Global risks affecting pension plans – Part 2

Pension portability allows a member to preserve the actuarial value of accrued pension rights when moving from one job to the next.

However, portability in our legislation only relates to movement between plans established in Jamaica.

A key consideration which will be of increasing importance is the portability of private pension benefits across borders as individuals move from employer to employer in different countries or within a single firm operating in different territories.

As early as 1996, all Caricom member countries, save for Suriname, signed the Agreement on Social Security. This Agreement provides for the portability of select pension rights for workers moving between Caricom member states.

There are also bilateral agreements between the United Kingdom (UK) and Jamaica, and Canada and Jamaica in respect of portability of social security benefits. There is no agreement between the United States and Jamaica, which is particularly significant since the US is by far the main destination of Jamaican migrants.

These agreements, which are all positive and beneficial, predated the passage of the Pensions Act. They only address the movement of social security entitlements (NIS) arising from government sponsored programmes, such as the National Insurance Scheme (NIS). And only the bilateral agreements between the UK and Jamaica and Canada and Jamaica have been incorporated into domestic legislation.

Cross-border movements

What about a regulation to make provision for the cross-jurisdictional portability of private pension benefits?

The usefulness of such regulation would inherently hinge on the ability of plans in other jurisdictions to import such benefits and, of course, there will be issues of international capital movements and foreign exchange considerations which will have to be factored.

Additional bilateral and multilateral agreements, and their subsequent incorporation into domestic legislation, are needed to provide for cross-jurisdictional portability. This will be important to facilitate the preservation of pension rights generated in Jamaica when a worker moves abroad, and also to preserve pension rights generated abroad if the worker decides to return to Jamaica.

But is the story solely one of doom and gloom? Are we headed towards a breaking point, with no plan of action to put us back on the right path? Here are some recommended solutions:

Higher retirement ages

For many, working longer may be an unfavourable solution. Jamaica currently caps the NIS normal retirement age at 65, and for private schemes the retirement age is between 60 and 65. Denmark’s current retirement age is 67, but will raise to 68 by 2030. Italy’s current retirement age is 66 and 7 months, and Spain has a current retirement age of 65, which it is raising to 67 by 2027.

Moving the normal retirement age up would be a welcome development, because working longer while persons are increasingly living longer improves the financial sustainability of pension systems

Shorter vesting periods

The nature of work is changing, and with more people frequently changing jobs, vesting periods need to be flexible. The UK has a vesting period of three months for early leavers and two years for local government pension schemes.

In Jamaica, we anticipate that phase two of the pension-reform process is likely to set a maximum vesting period of five years. But there has been a trend to reduce vesting periods around the world.

For instance, in Barbados the period is three years. Jurisdictions such as Bermuda, Ireland and Ontario have reduced the mandatory vesting period to two years. And there is immediate vesting in jurisdictions such as Australia and Quebec.

From the standpoint of retirement income adequacy alone, it is desirable to encourage the immediate vesting of accrued benefits, but in practice, this is a difficult goal, because of the costs imposed, especially where pension plans are voluntarily established by employers.

Greater savings

There should be with more dependence on personal savings as opposed to reliance on government pensions and employer pensions.

In December 2018, Minister of Finance Dr Nigel Clarke announced the establishment of an Investment Management Review Commission, to review the current NIF Investment Management Governance Framework against international best practices for state pension funds.

However, pensions benefits are only one pillar of the entire NIS framework, and while improving the benefits under the NIS is necessary and long overdue, it is unlikely to ever provide an adequate pension in retirement.

We all must bolster our own savings in order to protect ourselves and ease the burden on state and private schemes. Economic and financial downturns and natural disasters can affect pension funds and our ability to retire comfortably so each person has to individually and carefully plan for his own future.

Climate change, ageing societies, and the changing nature of work have a serious effect on pensions and their beneficiaries across the globe.

If the risks are not considered seriously at both the pension scheme and individual levels, we may have to be satisfied with working well into our old age and being satisfied with less generous retirement pay-outs at the end of our working lives.

Part one of this article appeared last week.

Sanya M. Goffe is an attorney-at-law and partner at Hart Muirhead Fatta and president of the Pension Industry Association of Jamaica.

Rochelle Haynes is an associate at Hart Muirhead Fatta.smgoffe@hmf.com.jm