Oran Hall | Your NIS pension alone won’t cut it

Amid concerns around the inadequacy of pensions paid by the National Insurance Scheme, it should be made clear that it was never intended that the NIS would pay a liveable pension to its beneficiaries, or that it would be their only source of retirement income.

The NIS is a compulsory contribution funded social security scheme covering all employed people living in Jamaica. It covers the employed and the self-employed as well as voluntary contributors.

The Ministry of Labour and Social Security is responsible for the collection of contributions and for the administration of benefits under the Scheme.

The contributions are invested by the National Insurance Fund, NIF, which is charged with maximising the returns of the fund while being prudent in doing so. It must ensure that the portfolio is managed and diversified in such a way that it is not exposed to too much risk while generating returns that are in line with the level of risk.

ROOM TO DIVERSIFY

The NIF invests the NIS contributions in equities, real estate and fixed income securities. The equities are generally listed on the stock exchange but it can also invest in unlisted ordinary stock, which is generally more difficult to acquire and more difficult to sell. There is room to diversify within this asset class by investing in several industries.

The contributions are also invested in residential, commercial and resort properties, which allows for diversification within the asset class.

The contributions are also invested in a wide range of fixed income securities, including money market securities, which are short-term liquid securities, and in bonds and debentures.

The NIF is also authorised to invest the contributions in collective investment schemes such as unit trusts and mutual funds. These are themselves highly diversified instruments and investors may choose if they prefer funds that focus on capital appreciation, preservation of capital, or a mix of both.

The stark reality is that investment instruments may lose some of their value – some more than others. Real estate and equities have the best potential for capital appreciation but also the highest potential for capital loss. Although money market instruments have the best capacity to hold their value, fixed income securities with longer maturities may lose value when interest rates increase, but appreciate when interest rates decline.

Investment instruments generally generate some income – some more than others. Equities pay dividends, fixed income instruments pay interest, and properties earn rent for the Fund. Generally, unit trusts and mutual funds do not generate a stream of income to the investor because the income they earn is re-invested to increase the value of the fund.

The portfolio also has the capacity to earn foreign exchange as the NIF is allowed to invest in foreign currency-denominated instruments, thereby providing a hedge against the loss of value of the Jamaican currency.

The ability of the Fund to earn income is constrained by the level of interest rates, rent and dividends. When interest rates are low, interest income will be relatively low as we have in the local market. They are now higher than in the recent past but are far from what they used to be in the more distant past.

Properties have to be rented and at good rates to generate rental income and companies must pay dividends to generate cash to investors. Companies must make profits to be able to pay dividends. But some profitable companies may opt to re-invest most of the profit they make and thus pay small dividends. Dividend policy is, therefore, an important consideration in the level of dividend income an investor can earn.

The level of income that the invested pension contributions earn is critical to the ability of the NIS to pay benefits. The capital appreciation of assets like stock and real estate does not translate into cash unless the assets are sold. Significant growth in the value of the Fund from capital appreciation does not necessarily mean that the NIS is able to increase the size of the benefits that it pays.

It is important for the contributions flowing into the NIS plus the income that the invested contributions earn to be more than how much is paid out in benefits. Otherwise, the ability of the NIS to survive can be put at risk.

Employers who do not remit the contributions of their employees to the NIS rob them of their right to the many benefits that the NIS pays to its beneficiaries and limit its ability to increase the quantum of the benefits that it pays.

The benefits are impressive: orphan benefit, employment injury benefit, employment disability benefit, employment injury death benefit, invalidity benefit, maternity allowance for domestic workers, spousal allowance, widow’s/widower’s allowance, funeral grant and NI Gold, which provides comprehensive medical coverage for all NIS pensioners, without them being required to pay a premium to access the benefits.

With the benefits listed above and more, there is bound to be pressure on the ability of the NIS to pay a pension at the level that many people expect, and, according to the former Minister of Labour and Social Security, the NIS was paying benefits to 133,000 beneficiaries in April 2022, eight per cent of whom, by the way, being Jamaicans living abroad.

Additionally, not all of the contributions are invested as a portion is used to meet the cost of administering the pension scheme.

To reduce the dependence on the NIS pension, employed and self-employed individuals need to take a look at approved retirement schemes as an option for a regular stream of retirement income.

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