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Pensioners advised to brace for NDX fallout

Published:Friday | February 15, 2013 | 12:00 AM
Governor of the Bank of Jamaica (BOJ) Brian Wynter (left) and Minister of Finance Dr Peter Phillips at the launch of the National Debt Exchange at the BOJ on Tuesday, February 12. - Ricardo Makyn/Staff Photographer

Sabrina Gordon, Business Reporter

Financial experts are holding comment on the expected impact of the National Debt Exchange (NDX) on businesses exposed to government bonds ahead of two meetings scheduled for today at the Bank of Jamaica (BOJ), but there are already signals that not all bondholders have yet been persuaded to play ball and accept the offer.

Most of them will, however, says pensions expert Constance Hall, who projected on Thursday that, like the first debt swap, the take-up would be near universal.

The Financial Services Commission is expected to host a meeting with insurance and pension fund managers today, Friday, which will be followed immediately by a second meeting of actuaries to discuss the NDX offer and its implications.

The Jamaica Debt Exchange (JDX) swapped J$702 billion of bonds and had a 98-99 per cent take-up; the NDX aims to swap J$860 billion worth of bonds. The offer creates 25 NDX bonds at lower tenures - interest will be shaved by one to five per cent - and extended maturity profiles.

Hall, a consultant actuary with the Jamaican office of Canadian firm Eckler, says pensioners should brace for an increase in the price of annuities.

"For the defined-benefit plan, the impact might not be detrimental, depending on how the assets are invested and whether there is a surplus in the fund," she told the Financial Gleaner.

"But for the defined-contribution plan it is likely to be detrimental for members retiring now because the price of annuities will be materially higher," she said.

Hall said after the JDX, the first debt swap in 2010, prices of annuities went up by as much as 25 per cent. Then, GOJ bonds were cut by an average of six per cent.

"It's hard to tell what the prices will look like this time around and it will also depend on how the assets are invested," she said.

The NDX offer opened Tuesday and closes next Thursday, February 21.

At June 2012, active pension plans totalled 456, of which 114 are defined-benefit and 342 defined-contribution schemes with combined member-ship base of 82,071. The active plans hold assets valued at J$271 billion; whereas the total number of plans, 798, were valued at J$288 billion.

The public pension fund, National Insurance Fund, whose J$73 billion of assets is dominated 76 per cent by GOJ securities, is also assessing the impact.

The NDX aims to shave J$17 billion in annual debt servicing costs.

Jamaica's overall debt, including the external component, was estimated at J$1.75 trillion at end of November 2012.

Hall said it is expected that all bondholders will take up this new offer, which has a settlement date of February 22, a day after the offer closes, saying there was too much uncertainty otherwise.

"I expect to see all persons taking up the offer. If they don't, we don't know what will happen and we haven't heard anything to say what will happen either," Hall said.

Fellow actuary Cathy Lyn, immediate past president of the Caribbean Actuarial Association, shares a similar sentiment.

"We have to, it's the only way to cut the debt, and agree to the lower rate being paid," said Lyn.

"The problem of bad debt means everybody must work together and it's more about that than an action to be viewed as our saviour," she said.

Lyn went a step forward to say that the NDX by itself will not solve the problem.

"A situation of lower interest rate is only going to help if there is increased productivity and lower inflation," she said.