Towards a Viable Pension Regime

KINGSTON — Rather than exhausting itself and becoming an unsustainable drag on the national treasury, an appropriately reformed pensions regime can result in significant savings, while enhancing the security of the pensioner.

This message captures the contribution of the Caribbean Actuarial Association (CAA) to the consultationson the Green Paper No. 2 – 2011, "Options for Reform of the Public Sector Pension System".

The regional actuarial fraternity, as practitioners of retirement systems, recently presented its considered views, which pensions experts say could reduceby up to $60 billion of 'past-service' liabilities for public pension payments due in the future. 

The CAA proposal sought to address some of the complexities involved in the reform process, while providing technical support to "facilitate the decisions which will have long term implications, both for the national budget and the employees in the public sector."

The professional body underscored its contribution, with the advice that the recommendations should be implemented in a holistic manner.

“We strongly urge that our recommendations be viewed in their totality, rather than that favourable recommendations are cherry-picked, and the unfavourable recommendations discarded. It is important that the reform be consistent as a whole, and the opportunity be embraced to introduce parity and preserve some inter-generational equity.”

In assessing the proposals in the Green Paper, the CAA’s recommendations were reflected in the acronym, “SAFETY”: Security of the Pension Promises; Adequacy of the Benefits; Fiscal Sustainability; Efficiency; Transparency; and Yield.

The actuaries posited that their plan could reduce, by 27 percent, the current $222.6 billion of estimated future payouts in annual pension benefits to teachers, civil servants, the police and military, retired public officials and other groupings, down to J$162.9 billion.

This was projected in the context of the average age expectancy of about 74-75, and the assumption that a retiree at 65 is expected to receive, on average, pension for about a decade.

The Pension Reforms Green Paper assesses pension liabilities at 36 per cent of GDP with an upward curve to 57 per cent by year 2075, based on the size of the public sector. However the CAA, assess those liabilities at 18 per cent of GDP.

Central Government Budget data indicates that the annual payout of pension benefits, at $15.6 billion, on average, for the past three years would escalate to J$22 billion by the end of fiscal 2011-12. 

While supporting the idea of a defined benefit scheme, the actuaries propose that the plan should be funded, “starting at a 50 per cent funding level of the past service liability and rising to 100 per cent over a period of 10-15 years."

The CAA argues that an unfunded pension system with mandatory contributions by members is inequitable and inconsistent with rights of portability.

Among the other recommendations of the CAA are changes in how the pension formula is calculated, early retirement terms and the normal age of retirement. It also proposes a pension formula of 2.0 per cent of pay for each year of service, averaged over the last five years prior to retirement, for both past and future service.

Like the Green Paper, the CAA advocates for an increase in the retirement age to 65. The association also agrees with the recommendation for indexation of pensions to inflation and national wages, but said it should be applied only when available funding permits it.

“The Green Paper recommends indexation to both inflation and nominal wages at 50 per cent. We do not support the recommendation that there should be guaranteed indexation, rather indexation should not be granted, unless there are windfall sources of either fiscal revenue or investment surpluses under a funded status," CAA said.

Another area of divergence between the two is that, the CAA calls for the use of existing capacity and expertise from within the private sector for the administration of the reformed system, rather than building out capacity and expertise in the public sector, which it said is expensive and time consuming.

In relation to transparency under the reformed system, the CAA calls for a dedicated fund similar to other pension funds in the private sector, and a board of trustees appointed by the Government, which should include persons nominated by different groups to administer the trust.

The Green Paper, on the other hand, does not recommend a governance structure. The dedicated fund with a proper governance structure, the CAA argued, is critical, since employees are being asked to accept a reduction in their benefits. The CAA also recommends that contributions by the Government be used solely for investment in real assets.

The Government is responsible for 28,000 pensioners, and is constrained by contractual obligation to pay the future pension of approximately 88,000 workers.

Among the recommendations contained in the Green Paper tabled in Parliament, are for the establishment of a contributory pension scheme and for groups, such as teachers, police and nurses, to be asked to contribute five per cent of their salaries.

The Green Paper on pension reform which was tabled in the House of Representatives in September is part of Jamaica’s committed to the International Monetary Fund (IMF), to reform pension arrangements as part of the country's medium-term economic plan.

The paper rationalizes that the move to reform the pension arrangements is based on the need to reduce expenditure on pensions as a percentage of GDP. Growth in the number of public sector workers, as well as increased longevity of pensioners, has increased the percentage of GDP paid for pensions from 0.4 per cent of GDP in 1990 to approximately 1.4 percent in 2010.

It proposed that a contributory pension scheme be established and that groups, such as teachers, police and nurses, contribute five per cent of their salaries. Currently, nurses and teachers make no contribution to the Consolidated Fund, while police contribute 1.6 per cent of salary.

The Green Paper also proposes the establishment of a pension division, staffed to calculate pension liabilities and advise the government on options for further pension reforms, while emphasizing that the state conduct an extensive financial educationprogramme, so that public sector workers become aware of the importance of saving for retirement.

The paper also calls for changes to the National Insurance Scheme (NIS), so that the facility can properly supplementpensions, in light of its low replacement rate. It recommended that the basic NIS should be enhanced through the development of improved funding arrangements and more efficient administrative procedures.

The Green Paper is a consultative document to facilitate public input on the proposed public-sector pension reform.

 

By Allan Brooks, JIS Senior Reporter