In our previous article, we listed the main reasons behind the deficit being faced by Bahrain’s Social Insurance Organization. We are now going to discuss the remedies being discussed by Parliament and the Shura Council to resolve the issue.
In order to put things into perspective, we need to get some figures from the SIO’s latest statistical report which could be found on their website. According to the report, the average age of insured Bahraini males working in the private sector is 34 years old and their average salary is 729BD. The average age of private sector employees going into retirement is 48 years old and their average pension is 638BD. Therefore, in order to make things simple, let’s take the example of Mohammed who is a 34-year-old Bahraini male earning a salary of 729BD. Mohammed already has 7 years of service under his belt and is planning to retire at the age of 48 and is expected to receive a monthly pension of 638BD. He is expected to live until the age of 78 so he will be receiving a monthly pension for a total of 30 years.
Bearing in mind that the SIO receives 18% average salaries as contributions to the retirement plans (12% from the employer and 6% from the employee – 1% from the employee goes to the unemployment fund), how many employees are required to cover Mohammed’s retirement salary?
To answer this question, we simply have to bestaucasinosonline.com multiply the average salary by the percentage of contributions for 20 years and then divide Mohammed’s monthly pension for 30 years by the resulting figure.
729 x 18% x 12 x 20 = 31,492.800 BD
(30 x 12 x 638) / 31,492.800 = 7.293 employees
So we will need 8 employees to cover the pension that is going to be paid to Mohammed. Accordingly, we should expect the number of contributors to be eight times the number of pensioners in Bahrain. The reality of the matter is however, we have 92,657 registered contributors in Bahrain while there are 30,477 pensioners. This is a ratio of roughly 3:1 rather than the required 8:1.
To solve this dilemma, we should explore all viable options.
Option 1: Increase Pension Contributions
Let’s assume that we decide to increase pension contributions from the current 18%. How much should we increase it by?
Solving for the pension contribution in the previous example, we get the following equation:
(30 x 12 x 638) / (729 x ? x 12 x 20) = 3 employees
The required contribution percentage would be 43.75%!
Taken on its own, this is clearly not a viable option.
Option 2: Reducing the Pension Salary
Parliament and the Shura Council are currently discussing reducing the pension salary by 10%. The proposed schedule for pension salaries according to the number of years in service is tabulated below.
| Years of Service | Current Pension Salary as a Percentage of Employee Salary | Proposed Pension Salary as a Percentage of Employee Salary |
| 20 | 40 | 36 |
| 25 | 50 | 45 |
| 30 | 60 | 54 |
| 35 | 70 | 63 |
| 40 | 80 | 72 |
Now let’s try to calculate the pension that the SIO’s fund will be able to sustain in light of the current challenges.
Solving for the pension salary in the Mohammed’s example results in the following equation:
(30 x 12 x ?) / (729 x 18% x 12 x 20) = 3 employees
Solving for the pension salary we find that it will have to drop from 638BD to 262BD! This is a drop of around 59% whereas the proposed reduction is merely 10%. Clearly, this won’t be enough to cover the deficit if implemented on its own.
Option 3: Increase the Minimum Required Years to Retirement
This option, although clearly not preferred by employees, could have the greatest impact. Not only will we increase contributions, but we will also reduce the years of pension payments. Solving for the increase in number of years generates the following equation:
((30 – ?) x 12 x 638) / (729 x 18% x 12 x (20 + ?)) = 3 employees
The resulting increase in number of years is 11. So instead of allowing Mohammed to retire at the age of 48, he will only be able to retire at the age of 59 – basically eliminating the option of early retirement. This is inline with what the Shura Council and Parliament are discussing however it will undoubtedly increase the unemployment bestaucasinosonline.com/nz/ rate in Bahrain since the rate of new retirees is positively correlated to the number of new job vacancies in the market.
The Easy Way Out
There is always the option of having the government bridge the gap in deficit, the question that has to be asked is how? The slump in oil prices hit Bahrain hard and the small island kingdom is now facing the very real risk of devaluating its currency as its foreign exchange reserves are currently covering only around one month of goods and services imports.
Sure, there might be a light at the end of the tunnel with the prospects of shale oil over the horizon. However, until that is certain, Bahrain will depend on the soon-to-be introduced VAT in order to meet its financial obligations, develop its infrastructure, and even finance its shale oil refinery. Should the government start diverting VAT revenue towards financing collapsing schemes such as the SIO’s pension fund would exhaust this resource and force us all to forego the many benefits that would have been gained.
