Actuaries lay out different path to pension reform

Sabrina Gordon, Business Reporter

The Caribbean Actuarial Association (CAA) has laid out a proposal that it says cold knock as much as J$60 billion off 'past-service' liabilities for public pension payments due in the future, amid ongoing consultations on reform of the current system.

The actuaries say their plan could whittle 27 per cent off the current J$222.6 billion of estimated future payouts in annual pension benefits to teachers, civil servants, the police and military, retired public officials and other groupings, down to J$162.9 billion.

The average age expectancy is about 74/75, which means that a retiree at 65 is expected to collect pension for about a decade on average.

The pension-reform paper assesses pension liabilities at 36 per cent of GDP with a northern trajectory to 57 per cent by year 2075 based on the size of the public sector. The actuaries, however, assess the liabilities at 18 per cent of GDP.

The annual payout of benefits, which was tracking at J$15.6 billion, on average, for the past three years will leap to J$22 billion by the end of fiscal 2011-12, according to central government budget data.

The actuaries say they support the idea of a defined benefit scheme but propose that the plan should be funded - starting at a 50 per cent funding level of the past service liability and rising to 100 per cent over a period of 10-15 years.

"The Green Paper does not mention funding, and starting at that point is good for the country because it would ease the burden when you pay out benefits," says Cathy Lyn, president of the Caribbean Actuarial Association.

"If you have something set aside, makes it easier to manage when the time comes," she said.

The actuaries have produced a paper on the best way to approach the reforms. The CAA argues that an unfunded pension system with mandatory contributions by members is inequitable and inconsistent with rights of portability.

Among the other recommendations of the CAA are changes in how the pension formula is calculated, early retirement terms and the normal age of retirement.

It proposes a pension formula of 2.0 per cent of pay for each year of service averaged over the last five years prior to retirement, for both past and future service.

"In spite of the reduction in accrued benefits proposed, this recommendation would reduce public-sector employee exposure to the replacement rate risk relative to that proposed in the Green Paper benefits," the CAA paper said.

The Green Paper uses a 2.2 per cent in its calculations and a 'career average salary' defined as midpoint the number of years of service by the employee.

The replacement rate risk inherent in this, CAA said, is that pensions will be insufficient to maintain the same standard of living after retirement.

Like the Green Paper, the CAA proposal advocates for an increase in the retirement age to 65.

The association also agrees with the recommendation for indexation of pensions to inflation and national wages, but said it should be applied only when available funding permits it.

The Green Paper recommends indexation to both inflation and nominal wages at 50 per cent.

"We do not support the recommendation that there should be "guaranteed indexation", rather indexation should not be granted unless there are windfall sources of either fiscal revenue or investment surpluses under a funded status," CAA said.

Another area of divergence between the two is that CAA calls for the use of existing capacity and expertise from within the private sector for the administration of the reformed system, rather than building out capacity and expertise in the public sector, which it said is expensive and time consuming.

transparency

In relation to transparency under the reformed system, the CAA says a dedicated fund should be set up as a trust, akin to other pension funds in the private sector, and a board of trustees appointed by the Government of Jamaica which should include persons nominated by different groups to administer the trust.

The Green Paper does not recommend a governance structure, which is critical, CAA said, since employees are being asked to accept a reduction in their benefits.

The CAA is also recommending that contributions by the GOJ be used solely for investment in real assets.

The Green Paper is a consultative document to facilitate public input on the proposed public-sector pension reform.

The Government is responsible for 28,000 pensioners and is contractually obligated to pay the future pension of approximately 88,000 workers.

Although the pension received by retired employees of the public sector is adjusted periodically, it is done on an ad hoc basis and said to be grossly inadequate.

At the end of 2009, the average pension received by a retired public servant was approximately J$29,000 per month. As a matter of policy, public pensions are not allowed to fall below J$15,000 per month.

A pensioner just added to the roll receives a set pension for the first two and a half years; benefits are adjusted annually after that, but the increase is not enshrined in law, says Harvey Sutherland, director of pensions administration at the Ministry of Finance and the Public Service.

"It's just based on a policy for it to increase every year, thereafter, and that has been done since 1991 up to last year," said Harvey.

"It is not something that pensioners are entitled to; so if enough funds are not there, the Government can stop it," he said.

sabrina.gordon@gleanerjm.com