How to treat a vested pension member's employer contributions

QUESTION: I read with some degree of interest your article on pensions in The Sunday Gleaner of October 24. The section I found most interesting spoke to vested members and their pension benefit. I need to make sure that I interpreted it correctly.

You said that if a vested member leaves a scheme and takes his or her contribution in cash, the company's portion should remain in the fund to provide said employee a pension at a pension age. Is this the law, or can this be varied based on the deed document of the pension scheme?

My reason for seeking clarification is I am a member of a pension scheme and whenever a vested member leaves, his or her company contribution does not remain for his or her benefit but is pooled, and once every three years, the amount in this pool is distributed among the remaining members of the scheme as a bonus payment. Is this legal?

- Marie

PFA: You are referring to the pension benefits of vested members of an approved superannuation fund. In an approved retirement scheme, an employer's contributions are vested immediately in the employee. The Pensions Act 2004 speaks of and clearly defines an approved superannuation fund and an approved retirement scheme. The words 'scheme' and 'fund' are, therefore, not interchangeable.

The vesting schedule in most superannuation funds is not properly explained to plan members.

There are three types of vesting schedules: immediate, gradual, and cliff.

Immediate: As the name suggests, the employer's contributions vest in the member immediately. This is what is required in the rules of an approved retirement scheme: the employer's contribution is vested in the employee immediately. Vesting is usually with reference to an employer's contributions since an employee's contributions, in either a superannuation fund or a retirement scheme always immediately vest in him or her.

Gradual: The employer, in the rules of the superannuation fund, will stipulate the period of time within which the plan member's participation will vest in the employer's contributions. There may be a five-year period, for example, but each year, the employer's contribution vests in the plan member at say, 20 per cent per annum. And there are permutations of this.

Cliff: This is the most popular type of vesting in Jamaica's approved superannuation funds rules. What this means is that the plan member will only be entitled to the employer's contributions after he or she has completed the required or stated years or conditions in the rules. If the vesting period is five years, for example, where an employee's membership in the fund is less than five years, he or she will forfeit the employer's contributions.

TYPES OF VESTING RULES

In addition to vesting, the rules may also state the conditions under which the member will qualify for the employer's contributions. There are, however, some rules which will state no conditions. Therefore, the vesting rules may be conditional or unconditional.

Where it is conditional, if the terminating employee does not comply with the conditions, especially where the member qualifies for the vested benefits, the member forfeits the employer's contributions.

So you can have a vesting schedule as five years and all basic contributions left in the fund as the condition for qualifying for the employer's contributions at retirement. This means that the terminating employee can request a refund of his optional contributions without forfeiting the employer's contributions.

On the other hand, where there is no condition, the vested member upon termination may request a refund of all his contributions and still be eligible for the employer's contributions at retirement. This is now the trend. I suggest you check if the vesting is conditional or unconditional.

All benefits must be administered in accordance with the rules of the fund, so your employer's action is legal if it complies with the rules. It is the employer who establishes the vesting conditions for the rules as the sponsor of the fund, and once the fund is approved, as well as Financial Services Commission-registered, all actions must be in compliance with them.

It would be necessary to take a close look at the vesting schedule to interpret the case better. Every 'trust deed and rules' is different and therefore it is better to give advice only after the actual documents have been seen, or the actual wording scanned from the registered document and submitted.

Remember, based on the Pensions Act 2004, each member can request a copy of the trust deed and rules, which has been duly stamped, registered, and approved by the Financial Services Commission and Taxpayer Audit and Assessment Department.

Consult a qualified pensions practitioner if you need further assistance.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning.Email: finviser.jm@gmail.com