Avoid poverty in old age

Oran A. Hall, Contributor

We will live longer and grow old later in life than any previous generation. Incredibly, two-thirds of all those who have made it to the age of sixty-five in history are today walking the earth. -- Dr Ken Dychtwald, psychologist and gerontologist.

Many Jamaicans alive today will live for 20 years or more in retirement. Income has to be found to keep life rolling for all those years, preferably at or close to the quality of pre-retirement life.

According to the Financial Services Commission report on the pension sector at June 2010, only 75,202 Jamaicans - seven per cent of the labour force - were members of pension funds. Of these, 40 per cent were members of defined benefit plans and 60 per cent members of defined contribution plans while 11 per cent were members of approved retirement schemes and 89 per cent members of superannuation funds.

There has been a noticeable shift from defined benefit pension plans to defined contribution plans, called money purchase plans, thereby shifting the risk of building an adequate pool of pension funds from the employer to the employee.

Defined benefit plans shift the risk of generating adequate pensions to employers who are required to pay pensions according to a set formula. If the fund is inadequate to meet current and future pension requirements, it is the responsibility of the employer to close the gap.

Pensions paid from defined contribution plans are based on the value of the contributions and interest in the employee's account. Contributions are normally made by the employer and employee.

With Government making a commitment to the International Monetary Fund to reform pension arrangements as part of the country's medium term economic plan and indicating that it intends to introduce a contributory pension scheme for its employees, it is clear that Government is shifting some of the burden for providing retirement income from itself to its employees.

Available only to Jamaicans

Approved retirement schemes came into being with the passing of the Pensions (Superannuation Funds and Retirement Schemes) Act 2004. This new facility for individuals to save for retirement is available only to Jamaican residents.

Open only to self-employed persons or employed persons who are not members of superannuation funds, members may contribute up to 20 per cent of income per annum. Employers may contribute on behalf of employees a sum equivalent to the difference of 20 per cent of income and the employee's contribution.

This s another indication that more responsibility for providing retirement income is being shifted to the employee.

The Jamaica Debt Exchange has ushered in a low interest rate regime, which seems bad on the surface because of the lower level of income that it yields thus threatening the standard of living of current pensioners and reducing the potential of future pensioners to earn strong returns. These are some of the negatives but there are positives.

Contributions to approved retirement schemes are deducted before the member's income is taxed. There is the added benefit of the funds earning tax-free investment income. The Pensions Act also increases the maximum pension from 66.66 per cent to 75 per cent of final salary after 37.5 years, and removes the dollar cap on lump sums.

Cushioning effect

Inflation is low thereby having a cushioning effect on low yields on interest-bearing securities. There is a growing pool of professional pension fund managers who offer a range of products not limited to Jamaican securities. This increases the scope for diversification and adequate risk management.

The Financial Services Commission, as a regulator and educator, with support from members of the investment and pension administration and management communities as educators, is providing greater protection for pension fund and retirement scheme members who should have little excuse for not being informed.

Panicking about the prospects of being poor in retirement should not push prospective pensioners to act rashly. While it is true that many persons are depending solely on formal pension arrangements to provide their retirement income, there are others who are building up investment portfolios to provide some or all of their retirement income. The challenge they will likely face is how to convert those assets to best serve them in their retirement years. Rushing into the arms of unregistered schemes promising unrealistic returns, as happened recently, and accepting inappropriate portfolios from registered professionals are options clearly not worth considering.

To reduce the risk of being poor in what could turn out to be a long retirement, take responsibility for the quality of your retirement, become a member of a formal pension arrangement, save and invest consistently and wisely, minimise taxes, stay away from high-risk schemes, educate yourself, prepare to extend your working years if necessary, protect your health.

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