Editorial | A DC plan makes better sense, PM
It is not surprising that Peter Phillips, the new opposition leader, observed, as this newspaper did, the failure of the Government’s public-sector pension bill to set a timetable for the launch of a segregated pension fund, or to say when the Government will begin to contribute to the scheme.
As it now stands, the bill only commits the Government to begin contributions “from a date as the minister shall determine”, without saying how much is to be contributed. Or, as Prime Minister Andrew Holness conceded, there is no assurance to public-sector employees that they will not be “at the mercy of a capricious Government”.
We understand the reason for the vagueness. The proposed reform will increase by five years, to 65, the age at which public servants retire, as well as require all government employees, on a phased basis, to contribute five per cent of their salaries to the pensions. Most civil servants do not now contribute.
In other contributory pension schemes, the employer would match the level of investment by the worker. With a wage bill of around $185 billion for the current fiscal year, this would mean a matching amount from the Government of more than J$9 billion.
That, however, is not the entire story. The existing government pension scheme is a defined benefit (DB) one. Employees are assured a specific pension based on the size of their salaries over a specific period and their number of years of employment.
This pension is paid directly by taxpayers from the Consolidated Fund. This year, the Government’s pension bill is J$34.3 billion, or 130 per cent higher than it was eight years ago. It is this arrangement that in 2010 left the Government with an implied pension debt of 36 per cent of GDP, which, if nothing changes, will reach 50 per cent of GDP by 2023 and continue to rise.
The problem for the Government is that not only would it have to start to make matching contributions against its pension obligations going forward under the new arrangement, but must also cover the existing debt. Given its fiscal constraints, and its need to run a primary surplus of seven per cent of GDP under its IMF-agreed debt-reduction strategy, the administration obviously prefers, at least for now, to keep its pension payments on a cash accounting basis, paid from the Consolidated Fund.
SUGGESTIONS FOR THE PM
Prime Minister Holness promised last week to review the issues raised by Dr Phillips, and hopefully bring some clarity to the matter. On this score, we have two suggestions for the PM.
First, the Government should abandon the idea of a DB scheme. It should opt for a direct contribution (DC), which doesn’t guarantee a specific level of pension, but rather provides benefits on the basis of the performance of the pension fund.
This would mean drawing a red line under the existing DB scheme. People who are part of the old DB plan would be paid a pension on that basis up to the point of its closure, Thereafter, if they remain in the public sector, they would be members of the DC scheme and receive pensions on that basis.
Further, the Government should level with its employees on the dollar figure of its implied pension debt and lay out a clear timetable for clearing that obligation, starting with its matching payments under the new DC scheme.