The combination of higher pricing for annuities, after the last debt exchange event in Jamaica four years ago the NDX followed by new accounting requirements, have made it more difficult to accumulate pensions, according to actuarial expert Constance Hall.
Returns for pension funds have fallen post-NDX, but the new requirements under the International Financial Reporting Standards (IFRS) itself represents “possibly greater negative effect on the pensions industry than anything else in the last 15 to 20 years,” said Hall, the principal actuary for Eckler in Jamaica, in a presentation at the annual pensions seminar in Kingston on Thursday.
Consequently, many employers have closed out defined benefit pension schemes, represented as a cost on their books, and have shifted employees to approved retirement schemes to which they themselves do not contribute, in the main, the actuary said.
“Lack of employer participation is already an issue,” she said. “Of 23,000 approved retirement scheme members in my database, less than 7 per cent had received any employers’ contributions. For many employees the 5 per cent contribution is a sacrifice. The loss of the employers’ 5 per cent is a blow.”
Hall said there are now fewer defined benefit plans and fewer superannuation funds, and that 44 per cent of plan participants are now in approved retirement schemes.
“The burden has been shifted to the employees not just for the interest risk, they are also expected to bear the brunt of the contributions,” she said at the seminar staged by Victoria Mutual Pension Management in collaboration with the Private Sector Organisation of Jamaica.
Defined benefit pension plans often have huge surpluses from high termination of members and previously high interest government paper, the actuary explained.
Under IFRS: “Those companies must disclose these surpluses as assets on their balance sheets and probably pay tax on such assets. They must also disclose pension income or expense each year that has nothing to do with their contributions,” Hall said.
The result, she said, was volatility. “So even sponsors with well-funded DB pension plans are getting them off their books.”
The trend requires pension administrators and regulators to switch focus to making defined contribution plans work better, as well as the approved retirement schemes, she added, while calling for a more intelligent design of the system
“The tendency is for DC plan contributions to be 5 per cent to match the employees 5 per cent. This is not good; not the best, not optimal.”
Hall also pleaded with employers to at least make the minimum five per cent contribution to the fund, saying “any pension is better than no pension”, while also imploring them to make bigger contributions to levels that they can genuinely afford.
She noted that the post-NDX returns for pension funds now range between 8.5 per cent and 10 per cent, with some schemes that are still 100 per cent invested in deposit administration funds earning around 6 per cent per annum.
“Other than the explosion of the equities market in 2015-16 returns have been normal,” the actuary said. But, there is “no evidence that trustees or managers have been overly concerned. From my perspective, it’s really been business as usual,” she added.
Hall noted that for low-income workers, their NIS pension plus a 10 per cent defined contribution pension offered good income replacement in retirement.