Pension sector healthy but signs of insolvency worry FSC
Published:Friday | February 24, 2012 | 12:00 AM
The private pensions sector was pronounced healthy and strong last week, but the Financial Services Commission (FSC) is also warning that it has detected signs that could lead to insolvency of some plans if left unaddressed.
The FSC defines a healthy plan as one with its assets at no less than 100 per cent of liabilities, that is, a one-to-one ratio on either side of the balance sheet. The fund becomes insolvent when the value of its assets is less than its liabilities.
"In carrying out our desk-based reviews, we look at actuarial valuation reports for defined-benefit plans - for defined-contribution plans sometimes we get actuarial reports, other times we don't - but we run a crude test to test the solvency of a plan, and we have found that the level of insolvency is definitely rising and it is an area of concerns for us," Nicolette Jenez, senior director of the pensions unit at the FSC told the Financial Gleaner.
"A lot are in the 90s range, but several fall below that into the 70s," said Jenez, referring to the percentage asset cover. She said the signs were not widespread.
There are 468 active pension and retirement schemes registered with the FSC.
The number of members in the plans have increased from 74,673 in December 2010 to 85,154 at June 2011, and the funds under management have climbed from J$232.3 billion to $$255.1 billion in the same period.
Falling apart
"It is not widespread, but if even one is insolvent we are going to be worried because our role is to protect the interest of members and beneficiaries, and so if we see even one we are going to be concerned. Of course, it's more than one but I would not say it is at a stage where the pension industry is falling apart, it is not, and by and large it is a very strong industry," said the pension director.
Jenez was reluctant to give data but said that anything below a 100 per cent asset-to-liability ratio is cause for concern.
The FSC employs a risk-based framework called DECIMAL in its supervision of pension funds.
In that assessment, the regulator looks at the design of the fund, which entails assessing the type, membership profile, the effective coverage and its vulnerability to different types of risk.
The employer is also assessed based on financial conditions and economic environment in which the company operates.
Under the investment and contribution elements of the pension plan, the FSC assesses the fund's ability to pay, performance of assets to cover plan liability, asset allocation and investment limits.
DECIMAL also considers the management of the plan, actuarial and solvency issues, as well as how well the operation of the plan complies with pension legislation.
The FSC's regulatory response varies from education to limited, active and proactive monitoring, and intervention, if required.
The FSC suggests that intervention are limited to plans seen as 'high risk', for example, in danger of insolvency or contributions are outstanding; and/or 'high impact', that is, having a large membership and asset base.
A pension plan has to have more than 1,000 members to be considered high impact, the FSC representative said, but declined to disclose any statistics on such plans.
The FSC's intervention may be remedial, where orders are issued to make improvements; or punitive, which is an order forcing the fund to wind up.
Jenez said the commission has never reached the level to force the winding up of any plan.
Of the 85,154 active members in pension schemes, approved retirement scheme account for 17,554 while supperannuation funds has 67,600.
Assets under management in retirement schemes totalled J$4 billion.
Reviews of retirement schemes are done every three years, but the period may vary according to the complexity and relative risk of particular scheme.
Examinations are generally performed annually for high-risk plans with huge funds and large memberships.