Public pensions to be managed as segregated fund
Sabrina Gordon, Business Reporter
The Parliamentary Joint Select Committee on pension reform has recommended a defined benefit (DB) pension plan for public-sector employees, whose contribution would be set at five per cent of salary.
Thirteen groups weighed in on the reform Green Paper to create a pension scheme for government workers, only one of which, Jamaica Medical Doctors Association, was not in favour of the DB scheme.
Twelve of the submissions were in favour of workers contributing towards their pensions. Jamaica Defence Force was against it.
On Thursday, pension expert Rezworth Burchenson said many elements of the report provide a platform to move ahead, but he was not entirely sold on the model selected.
"A defined benefit model is a unique animal, because there are so many variables to monitor to ensure that this plan type remains viable while keeping the costs low or fiscally sustainable," said Burchenson, the managing director of Prime Asset Management.
"I would have preferred a slightly different approach," he said, listing them as follows:
1. A modified DB for workers above 50, or some other predetermined age;
2. A defined contribution (DC) plan for workers below 50, or some other predetermined age; and
3. A DC plan for all new employees.
"The main benefit of this is that the cost of a pension plan - the implied debt - eventually goes to zero after a 40-50 year period," said Burchenson.
"That, to me, would have created the fiscal sustainability this economy requires."
Other groups making submissions on the reform were: Milestone and Lifestyle Planning Services, lOS Partners, Jamaica Police Federation, Constance Dalmadge-Hall Fellow Society of Actuaries, Jamaica Civil Service Association, Jamaica Teachers' Association, Jamaica Confederation of Trade Unions, the Private Sector Organisation of Jamaica (PSOJ), among others.
Currently public-sector employees are paid a pension at retirement out of the Consolidated Fund in what is called a Pay-As-You-Go (PAYG) system, under which at least 80,971 employees are eligible for a pension.
Pay as you go
The GOJ being the largest employer in Jamaica has about 37,465 persons employed to Central Government, 16,835 employed to the security forces (JCF and JDF) and 26,671 employed as teachers.
The PAYG system is unfunded, that is, no contribution is set aside in a discrete fund for the payment of those pensions, and as such, it is increasingly difficult for the GOJ to meet its pension bill.
In 2011, pension payments represented 1.4 per cent of GDP, or about five per cent of total Government revenue, and is expected to increase over the coming years.
While there was a general consensus about reform of the pension system and for a contributory scheme to be implemented, there were areas of divergence by some of the interest groups. For example, the PSOJ and Constance Dalmadge-Hall were both in favour of a combination defined benefit and defined contribution scheme, while the World Bank proposed a combination of the defined benefit for past service and a hybrid scheme to cover service after the start-up date for the reformed system, the parliamentary committee said in its report.
Not all groups mentioned the issue of vesting, but the four that did said the period should be reduced from 10 years to five years, consistent with the practice for pension funds in the private sector.
The committee reports that the groups also had some divergent views in areas such as the base salary used for pension computation, where some wanted a career average versus a proposed final five-year average salary, indexation and the pension accrual rate.
The Green Paper proposed that pension contributions should flow to the Consolidated Fund, but interest groups disagreed, saying they should be managed as a segregated fund.
After nine meetings and a special retreat, a segregated fund under trust was proposed as the better alternative; that public-sector workers would be required to make compulsory contributions of five per cent and could opt for additional voluntary contributions; that the fund be actuarially reviewed every three years, or earlier if there is a significant change in the economic environment; the retirement age for all employees would be set at age 65; and that the vesting period should remain at 10 years.
The Select Committee also recommended that Government contribute J$17 billion per annum for 40 years to fund the legacy liability of the pension system plus a further 3.5 per cent of employers' payroll annually for ongoing service costs.
The cost of Government salaries is now running at J$146 billion per year.
The start-up date for the new defined benefit pension scheme is proposed for January 1, 2013 for new employees only, while existing government workers would transition to the plan within the 2013-14 financial year on a date to be decided by Cabinet.
Public-sector pension reform is one of the key issues Jamaica needs to tackle to secure a deal with the International Monetary Fund.