS) to replace the current pay as you go system with a system whereby benefits are set with reference to the amount of contributions paid into the scheme (‘NIS eyes contribution-based pensions proposal as part of reform,’ Sunday Stabroek, November 5, 2006). This is a topic of great interest to me, and one that I had wanted to return to cover in more detail. My interest was sparked largely due to an incident at a pension fund management workshop in Barbados in 2005 where I gave a presentation, ‘The Actuary’s Perspective.’

Although the seminar was entirely aimed at private sector provision, in the panel discussion at the end a heated debate ensued on whether a defined benefit or defined contribution approach was more suitable for social security benefits. I was put on the spot at the time as the question was posed directed at me! It should be noted that Barbados recently had a substantial overhaul of its social security system, including increasing retirement ages and contributions – now with the highest contribution rate of any scheme in the Caribbean at 18% – well above the next highest which happens to be Guyana at 13% – hence the interest in other possibilities from the delegates.

At the time I advocated a basic minimum provision provided by the state with substantial proportion of provision provided by the private sector and individual. This is in sharp contrast to the current situation in most of the Caribbean where the state scheme provides the majority of benefits. The main problem I highlighted was the one of making private provision affordable given that a substantial contribution is being paid into the current social security scheme. One option that was put forward by a delegate was to replace the defined benefits based on years of contributions and salary with benefits defined by the contributions paid in. All well and good, I argued, but then who pays for the existing defined benefit promises that have already been made given that contributions are now being diverted away from the old scheme?

Now such a move is being put forward as one potential reform for the NIS, I decided to revisit this problem and see if a move to a defined contribution social security scheme can be managed in Guyana. This process is often referred to as ‘privatising’ social security which is a bit of a misnomer, since if contributions are compulsory it is still a state scheme – more accurately the process should be described as the investment of social security funds in private funds.

The Chilean system

Chile is often pointed out as the poster child for the move to a defined contribution scheme. Anyone interested in how they managed to tackle the thorny issue of transition can read the journal of Jos