Sun | Jul 22, 2018

Costly management lead to winding up of pension schemes

Published:Friday | August 5, 2016 | 12:00 AMMcPherse Thompson
Constance Hall, actuary with consultancy firm Eckler.
Angela Fowler, pension lawyer with Livingston Alexander and Levy.

Actuary Constance Hall has attributed the winding up of some 400 pension schemes by firms in Jamaica over the last eight to 10 years to the burdensome costs of managing the pooled contributions on behalf of the companies and their employees.

Partner in the law firm Livingston Alexander and Levy, Angela Fowler, agreed, saying that smaller firms cannot manage their own pension funds and therefore have to outsource a process that is expensive.

She said that in the early 2000s, there may have been about 1,200 pension plans. The latest data from the Financial Services Commission (FSC) shows that there are now 802 plans, only about 415 of which are active. The others, Fowler says, are in the process of termination or dormant.

According to Hall: "What we've had in, I'd say the last eight to 10 years, not by assets or employees, [but] by the number of pension funds, half of them have either fully terminated or are in the process of being terminated."

Hall, addressing a Gleaner Editors' Forum at the company's North Street offices in Kingston, said: "When we got the Pensions Act, [it was] a wonderful piece of legislation, but I think suddenly the burden became great. It's the small plans that are terminating. The Graces, BNSs and NCBs - those are not just alive but they are doing well."

Few persons getting contributions

Hall said the hope was that money which came out of the pension funds when the plans were terminated would have gone into an approved retirement scheme. An approved retirement scheme, or ARS, is recognised under the Pensions (Superannuation Funds and Retirement Schemes) Act 2004 to enable its members to save for their pension at retirement.

"I have done valuations for most of the approved retirement schemes in the island and I know for sure that in most of them, you have a tiny fraction of the headcount that's getting any employer contributions," she added.

"So when the members moved from superannuation, where the employer was required to contribute, into the approved retirement schemes where the employer contribution is voluntary the employers' contributions ceased," said the actuary.

"Now, if you were in a defined-contribution scheme, where you pay five per cent and your employer pays five per cent for you, when you retire the pension might not be wonderful, but it would be okay. That pension is now chopped in half because your employer's five per cent is no longer being saved," she said.

Asked what was the fix for that, Hall said, "We talk and talk and talk because we must get back all the small employers ... to begin to put back the five per cent. So you don't want to manage the small pension fund because it's costly to do it, put the five per cent in the approved retirement scheme."

Fowler said she believed that "phase one of the Government's pension reform is well-intentioned and there's a lot about it that is really good, but I think you have to bear in mind that private-sector pension funds are voluntary".

In that regard, "What you want to do is to encourage growth of pension funds in Jamaica, not discourage them. And there are some factors which discourage the growth. [With] small pension funds, you cannot manage your own pension fund, you have to outsource and outsourcing is expensive."

Cost of managing funds

Hall said that among the costs associated with managing pension funds are administrative fees which, in most cases, are pegged to contribution income and is usually up to five per cent of those proceeds, in addition to investment management fees, which tend to range between 0.5 per cent and one per cent.

Fowler added that those are only a part of the costs, noting that there were also expenses for trustees, auditors, actuarial, as well as fees for the FSC, which regulates the industry.

"The whole regulation of the industry is extreme in my opinion. There was a time when life was simple," she said, recognising, however, that some of the wrongs attributed to the industry needed to be addressed.

President of the Pensions Fund Association of Jamaica, Allan Lewis, who also addressed the forum, noted that insofar as pension is concerned "the private sector is kind of nebulous".

However, he said "most of the big companies in Jamaica have a pension arrangement. The persons who don't have pension arrangement, for the most part, are people employed to small companies."

Private pension funds have more than $360 billion under management in the private sector, which is "bigger than the Government's pension scheme," Lewis said. The public pension fund managed by the National Insurance Fund is valued at around $78 billion.