Retirement schemes – another path to a pension

There are not as many retirement schemes (RS) as superannuation funds (SF) and they have far fewer assets, but their membership exceeds that of the SF as they keep opening a path to people who previously had no way to secure a formal pension.

At September 2023, there were 14 retirement schemes accounting for 3.86 per cent of registered pension arrangements and 349 superannuation plans accounting for 96.14 per cent. But there were 80,400 RS members and 73,760 SF members, that is, 52.15 per cent and 47.85 per cent, respectively.

The value of the assets of the SFs was $646,788 million, compared to the value of the RSs of $67,354 million. That is 90.57 per cent and 9.43 per cent, respectively.

Both types of arrangements are on the growth path. The membership of SFs was 68,752 in 2021, 68,751 in 2022 and 73,760 in 2023, while that of the RSs was 70,667 in 2021, 72,899 in 2022 and 80,400 in 2023.

These numbers from the Financial Services Commission’s Private Pension Industry Statistics for September 2023, show that more people are participating in registered pension arrangements.

However, it is quite clear that only a small portion of the population has membership in a registered pension arrangement.

The retirement scheme is the new kid on the block, and has overtaken the fund in membership, but the average pension savings of each member of the SF dwarfs those of the RS. One reason for this is that the former has been in existence for a very long time, compared to the latter.

There is a meaningful difference between both types of pension arrangements. The SF is an employer-sponsored facility to which both employer and employee make contributions to provide a pension for the employee in retirement. There are two types – defined benefit plan and defined contribution plan, also called a money purchase plan.

In the first case, the benefit is linked to the employee’s years of service and salary. In the second, it is the contributions of the employer and employee and the income they generate which buy the pension for the employee at retirement.

Retirement schemes are defined contribution schemes, so it is very important for the member to contribute as much as possible within the limits set by law. These schemes are often referred to as individual retirement schemes and are not confined to people in the employ of others.

In fact, only those who are so employed and are not members of an SF may be members of an RS.

There are, however, employers who contribute to the retirement accounts of their employees, but their contributions plus those of the employee cannot legally exceed 20 per cent of the employee’s salary. Also eligible for membership are the self-employed.

The RS has given even small earners an opportunity to make provision for retirement, even if the pension is small. What it can do is to shift the attention of small earners from focusing on the National Insurance Scheme to provide some cash flow in their retirement. It must be remembered that the NIS is more insurance than pension.

According to industry sources in the RS market, middle-aged and older individuals generally take a more serious approach to pension savings because they realise how little time they have left to their retirement.

The big drawback for this group is the likelihood of insufficient funds to buy an annuity sufficient to provide a good pension.

Younger people are less enthusiastic. They often want to know why they should tie up their money for so long when there are other ways to use it, such as putting it into the stock market to grow faster. Others say they prefer to enjoy their money now and many see retirement as being far into the future.

For those employed by a company that does not have a pension plan, it is often challenging to develop a culture of saving for retirement.

There are generally more female members than males and more employed people than self-employed people in the RS. By being able to contribute through salary deductions, the employed are able to contribute regularly, and some benefit from their employers contributing on their behalf. The employed are also able to increase their contribution at mid-year or year-end when they receive a salary increase or bonus.

But some members interrupt their payments for various reasons. For example, members may stop making contributions if they become unemployed, if they have health issues or family financial issues, which then become priority.

Additionally, the fact that the law restricts refunds also tends to make it more tempting for members to pause their contributions in tight financial situations to fund immediate needs.

Industry sources are also of the view that some members are not as disciplined as they should be in making their contributions because the law allows them to make contributions annually, so they feel no pressure to do so more regularly.

At the same time, the self-employed seem not to participate at the level of the employed because the process of onboarding is longer, as they tend not to have a reliable means of verifying their income, due largely to their businesses not being registered and them not keeping reliable records.

Income verification is an imperative for the self-employed if they are to benefit from tax exemption on up to 20 per cent of their income which the law allows them to contribute to the retirement scheme.

In Jamaica, contributions to registered pension funds and plans are tax exempt, as is the income they earn, and pension savings are used to buy annuities so that pensioners do not outlive their pension. There is room in retirement schemes for people who do not qualify to be in superannuation funds.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com.