Oran Hall | Boosting retirement schemes

Although the membership of retirement schemes has surpassed that of superannuation funds, there seems to be much room for them to be embraced more by members of the employed labour force.

Superannuation funds are sponsored by employers. Some are defined benefit and others defined contribution. In the case of the former, retirement benefits are based on a formula on the basis of years of service and pensionable salary. In the latter case, retirement benefits are based on the amount of pension contributions and the interest they earn.

Retirement schemes are defined contribution, or money purchase, schemes. It is thus very important to build up a strong pool of funds in the scheme by starting early, contributing regularly, and contributing the maximum allowed by law.

According to Financial Services Commission data on private pensions for September 2021, superannuation funds accounted for 49.31 per cent, or 68,752 members, and retirement schemes for 50.69 per cent, or 70,667 members, of the employed labour force that is covered by active pension arrangements.

In September 2021, total private pension coverage was 11.47 per cent, compared to 11.91 per cent in September 2020 and 9.95 per cent in June 2019. Of note, though, at September 2021, the asset value of the 360 superannuation funds was $630.5 billion, compared to $57.4 billion for the 13 retirement schemes – 91.65 per cent and 8.35 per cent, respectively, of private pension assets.

News that 10,000 people have registered as members of the Tourism Workers Pension Scheme and that there is potential for 350,000 to do so, suggests that there could be a big boost for the membership of the retirement schemes.

Against this potential positive development is the concern that retirement schemes, which are suitable for the self-employed and employed people who are not members of superannuation plans, are not being embraced to the level desirable.

In an effort to understand what could be causing the reluctance to do so, I spoke to the manager of a retirement scheme. I find the information gleaned insightful.

The manager stated that much time is devoted to giving talks to educate the population about the value of having an income in retirement. Generally, though, there tends to be little action by the prospects.

Generally, it is people who are closer to retirement, 50 years old and older, who seem more inclined to embrace the opportunity to set aside funds for their retirement years through retirement schemes upon recognising that they have no formal arrangement in place to provide an income in their retirement years.

Young people tend to say that they have time, so it is not a necessity or priority. They have time to think about saving for retirement and everything will work out. Some express the view they will not live to retirement age. Given the option to sign up, many do not. Many who participate do not make contributions consistently as they consider the making of contributions optional.

MAKING CONTRIBUTIONS MORE CONSISTENT

The use of salary deductions and standing orders with a bank tend to contribute to the making of more consistent contributions.

From the point of view of that manager, more small businesses are on board, but many employers do not contribute. When they do, more employees tend to contribute, and there is a higher level of staff retention. For employers who contribute, the more the employees contribute, the more they contribute, and some employers encourage their employees to start small and contribute more as their salary increases.

A big concern is how difficult it is to engage and motivate the self-employed, who do not have the benefit of an employer who may make contributions on their behalf.

A point which needs to be emphasised is that members of a retirement scheme can have their retirement savings account transferred to another registered retirement scheme or registered pension plan if necessary.

The tax advantage also needs to be emphasised. Pension contributions are deducted before income tax is applied, thereby increasing disposable income, and the income earned by contributions in the fund is not taxed. This is a strong point for people at higher income levels, but it is not likely to have the same effect on people at lower income levels as those below the income tax threshold derive no additional tax saving on employment income.

The Pension Industry Association of Jamaica is one organisation that, through public education efforts, is encouraging more Jamaicans to change the way they plan for retirement. Their focus on workplace entrants and young professionals on the rise who can benefit from an early start to pension saving is spot on.

Workplace financial education and retirement planning programmes must take on greater urgency. The reality of longer post work years and the increasing cost of maintaining a decent lifestyle after work must be highlighted in any programme aimed at encouraging employees to save towards living a decent life after the working years.

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