Conclusion
Poor funding positions, insufficient contributions, expensive benefits and increasing economic and demographic pressures mean that the current pension scheme is unsustainable. Pension benefits are generous and contributions have been set years ago without actuarial consideration. All of the remedies presented in this brief study are bitter to say the least and would only put a band aid on a gushing wound. The pension fund is in dire need for reform and the government has 3 levers to play with in their path to reform:
All options are equally difficult to implement without social, political, and financial implications.
In our next article, “Bahrain’s Social Insurance – Part 3: Complete Overhaul”, we will discuss out-of-the-box solutions that have not been discussed by the legislators to resolve the Pension Fund problem.
Written by:
Munther Al-Arayedh, MBA, CPA
So, what is a disaster?
A disaster is an event, often unexpected, that seriously disrupts your usual operations, processes and producers, and can have long term impact on your normal way of life or can affect your business.
What is Business Continuity Planning (BCP)?
Business continuity plan (BCP) is the creation and validation of a practical logistical plan for how a business will recover within pre-defined time after a disaster has occurred.
These management disciplines, processes, and techniques provide business continuity for critical business functions under the circumstances and limits set by senior management.
These circumstances and limits include:
Why Should we do Business Continuity Planning (BCP)?
Business continuity planning is one of the most critical components of any recovery plan. Unfortunately, not every organization develops a business continuity plan.
The effects of September 11 2001
The disaster that happened in September 11, 2001 demonstrates the high impact, low probability disaster that can happen, a recovery is possible. Businesses and organizations with continuity plans survived despite the buildings were destroyed and blocks of Manhattan were affected.
The lesson learned that day are:
Start Your Business Continuity Planning
Planning for a disaster or terrible event should happen when business is going well, not when disaster strikes. Having a pre-defined, well-documented business continuity plan that clearly communicates how your business will respond during an event can help mitigate risk and is one of the best investments your company can make.
Think Your Business Can Withstand a Disaster? Think Again
Twenty-five percent of businesses do not reopen following a major event. It does not take a major disaster to shut down a business. In fact, seemingly minor disruptions compared to widespread natural disasters can often cause significant damage, power failures, broken water pipes, or loss of computer data.
The success of a manufacturing business primarily depends on the way that the products are costed. There are different kinds of costs involved in a manufacturing organization. Knowledge about the difference between absorption costing and variable costing is essential to do the product costing.
Mainly, the costs can be recognized as variable costs and fixed costs. Absorption costing and variable costing are two different costing methods used by manufacturing business. This difference occurs as absorption costing treats all variable and fixed manufacturing costs as product cost while variable costing treats only the costs that vary with the output as product cost. A business cannot exercise both the approaches at the same time while the two approaches, absorption costing and variable costing, carry their own advantages and disadvantages.
Absorption vs Variable
So, what is variable costing?
Variable costing, known also as direct or marginal costing reflects only the direct costs as the product cost. Therefore, the cost of a product consists of direct labour, direct material and the variable overhead. Fixed manufacturing overhead is considered as a periodic cost like the administrative and selling costs and charged against the periodic income.
Variable costing produces a clear picture on how the cost of a product changes in an incremental manner with the change in level of production of a manufacturer. Nevertheless, since this method does not reflect the overall manufacturing costs in costing its products, it minimises the overall cost of the manufacturer.
What is Absorption Costing?
Absorption costing, known also as full costing or traditional costing, calculate both fixed and variable manufacturing costs into the unit cost of a specific product. Thus, the cost of a product under absorption costing consists of direct material, direct labour, variable manufacturing overhead, and a portion of a fixed manufacturing overhead absorbed using a suitable base.
Some people believe that using absorption costing is the most effective method to calculate the cost of a unit because absorption costing takes all the potential costs into consideration in the calculation of per unit cost. Moreover, using this method allows the inventory to carry a portion of the fixed expenses. By showing a highly valued closing inventory, the profits for the period will be improved. Moreover, this can be used as an accounting trick to reflect higher profits for a certain period by moving fixed manufacturing overhead from the income statement to the balance sheet as closing stocks. The similarity between Absorption Costing and Variable Costing is that the purpose of both approaches are the same; to value the cost of a product.
