Editorial | Widen pension system review

At first blush, and without the benefit of the hard details, the ideas floated last week by Nigel Clarke for reforming Jamaica’s private pension market are attractive and likely to win support. However, there are questions of whether the finance minister’s proposals will be sufficient to deliver on his main goal: significantly increasing the number of people who are part of pension plans.

We hope they are! Many people will probably say no. They might note that Dr Clarke didn’t suggest that joining pension schemes will be obligatory. That is why this newspaper hopes for a robust debate on the matter of pensions. And an overhaul of the law on private superannuation schemes shouldn’t be discreet exercise. It’s an opportunity for Parliament to simultaneously review the legislation on public sector pensions, which has already passed the legislated two years for its first evaluation.

In fact, the Government should, as this newspaper proposed from the beginning, allow for a dual-track arrangement, with new entrants to the pension plan having to be members of defined contribution rather than a defined benefit scheme. Further, contributions, or portions thereof, by these participants should go into a managed segregated kitty, rather than the Consolidated Fund.

The imminent big adjustments to the salaries of government workers, as part of a broader reform of the public sector, makes a good case for tweaking the pension arrangements.

The crisis of a lack of pensions in Jamaica, however, was highlighted by Dr Clarke in his budget speech last week and was reflected in the case of people like Annie Ivey, whose story was reported in these columns a year ago. Seventy-eight at the time, Ms Ivey worked as a market vendor. She worked every day. She intended to work until she couldn’t go any longer. She couldn’t afford to stop. She had no pension.

Indeed, less than 12 per cent (139,000 people) of Jamaica’s employed labour force of more than 1.23 million were part of private pension schemes at the time of the latest analysis, last September. There were 373 active plans, with assets of J$687.96 billion. That was nearly 99 per cent of the assets of all private pension schemes (active and inactive).

“This means that the vast majority of persons in the private sector will only have NIS (National Insurance Scheme) to rely on in retirement,” Dr Clarke said.

LESS THAN 40 PER CENT

Yet, while enrolment in the NIS is presumably compulsory for all workers, fewer than 500,000 people, or less than 40 per cent of the labour force, are part of the scheme.

It is against his backdrop that Dr Clarke wants reforms that lift participation in private schemes. These would include regulatory and other changes to make it easier to move with their accumulated pension savings from job to job. And they, after a specific period, would be made to move with the employer’s contribution to their pension savings. Additionally, the time for vesting in pension schemes would be shortened to five years.

These initiatives may indeed encourage greater participation in pension schemes. However, pension schemes are usually sponsored by firms and the minister said nothing of how companies might be incentivised to launch pension schemes, or to make it mandatory that workers be part of pension arrangements – perhaps something akin to the Chilean model.

Even as Dr Clarke expands on the ideas for private schemes, he should also pay attention to the public sector arrangements, under which retired employees can earn up to two-thirds of their last salary, which, for the 2022-23 fiscal year, will cost taxpayers around J$40 billion benefit payments. Workers will offset around J$14 billion with their contributions.

The law calls for the eventual establishment of a specific pension fund which will manage Government and workers’ contributions to the scheme. But it allows for implementation to be delayed until the public debt falls to 60 per cent of gross domestic product (GDP).

We appreciate the basis of that premise, including the administration’s view that it isn’t in a position to set aside the amount of cash necessary to seed the fund, while at the same time meet existing pension obligations.

RECONSIDERED

Our view is that the whole premise of the scheme should be reconsidered. The Government should define a contribution system, with pension payments based, ultimately, on the performance of the pension fund. It is appreciated that this couldn’t incorporate existing pension obligations. Dr Clarke could therefore consider drawing a red line under the existing obligations. New employees would then save for their future pensions through a substantial scheme, for which the initial outlay would be relatively small.

Starting a funded arrangement makes sense in a very important respect. The 2011 analysis on public sector pension freeform showed that the Government implied pension debt of 365 per cent at the time, in the absence of a funded scheme, would reach 58 per cent of GDP by 2075. That was before the wage reform project which will significantly increase salaries and add J$100 billion to the wage bill over a three-year period. Higher wages will mean increased pension obligations, especially under a direct benefit scheme that is unfunded and paid for by collected taxes.

Starting a funded scheme, with, for the time being, limited cover, with its first call being decades down the road, would begin to change the trajectory of the implicit pension debt and lessen a burden on future generations.