Wed | Jan 23, 2019

Actuary proposes integration of NIS and private pension funds

Published:Friday | December 12, 2014 | 12:00 AM
File Constance Hall, consultant actuary with Eckler.

Actuary Constance Dalmadge Hall has floated the idea that NIS contributions should double from five per cent to an average of 10 per cent, saying it is the only viable solution to sustaining the national pension scheme over the long term.

A 2013 actuarial review has found that the National Insurance Scheme (NIS) is insolvent and will run out of funds in six years if inflows are not boosted substantially.

The pension scheme provides some 17 benefits, including old age pensions to contributing Jamaicans. Outside of investment income, it has been in the red for the last seven years, handing out more money in benefits than it collects in contributions.

Currently, Jamaicans pay 2.5 per cent of their salary in NIS contributions, which is matched by another 2.5 per cent by their employers - totalling five per cent. Domestic helpers pay $100 per week.

But Dalmadge Hall, addressing the annual Labour Market Forum in Kingston on Wednesday, said that by actuarial estimates, for employees aged 25, contributions of 8.6 per cent are needed, broken down as: 4.5 per cent to fund the flat pension payment; another 2.3 per cent of wages to fund the wage-related element; and 1.9 per cent for spouses' pension.

The administrator of NIS contributions, National Insurance Fund, provides both a flat rate of $2,800 weekly and a wage-related component.

For the contributor aged 40, a total 13.7 per cent of salary is needed to fund the benefit.

"The reality is that we are at four per cent contribution - with one per cent diverted to health," said Dalmadge Hall. "We are 50 per cent underfunded," she said.

The one per cent is funnelled to the National Health Fund (NHF) to finance drugs for the elderly and other health benefits.

In revealing the results of the 2013 actuarial assessment, Dalmadge Hall said the fund was insolvent and, if contributions do not grow, it will be exhausted by 2020.

prognosis serious

The actuary said the prognosis for the fund were even more dire than the previous evaluation done in 2009 when the Ministry of Labour was advised that the fund would be exhausted in 2037.

NIS contributions are managed by the NIF which currently pays benefits to 108,000 Jamaicans monthly. Over 80 per cent of funds go towards providing retirement benefits but the fund is also used for health benefits, disability and spousal support.

"If the intention is to have a scheme which is viable and sustainable, over the long term, the contribution rate has to be increased," said the consultant actuary and partner of Eckler Consultants and Actuaries.

"Tweaking the system will not work," Dalmadge Hall added, nor will widening the contributing base from the current 40 per cent of employed workers - at the same poor levels of contribution - be of benefit in the long term, she told the forum.

"Increasing the number of participants will help in the short term, but after that things will begin to go bad very quickly," she said.

Dalmadge Hall suggested that any increase in contributions could be facilitated by employers integrating current pension schemes with NIS contributions and that private pension managers should be employed to manage the funds.

"The board could employ private managers to manage some of these funds. That would create some competition," she said.

Integration, she said, should lead to a much bigger amount paid over for the wage-related element of NIS payments.

The proposal does have a downside, Dalmadge Hall admitted. It would cut back on private pensions and "getting employees who do not pay pensions to participate would be a challenge," she said.

An increase in contributions, she also indicated, would remove taxable income from the market.

The NIF, with assets of just over $60 billion in 2013, was found to be paying out $215 million weekly to pensioners.

Using the solvency/deficit approach to "give a good idea of exactly where the fund stood currently", the review found "that the accumulated fund was not sufficient to cover the cost of pensions for just those persons. If there were no further contributions to the fund, the money already accrued would not be sufficient to pay pensions for the existing group," said Dalmadge Hall.

"In the private sector, this would have been a shocking result ... the fund is in a really bad state."

The analysis also found that the pensioner who retired in 2010 will exhaust all contributions in 2.5 years.

In 2009, changes suggested by actuaries had included raising the level of contributions up to 10 per cent in gradual steps - five per cent from employee and five per cent from employer.

The labour ministry has taken on several of the changes suggested, but still has not raised contribution levels, which Dalmadge Hall said may have consequences for the wider economy.

Out of the earlier review, the Government has lifted the wage ceiling to $1.5 million and the retirement age of women to 65 by March 2016.

The actuaries have also looked at increasing the wage base, but said that this was problematic, as the higher it climbs, the fewer contributors it impacts.

The actuaries are still suggesting, however, increase of funding based on percentage charges by income bands as follows:

ï A one per cent increase for the first $1 to $1.5 million income earned;

ï A charge of eight per cent for the next million, that is, $1.5 million to $2.5 million;

ï An additional charge of 10 per cent for earnings between $2.5 million and $5 million.

This, Dalmadge Hall said, would be accompanied by increasing basic pension from $2,800 weekly to $5,000.

For unemployed person who do not verify their income, the actuary said, contributions should be set at the highest rate.

Also speaking at the forum on Wednesday, Inter-American Development Bank consultant and economist Eduardo Fajnzylber said that some tweaking of the NIS, including raising the ceiling to $5 million, would allow the pension fund to meet its obligations for a longer period.

He also suggested reducing the number of benefits, including those that pay multiple benefits to one family.

"Key parameters of the system should be formally, by law, linked to inflation - even a three-year average," Fajnzylber added.

Dalmadge Hall also suggested the removal of the spousal allowance and reduction of the widow's pension, especially in cases where other benefits were being received by the family; and that domestic workers' contributions should increase to five or six per cent of minimum wage, instead of the current $100 weekly.

Fajnzylber said the minimum contribution should be $250 per week.