Passive trustees hurt pensioners pockets
Pension funds trustees occupy a very privileged position in Jamaica.
Technically, and according to the Financial Services Commission's (FSC) latest published data for March 2014, they govern a $317-billion asset mountain for pensioners, the vast majority of whom are elderly, no longer earn steady pay and often are poor.
It really is an awesome responsibility that many trustees view with less gravity than they probably should.
When persons occupy positions of trust that command so much control over such a lot of cash and other assets, and do affect so many ordinary people's lives, and which carry a great deal of fiduciary responsibility they, unlike what happens at the National Housing Trust, must be openly accountable and transparent in the manner in which they operate.
I have sat on boards of institutions and served as a trustee of a large company's pension fund and I share the view that there needs to be significant reforms to the pension arrangements in Jamaica.
Let us start with the trustees. They are largely appointed by the companies which establish the pension funds. Invariably, there are representatives - or a token trustee -appointed by the pensioners. In companies where employees' unions exist, the unions often select the employees' representative on the board of trustees.
The trustees have a primary fiduciary responsibility to pensioners, but they do not report to, nor do they generally interact with the pensioners they represent.
Pensioners really do not have meeting with their trustees to express how much they appreciate their pensions - or to explain that a pension amount which was instituted five or more years ago has little or no relevance to the cost of food, electricity, rent and other basic living expenses which, unlike the pension payment, are not fixed and are constantly increasing by inflation and currency depreciation.
RISK-AVERSE AND PASSIVE
The disconnect between trustees and pensioners, the effect of government and regulatory investment directives, the fact that many pension managers use these regulatory and statutory requirements to take the easy road to investing pension money, and the stern opinions of actuaries all combine to make trustees risk-averse and they and their pension fund managers rather passive.
Some pension funds I know, a few where smart executives from the establishing companies act as trustees, do perform very well and earn increasing returns on the funds that they invest for pensioners. When this happens, pension payouts stay ahead of inflation and do provide a good measure of economic comfort for elderly pensioners.
Regrettably, too many trustees have too little knowledge about investing and building properly populated investment baskets for the pension institutions they oversee.
Many pensioners suffer and could become destitute because their pension funds trustees and their institutional managers do such an unacceptable job at managing the funds and assets for which they are responsible.
As for the institutional pension managers, often they have a cosy relationship with trustees so their underperformance is accepted.
The managers take the substantial annual managers' fees and many, not all, trustees through ignorance, fear, passivity or lack of backbone accept the managers' poor results and appoint them for yet another year.
In my view, the relationship between trustees and managers is not transparent enough and that lack of transparency hurts lots of pensioners through poor investment results.
GOJ PAPER STUFFING FUNDS
The Government of Jamaica (GOJ) requires pension funds to invest in government securities. This state directive was dripping with financial hubris and national cockiness and was predicated on the widely held belief among the governing class that the Jamaican Government would never, could never, default on its debt.
Well, we all came to know how wrong that was in 2011 and 2013 when JDX and NDX 1 & 2 impaired significantly the value of the government securities held by banks, pension funds and others.
In the Aggregate Investment Mix published by the FSC for the period ending March 2014, the amount held in direct government securities was $133.2 billion.
There was another category of assets on the list labelled 'investment arrangements' totalling $93.3 billion of which an FSC note said 59 per cent was indirect investment held in government securities. This means that another $55 billion has to be added to the $133.3 billion for a total of $188.2 billion.
This is an approximate figure because there may be government securities also held indirectly in other investment categories, and a small fraction of the total may be held in foreign government securities.
While the Government demanded the lion's share of pension funds money to fund its many times wasteful, often not transparent spending practices and its unsustainable borrowing habits, a measly 10 per cent, or $30.57 billion, was invested in publicly traded shares.
The GOJ crowds out private investors in every important aspect of our economy - and we expect to get robust private-sector-led growth. Who is kidding whom?
I certainly hope the pension fund reforms, which have been in discussion for forever, will happen soon and will ensure that poor pensioners, and Jamaica, get a better deal than exists at present.
The share of Government's take, by fiat, from this pool of pension money must be greatly reduced to force pension funds trustees and their institutional managers to invest more in the local private economy.
n Aubyn Hill is CEO of Corporate Strategies Ltd and chairman of the opposition leader's Economic Advisory Council.