Paulette Simpson (left), Jamaica
National Building Society chief representative officer in the United
Kingdom, records important information to assist a pensioner attending
the JN Pension Expediter Service meeting in May Pen, Clarendon. Only 25
per cent of Jamaican workers are said to be participants in
retirement/superannuation schemes.
The government and private sector of Jamaica have been working hard to
allow people who have worked a full career to receive pensions that can
at least provide for minimum living requirements in their golden years.
This is a worldwide problem, and while each country presents unique
issues, the sharing of knowledge and strategies may be of general
benefit to practitioners in pension systems and, consequently, the
population covered by these systems.
Jamaica has a total population of 2.7 million people. Retirement with an
immediate pension can be as early as age 50 and as late as age 70.
The average age at death for persons receiving a pension from a pension
plan is the late 70s to early 80s, so retirees need an income for many
years after ceasing employment.
The 'social security system' is weak but occupational pension funds
(private sector) with retirement savings now worth about US$1.5 billion
(J$103.5 billion) have been established since the 1940s, covering about
70,000 private-sector workers out of a total workforce of one million.
A further 130,000 to 180,000 working persons are covered under unfunded
government programmes for the public sector. As elsewhere, the
population of senior citizens aged 60 and over is increasing, both in
absolute number and as a percentage of the total population, and is the
fastest growing age group.
It is, therefore, critical to implement long-term measures that allow
larger numbers of senior citizens to be financially self-sufficient. In
addition to the benefits to the retirees, more savings could strengthen
the economy as these funds provide financing for profitable long-term
ventures.
PRESENT RETIREMENT SCHEME
In 1966, the National Insurance Scheme (NIS) was introduced to provide
basic pension benefits to a wide cross section of Jamaicans and their
dependents.
In spite of these broad-based provisions in the NIS Act (1965), only
approximately one third of older persons 60 years and above met the
qualifying criteria and are in receipt of NIS pensions, the majority of
whom are women.
Approved superannuation funds and approved retirement schemes for
individuals set up in the British style trusts benefit from preferred
tax treatment. Until 2005 the legislative framework governing these
funds were provisions in the Income Tax Act primarily dealing with the
conditions necessary to qualify for tax exemption on contributions and
investment income.
In the private sector, there are currently about 800 employer-sponsored
pension funds covering about 80,000 persons. Within this group there are
about 8,000 persons receiving pensions today. However, a high proportion
- more than 50 per cent - of pensioners still receive pensions that are
below the minimum wage of the country (less than US$2,500 per annum).
Small pensions in Jamaica are usually the result of insufficient savings
caused by:
Low wages.
Pensionable earnings that are a fraction of taxable earnings.
Sporadic or limited participation in pension plans.
Access to cash refunds of "own contribution" (tax free) when changing
jobs, thereby losing any accrued benefit for that period of service. The
refund is typically used for consumption rather than investment.
Falling interest-rate environment (which is a significant factor since
the majority of pension plans are of the defined-contribution type).
Virtually all plans only guarantee a fixed pension payable for life and
do not grant automatic post-retirement pension increases, so pensioners
can only rely on discretionary ad hoc increases.
Working Jamaicans are unlikely to accumulate enough money to provide an
adequate pension at retirement and current pensioners are likely to face
increasing difficulties meeting their financial needs as inflation
erodes the purchasing power of their pensions.
THE NEW LEGISLATION
The pension reform process in Jamaica has evolved over the past two
decades.
The new legislation introduced a registration process for plans,
trustees, investment managers, administrators and their professional
advisers with accompanying registration fees.
It contains provisions as to how all these parties should function and
tries to replicate the contents of the constitutive documents. It is
trying to put "proper arrangements in place" by setting a standard of
governance and requiring a substantial amount of detail to be submitted
to the regulator.
The cost of submitting and reviewing all this information in a central
place is high. The impact of the cost is likely to have a negative
impact on benefits paid from these funds (current industry estimate is a
reduction of 15 per cent over time). This aggravates, rather than
improves, the situation.
LOCKING IN OF FUNDS
Mandatory locking in of members' retirement savings until retirement has
been so controversial that this was delayed. This provision was intended
to force members to keep their retirement savings intact until they were
allowed to start their pension.
The implementation of the locking in, when it occurs, will only apply to
future contributions. However, once implemented, the impact on benefits
is expected to be positive over the long term provided the benefits are
not eroded by inflation.
