Sabrina Gordon, Business Reporter
Insurance and pension fund managers were implored by government officials at a special meeting last Friday to give full participation in the National Debt Exchange (NDX) while highlighting some of the measures they say could cushion the blow to the sectors.
There is an expectation that NDX will impact the capital base of companies in the sector, but Leon Anderson, acting director general of the Financial Services Commission (FSC), assured the meeting that his agency would exercise "forbearance" in its assessment of sector companies, which may fall below the capital regulatory requirement because of the debt swap.
Without naming them, the FSC said it has companies in insurance and securities sectors that are likely to fall below the regulatory capital threshold due to the implementation of NDX.
"The impact is supposed to be less than the first exchange because in that case the interest cut was more significant," said Anderson.
"In terms of the insurance companies, they are very strong but we expect that a couple - one or two - will fall below regulatory threshold but we won't do anything," he said.
Meantime, a working group of Jamaica's pension actuaries have estimated that the NDX will result in approximately 20 to 30 per cent increase in liabilities for defined benefit plans, while for defined contribution it will see a 30 per cent reduction in pension for later retirees and a 10 per cent reduction for new retirees.
The actuaries met right after the meeting with Finance Minister Peter Phillips and his team.
Greater loss of value
"While we are asking all the stakeholders in the NDX to sacrifice some value, the consequences of not participating will result in a much greater loss of value. The range of choices that we face is not a choice between some abstract or ideal arrangement and a bad one, it is a choice between a range of bad and worse alternatives," said Phillips.
"As investment managers and trustees, we recognise that this transaction is an essential part of us being able to establish a new platform for economic growth, and it is important to recognise also that we have established a special instrument which we believe should be helpful for pension funds to manage its asset and liabilities portfolio through this transaction, the CPI indexed bond, we believe will help to mitigate the effects of the transaction in the long term," he said.
Jamaica's largest pension fund manager, Sagicor Life Jamaica, has already said it would participate in NDX.
While an agreement has been reached on an IMF bailout agreement for Jamaica at the staff level, it will need to be approved by the IMF board in March. That approval is conditional on full participation in the NDX, otherwise it falls through, Phillips said.
"We have concluded a staff-level agreement so we are off to a good start but there still remains to be a series of critical hurdles to overcome to get agreement at the board level and, more importantly, to meet all the critical targets that are part of this agreement," Phillips said.
"What we have here is something with no haircut on principals, it preserves the stability and integrity of our financial system but it does involve sacrifice," the minister said.
Brian Wynter, governor of the Bank of Jamaica, also speaking at the forum, said even though the financial sector is expected to be impacted, the stress test conducted shows that the impact will be manageable and no company will become insolvent as a result of the transaction.
"In our review and the stress test it shows that the temporary impact on profitability and capital adequacy will be manageable for the financial sector," said Wynter.
He said that the financial sector support fund will be revived to provide liquidity if the need arises.
Leon said the FSC will work with the companies that are affected by NDX.
"Again, for the securities dealers sector, a couple of them will have problems. We have to look at them as well but the financial sector support fund will help to provide liquidity," he said.
Meantime, Hugh Reid, president of the Insurance Association of Jamaica, said while it is difficult to speak in any specific terms, the adverse effects of NDX will be felt by both the companies as well as consumers.
"Companies profitability and capital adequacy will be impacted and consumers in terms of premium rates increasing and declines on the returns they get on policies," said Reid, who also manages Scotia Life Insurance Company.
He said given the likely reduced investment income for the sector, it is conceivable that insurance premiums could increase in the months ahead.