Wed | Sep 19, 2018

Reform will slow pension surplus accumulation - But no real impact expected on payouts

Published:Friday | August 29, 2014 | 12:00 AM
Constance Hall, consultant actuary with Eckler.
Trecia-Gay Clarke, senior pensions administrator, Prime Asset Management Limited. - File Photos

Avia Collinder, Business Reporter

Proposed adjustments to the decade-old pension law will make it easier for employees to gain access to the employer portion of their pension benefits, referred to as vesting, but make it harder for pension plans to generate surpluses, as conceded by analysts and asset managers.

However, actuarial expert Constance Dalmadge Hall says the impact on surpluses will likely be muted, given the current configuration of the sector, and that shortening the vesting period, as proposed, will have little or no effect on individual pension benefits/ payouts in the future.

With or without such surpluses, she said, local plans are adequately funded in relation to their existing pension obligations.

Trecia-Gay Clarke, senior pensions administrator at Prime Asset Management Limited, says surpluses tend to accumulate, especially in a defined-contribution or DC pension plan, either from unused or unallocated employer contributions or when returns to a member's account is credited at an interest rate that is less than the actual return earned on the fund.

Pension regulator, the Financial Services Commission (FSC), wants the vesting period in which members become eligible to collect the employer's portion of the contribution to their pension to be capped at five years.

That adjustment essentially narrows the window for pension plans to benefit from windfalls gained when non-vested employees leave the job and end their membership in the pension plan.

Both Clarke and Dalmadge Hall's firms are members of the Pension Fund Association of Jamaica, which has been open about its concern in public discussions on pension reform. The FSC has not responded to requests for comment.

Under current law, there is no statutory limit on the vesting period, but in practice it ranges from five to 20 years, depending on respective plan rules, Clarke said.

"Based on current practice, in a pension plan which has a vesting period of 10 years, a member who leaves the company with nine years of membership will have no benefit at retirement from the employer's contributions," said the pension executive.

FSC also proposes to end the practice of 'conditional vesting', under which plan members are required to leave at least their compulsory contributions in the superannuation fund upon termination of employment, in order to benefit from the employer's contributions at retirement, Clarke said. The practice, she indicated, is fairly widespread.

The new maximum period for vesting shortens the length of time required to qualify and slows the rate at which unused employer contributions revert to the fund.

Daldmadge Hall, who is attached to the Jamaican office of Eckler, says such surpluses are not key to the viability of local pension plans.

"It is true that most of the surplus in defined contribution plans is due to termination of non-vested members, so by reducing the vesting period, the surplus would build more slowly. However, to my knowledge the intent is to have the vesting period set at five years and most of the plans that I work with already have a five-year vesting period, so they won't be affected at all," she said.

No change to surplus

The vesting period may have even less of an impact on defined-benefit or DB plan surpluses, the actuary said, since the employee collects only what he or she has contributed on termination of membership.

"Changing the vesting period from 10 years to five years won't change the actual benefit payable and, hence, will not change the surplus," Dalmadge Hall said.

A defined-contribution plan provides a benefit at retirement based on the total pot of accumulated contributions, including that of the members, the employer, and other sources of income, such as voluntary contributions. DC benefits are determined by contributions, interest earned and other gains and losses allocated to the member's account.

A defined-benefit fund allocates retirement benefits by formula based on salary at retirement, the number of years of service and investment returns. DB plan surpluses are often used to reduce the employers contribution, says Clarke.

At March 2014, the private pensions industry had total funds under management of $317 billion. Defined-benefit plans accounted for 25 per cent of total membership but 66 per cent of pension fund assets. Contributory schemes, numbering 327 of the industry total of 436 active plans, have 73 per cent of membership but represent just 34 per cent of total assets.

Total active membership in the 436 plans amounted to 97,374 contributors.

Pension experts cited confidentiality requirements when the Financial Gleaner sought to ascertain the number of plans with surpluses.

Clarke of Prime Asset notes that for DB pension plans, a surplus also arises when the actual economic conditions - namely rate of salary increases and rate of return on investments - are consistently different from the assumptions in the actuarial valuation used to determine the employer contribution rate, usually for three-year intervals.

"This leads to the possibility of the employer contributing at a rate higher than that actually required to fund the members' benefits," she said.

Pension reform will impose a new trigger for winding up a super-annuation fund - the termination of 30 per cent or more of plan membership over a period of three years.

Reform benefits all

The current arrangement is that surpluses are only to be distributed if a pension plan's trust deed and rules allow it. Such surpluses are usually distributed based on the recommendations of the plan's actuary after the completion of a funding valuation.

However, under the reform proposal, at wind-up "all active members are deemed to be vested and, as such, will be entitled to a benefit at retirement from the employer's contributions made on their behalf," said Clarke.

"This, again, will reduce the rate at which surplus from unused employer's contributions accumulate, since more members will be entitled to a deferred benefit at retirement," she said.

Additionally, under pension reform, all surplus distributions must be approved by the FSC prior to payout, whether the pension plan is ongoing or in the process of winding up, the pension executive said.