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Defined benefit plan more risky to government - Burchenson

Published:Sunday | December 9, 2012 | 12:00 AM

Sabrina Gordon, Business Reporter

As interest groups continue to haggle over the more appropriate pension plan for public sector workers, one expert is adamant that a defined contribution scheme would be a better option to the defined benefit scheme that has been recommended by Parliament's joint select committee on pension reform.

"Defined benefit plans are inherently risky to the Government," said Rezworth Burchenson, managing director of Prime Asset Management, which provides pension fund investment advisory services to a number of corporate entities in Jamaica.

Under the defined benefit scheme, "any unfunded liabilities will need to be funded and the Government will fund these balances by tax increases, thereby reducing the disposable income for all members of the society, and deficit financing, paying additional interest expense to borrow these monies," he said.

The joint select committee made its recommendation in October for a defined benefit scheme, whereby public-sector workers would be required to make compulsory contributions of five per cent of their salaries to the fund, and could also opt for additional voluntary contributions.

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.

A start-up date of January 2013 is proposed for new employees of the public sector, while existing government workers would transition into the plan within the 2013-2014 financial year, on a date to be decided by Cabinet.

But even after the conclusion of the select committee's report, some stakeholder groups were still making further recommendations to the discussions on the reform process.

Horace Dalley, Minister Without Portfolio in the Ministry of Finance, while closing the debate on a report from the joint select committee, said recommendations were still being made despite the committee having already concluded its work.

Burchenson further pointed out that under a defined contribution scheme "there is a fixed predictable cost to the employer. No unforeseen funding challenges will arise in the future as the employer is only required to make his contributions," he said.

Furthermore, he explained that under a defined contribution scheme, "it is much easier for accumulated balances to port from one employer to another, and since the administration is easier, the attendant costs are likely to be lower."

In addition, Burchenson said "actuarial valuations for defined contribution plans are always lower than defined benefit plans, (thereby) reducing the overall expenses."

The Jamaica Medical Doctors Association, in its submission to the committee also advocated for a defined contribution scheme.

The defined benefit model is an employer-sponsored retirement plan where employee benefits are sorted out based on a formula using factors such as salary history and duration of employment.

Under the defined contribution plan, the pension is determined by the amount of contributions paid by and in respect of an employee, investment income on the assets and interest rates prevailing at retirement.

Currently, public-sector employees are paid a pension at retirement out of the Consolidated Fund in what is called a Pay-As-You-Go system, that is, no contribution is set aside in a discrete fund for the payment of those pensions.

Public sector pension reform is a major plank of the Government's economic programme and also forms part of the critical undertaking on which an agreement with the International Monetary Fund will be established.