Pension reform has been given a lot of publicity by the Government and
private sector. Also, there is mandatory communication with participants
on a regular basis. However, given that only about 25 per cent of the
working population has access to pension arrangements, there is a
continuing disconnect.
Growth of social awareness is likely to take some time but should
improve as access improves. Two groups, self-employed and those in non-pensionable
posts, have the greatest need in the Jamaican retirement system.
The first stage of the reform only dealt with occupational pension funds
because the Government decided to delay introducing the regulations for
approved retirement schemes or personal pension plans until the next
stage of legislation.
If they had concentrated on implementing formal arrangements for the
self-employed and employed persons without an employer-sponsored plan
first, the benefit of allowing these groups to make realistic savings in
approved retirement schemes earlier far outweighs the benefit to the
public of legislating for occupation funds.
EFFECTIVE SUPERVISION
Success hinges on a well-crafted trust deed and rules otherwise referred
to as the 'constitutive' document and a regulator that enforces the
provisions of the trust and the recommendations in the actuarial
valuation report. Newly introduced mechanisms include:
Mandatory professional indemnity coverage for each investment manager
and administrator (about US$76,000 coverage minimum) and fidelity
guarantee insurances for each investment manager (about US$152,000
coverage minimum).
Detailed prescribed reporting for each of the administrator,
investment manager and trustees (reporting timelines range from 60 to
120 days).
Detailed report of the plan's operation (annual report) within nine
months of the plan's year end.
Changes to the plan's trustees, administrator, investment manager or
professional advisers where made should be reported within 14 days.
Resources and expertise are scarce in a small developing country like
Jamaica. The regulator is not immune to this scarcity and will face
difficulty in efficiently analysing the detailed reports demanded. This
challenge will be exacerbated (at least in the near term) by the fact
that the reports are not submitted electronically.
At the same time trustees and participants may be lulled into a false
sense of security having accepted the assurance that the regulator is
keeping tabs on the health of each plan.
The outcome is that governance standards have been strengthened, but the
supervision end may not be sufficient to enforce them.
ENSURING TRANSPARENCY
Members have the right to information about the operation of the plan
(inclusive of annual report to be produced annually) and their level of
participation in the decision-making process has been increased:
Nomination of a minimum number of trustees.
Approval for all amendments to the constitutive documents except those
made for compliance purposes.
Minimum standards for member communication material (what they should
receive and the minimum information to be included).
Severe penalties for breaches of the 2004 Pensions Act and regulations
(fines and/or imprisonment).
A complaints mechanism so participants can go to the regulator
(Financial Services Commission) as a last resort to resolve their
problems.
The introduction of transparency is expected to have a positive impact.
The main challenge will be the participants' ability to digest and use
the information.
VESTING AND PORTABILITY
The introduction of minimum benefit standards will be part of the next
stage of legislation and will include vesting, locking in and
portability.
When introduced, social awareness will be a key component to translating
the objective into a benefit to working Jamaicans. More access to
pension arrangements is likely to drive the social awareness so the
benefit of the minimum standards is likely to take a few years to
emerge.
So far, all pension reform has mainly dealt with pension plans set up in
the private sector. There is some indication that the public sector has
been attempting to move in this direction.
Nonetheless, public-sector issues remain outstanding, at least in the
public domain. Employers, administrators, investment managers and
trustees will be under more scrutiny from the regulator and scheme
participants. This is expected to raise the confidence levels of
existing pension savers.
The expenses of operating these plans are a challenge. Following the
introduction of the new legislation, employers and trustees are in the
process of winding up at least 100 plans, mostly small or dominated by
low-income workers.
The main reason is the increased cost introduced by the new regulations.
However, pension reform is weeding out the weak plans and the costs of
compliance are giving employers incentive to consolidate pension
arrangements for their employees.
There will be a shift toward approved retirement schemes or personal
pension plans as employees of small businesses, self-employed persons
and persons in non-pensionable posts gain access. This is expected to
expand the base of pension savers overall.
Unfortunately, growth is likely to be slow due to overall lack of
education in the population (generally and particularly in respect of
retirement issues). There is a culture to raid any savings before
retirement occurs and this, coupled with a general distrust of
institutions, means social awareness may be slow to change. Substantial
funds will be required for education.
Meanwhile, the Government is committed to at least biennial reviews of
the legislation to fix what does not work and fine-tune where needed.
This is significant as it provides the Government and pension industry
with a mechanism to respond to unintended negative provisions in the
legislation.
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