Pending shifts in asset allocation
Published:Friday | December 10, 2010 | 12:00 AM
Rezworth Burchenson, Guest Writer
Recently, the Financial Services Commission (FSC) published its most recent data on the local pension industry as at June 2010.
This report revealed some important statistics.
The size of the pension industry now stands at J$245 billion, up from J$210 billion last year.
Pension assets, as a percentage of GDP, now stand at approximately 22 per cent, an encouraging sign considering that Jamaica's attitude to retirement planning is below par.
This is a solid ground on which to build continued reform to the sector such as portability and locking in, which seeks to maximise a member's income at retirement. The FSC's recently launched campaign on financial education will play an important role in this endeavour.
Defined benefit, or DB, plans account for 26 per cent of plan types but 62 per cent of pension assets.
This is not surprising as data suggest that DB plans are much older than defined contribution, or DC, plans and as such would have accumulated much larger balances than DC plans.
Additionally, the older and larger Jamaican companies have traditionally formed DB plans for their staff members, many in existence from the 1950s. DC plans provided many smaller companies the opportunity to provide a retirement vehicle for their staff members without the financial risk.
A staggering 272 pension plans with assets of $16.8 billion are being terminated.
Many factors could have contributed to this decision, including: converting from a DB to a DC plan to reduce the risk on the business, mergers and/or acquisitions, challenging business environment and the need to cut costs and burdensome regulatory reporting requirements.
Whatever the reason, we hope that terminated members will continue to save for retirement using the services of the numerous individual retirement schemes available. Human resources managers and business executives should also encourage and educate their staff members on the importance of retirement planning.
The data also reveal that 92 per cent of pension plans outsource their administration.
This statistic is not surprising, as pension plans are now required to file numerous regulatory reports within specific timelines. Our research indicates that many trustees have sought to engage the services of a professional service provider and to release the trustees and in many instances, the HR Department - which previously performed this function - of this burden.
This allows the HR team to now focus on their core job-specific responsibilities.
The number of members enrolled in pension arrangements - both superannuation funds and retirement schemes - has increased from 61,607 as at January 2009 to 75,273 as at June 2010, an increase of 25 per cent.
The data suggest that the main contributor to this growth was attributable to enrolment in individual retirement accounts (IRAs), which now stands at 7,917 members with J$1.9 billion in assets (Jan 2009: J$401 million).
However, total pension enrolment represents only 8.0 per cent of the private sector workforce, and every effort must be used to expand our pension coverage.
Nonetheless, we expect this positive trend to continue as persons not enrolled in a company superannuation fund seek to utilise the tax-efficient IRA for their retirement planning needs.
Additionally, IRA providers will play a major role in the growth of this subsector based on their reach and marketing savvy.
Pension assets under management are skewed towards government securities. The top four asset exposures were as follows:
Government securities- 51%Repurchase agreements - 14%Equities - 13%Real estate - 7%
Based on the current low-interest rate environment, we can expect that a shift to higher-yielding assets will commence over the medium term. Such investments that will become attractive are:
● Corporate loans and leases - as pension fund managers seek to invest in high-quality corporate to earn higher yields.
This practice, we estimate, will improve the competition in the loan market and lead to lower interest rates on loans.
● Real estate - already our intelligence suggests that the commercial real estate market is becoming vibrant, with many players seeking quality properties/tenants. We expect this trend to continue and be reflected in future valuations.
● Equities - while the local equities market remains subdued because of lacklustre results from a depressed economic space, interest is increasing as witnessed by the many junior market listings. Additionally, many strong, well-managed companies trade at very attractive multiples and dividend yields and will form a greater percentage of pension assets in the future.
The Mercer Global Pensions Index can serve as a reference point as we move forward to build the pension sector. Historically, too much effort has been placed in improving regulatory reform and governance while omitting the important principles of adequacy and sustainability.
The outlook for the Jamaican pension sector looks promising and we encourage the authorities to move forward and implement the reforms from the Phase Two consultations, especially reduced vesting, portability, and locking in of contributions.
Rezworth Burchenson is managing director of Prime Asset Management Limited.