Sat | Aug 19, 2017

Editorial | Rejig the pension plan

Published:Thursday | February 23, 2017 | 2:00 AM

We are surprised that having talked about this matter for years and with the proposed implementation date a mere month away, the Jamaican government and public sector unions appear so far apart on a new pension scheme.

A question that will be asked by many is what the Holness administration was doing on this matter - which is a clear priority under the government's billion-dollar standby finance agreement with the International Monetary Fund - in the year it has been office? It can't be that they were not negotiating.

Whatever the explanations, or whoever is at fault for the current state of affairs, this newspaper sees a silver lining in the lack of consensus between the parties on the proposed scheme. What the government has on the table is flawed, but not for the reason for which the unions are disgruntled. They have an opportunity to put it right, which might mean having to push back a tad the April 1 implementation date.

There is little doubt that reform of the government's pension scheme is necessary; inevitable almost. For what is in place is unsustainable.

Over the next fiscal year, the government expects to pay its pensioners J$34.3 billion, or 14 per cent more than for the year ending March 31. This means that over the past eight years, since the 2008-2009 budget, pension payments will have risen nearly 130 per cent. Further, looking down the road, if the government does nothing, its implicit pension debt to current and future pensioners is 36 per cent of GDP, with the potential to get worse. Almost all of this expense is now borne by taxpayers because most public servants contribute nothing towards their pensions. Pensions are a charge on the Consolidated Fund.

In that regard, the reforms now on the table represent an advance. Employees are being asked to pay five per cent of their salaries to their pension, and an investible fund is to be established to meet the charges. Further, the retirement age for public servants is being adjusted, during a five-year transition, from 60 to 65, bringing it in line with what prevails in the private sector.

 

THE BIG FLAW

 

The big flaw in the reform is that a direct benefit scheme is being retained, which means that public servants will be guaranteed a specific pension payment, as a ratio of the last five years of salary, when they retire. If the Fund can't meet those payments, then they have recourse to the good old taxpayer.

Private-sector companies, globally, are increasingly moving to direct contribution (DC) schemes. Employee and employer contribute specific portions of the worker's salary to the fund, whose returns determines the level of pensions. Workers have an incentive to ensure that pension funds are well managed, and firms are freed of the hazard of having to cover an underfunded scheme, such as will still be faced by taxpayers.

What the government must do is to draw a red line under the defined benefit obligations as of the date of the implementation of the reforms; thereafter, all pensions due to public servants, including those already employed, must be on a DC basis.

Unions now complain that contributing to their pensions will make them worse off. The government, in exchange for a DC scheme, depending on the impact on the public finances, might then consider a form of matching contribution to the pension fund.