By Rawle Lucas
Rawle Lucas is a Guyanese-born Certified Public Accountant and Assistant Vice-President of the Lending Services Division.
Mr Lucas has agreed to serve as a columnist with the Stabroek Business and will be contributing articles on economic, financial and development matters.
Inaccessible
The recent financial crisis that hit CL Financial and Stanford groups, two major players in the financial arena of the Caribbean region, undoubtedly has cast a shadow over the infallibility of the finance sector. This development is especially painful for Guyana which has a per capita gross domestic product (GDP) below US$1,600, one of the lowest in the Caricom region. Two of Guyana’s important private-sector non-bank financial institutions have been severely impacted by the CL Financial and Stanford crises. With much of the Stanford entity’s money frozen, some investments of Hand-in-Hand Trust are inaccessible and may be lost forever.
A more serious situation faces Clico (Guyana), another of the institutions adversely affected by the financial crisis. The problems of Clico (Guyana) are far advanced and the organization, which held the future of many Guyanese in its hand, may be at the point of no return. Clico is in danger of disappearing from the insurance landscape of Guyana judging from the recently publicized disclosures of Mrs. Van Beek, the Judicial Manager of the entity. Once a protector of risk, Clico (Guyana) is a victim of risk. According to the Judicial Manager, the liabilities of Clico (Guyana) exceed its assets. Some of the assets that Clico (Guyana) is counting on to meet its obligations have been caught up in the liquidation of Clico (Bahamas). The reports emanating from that country leave Clico (Guyana) with virtually no chance of recovering any of that money.
Losses
As an independent entity that poses no serious threat to the financial system of Guyana, the liquidation of Clico (Guyana) by itself is no big thing. But, as it falls to the ground like a meteor, Clico (Guyana) is leaving a gaping hole in the future and financial security of nearly 15,000 Guyanese. Many are holders of insurance policies while others are contributors to the pension plans that Clico (Guyana) managed.
It has also punctured the national safety net, the money of the National Insurance Scheme (NIS), with nearly G$6 billion disappearing from the asset pool of NIS. Administration officials have acknowledged that the money represented about 20 percent of the investment strength of the Scheme at the end of 2008. The level of the financial loss, estimated at US$30 million, is nearly equivalent to on year’s contribution to the NIS. With such a sizable loss, the collapse of Clico (Guyana) has also weakened the capacity of NIS to raise the level of resources required to fulfill its mandate.
Pension Funds
Common to all three local institutions, Clico, Hand-in-Hand and NIS, is the responsibility that they have for managing, among other things, pension assets. The NIS was created by the government to serve a national need and there is the belief that, if NIS ever ran into financial difficulty, the government would bail it out. That level of confidence does not extend to the private non-bank financial institutions.
Pension funds are linked to the retirement of workers and are caught up in the current crisis. According to the web site of the Office of the Commissioner of Insurance, there are 109 registered pension plans in Guyana. Clico (Guyana) managed 17 of those plans while Hand-in-Hand managed 13 of them. It is not clear at this time of writing as to how many of the registered pension plans in Guyana are defined contribution plans and how many are defined benefit plans. Irrespective of the type of plan, the nexus between insurance companies and pension plans should encourage a closer scrutiny of how pension assets are being invested.
The Clico (Guyana) fiasco, in particular, underscores the significance of paying attention to the investment of pension assets. Owners of pension plans should realize that there has been a shift in the composition of pension assets within the last 10 years. The pension plans kept most of their money, over 50 percent, in the banking system in the late 1990s and early 2000s. The first major shift in the investment portfolio was noticed in 2001 when the pension plans began to reduce their deposits in the banking system and started allocating more of their resources to private securities. As a result, by 2003 the pension plans held 39 percent of their assets in private securities.
During this period also, investment in the foreign sector began to pick up speed. In 1997, for example, pension plans had one percent of their assets in foreign securities. The progression towards foreign assets continued gradually until 2001 at which time foreign investment began to gain in strength. The second marked shift in the investment portfolio occurred after 2003 when, in 2004, the share of foreign investment rose to 20 percent of plan assets. Ever since then, the share of assets in the foreign sector grew at a healthy 21 percent annually to reach 33 percent by the end of 2008.
Regrettable
Admittedly, monitoring the performance of the financial institutions ought not to be an individual exercise, especially since so many insurance companies are involved in managing pension assets and there are officials who are paid to ensure that their investment practices comply with the law. It is indeed regrettable, as so many have already observed, that Mrs. Van Beek is now discovering, in her capacity as Judicial Manager and not as Insurance Commissioner, how badly the assets of Clico (Guyana) were managed. It is this type of faux pas, often exercised with impunity and no accountability that makes it difficult for so many Guyanese to root for this administration.
Accountability
With the way things are, Guyanese have no where to turn for accountability. On this matter of Clico (Guyana), the administration has offered no explanation as to the nature of the investment of NIS. Guyanese had to search through the annual reports of CL Financial to know that NIS could not be a shareholder because CL Financial owns all the shares of Clico (Guyana). The other possibility is that NIS lent money to Clico. If it lent money to Clico (Guyana), NIS would be either a secured or unsecured creditor of Clico (Guyana). That Guyanese would have an interest in knowing the creditor status of NIS should be no surprise since Guyanese understand that they are the ones who would have to replace the lost investment. They also know that if NIS is a secured creditor, that could lessen the burden on them.
That apart, it would also be helpful to know why the administration saw it fit to allow NIS to invest so much money in this particular insurance company without doing due diligence on its investment. Let us hope the scrappy paperwork of Clico (Guyana) that Mrs. Van Beek referred to is not used as an excuse.