Fri | Jan 18, 2019

New pension model reduces risk for employer

Published:Friday | October 24, 2014 | 12:00 AM

Avia Collinder, Business Reporter

A new pension savings model, though not on Jamaica's radar, has piqued the interest of local pension fund managers, who say the rate of payouts under the system are guaranteed but not by the employer.

The plan would potentially require employee contribution of 18-22 per cent of salary.

The contribution model - referred to as the Defined Ambition Plan (DAP) - is superior to the two traditional models in operation in Jamaica, defined-benefit and defined-contribution plans, according to Geoffrey Furlonger, chairman of the International Employee Benefit Association, who initially raised the issue at a September 30 workshop in Kingston.

He says the model is currently being introduced in parts of Europe, including The Netherlands and United Kingdom.

The defined-target plan guarantees that the retirement benefit payable to individual pension plan members will never fall below a prescribed limit but comes without guarantees by an employer or other sponsor.

The scheme may either provide a "money-back guarantee to the value of contributions made, or guarantee a minimum level of income, or a certain level of investment return," said Furlonger.

Asset Protection

The plan offers protection of assets, and flexibility in contribution rates and retirement ages, he said.

President of the Pension Funds Association of Jamaica, Allan Lewis, said the plans have been introduced in European workplaces in recent years.

"The defining feature of DAP is that risks are shared more evenly between plan members and sponsoring employees," he told the seminar.

"The plan commends itself to our study, in light of the skewed nature of the risks that accompany the defined-benefit and defined-contribution pension plans."

Managing director of Prime Asset Management, Rezworth Burchenson, told the Financial Gleaner that his company is not averse to testing the new model, but said its introduction to the Jamaican marketplace would come only after rigorous actuarial analysis, and with the blessing of financial regulator Financial Services Commission and the revenue authority, Tax Administration Jamaica.

Burchenson said actuarial analysis was key as Furlonger's agency has not done an impact study on Jamaica.

"It is now time for the local industry to sit and crunch the numbers and analyse what changes to the legislation/regulations would be required," he said.

Introduction of the 'defined ambition' model calls for greater flexibility in contribution rates and retirement ages, issues which would require adjustments to pension laws, said the pension fund manager.

Similar to defined benefit

Tricia-Gay Clarke, senior pensions administrator with Prime Asset, said DAP is a variation of a defined-benefit scheme, but excludes the employer's guarantee, allowing the employer to renege on set targets if resources are not available to cover pension obligations.

"In a defined-benefit plan, pension is calculated using a formula which is usually a factor of the member's salary and years of pensionable service. The member's retirement benefit is guaranteed and must be provided at whatever cost," said Clarke.

"The employer bears the risk in a defined-benefit plan since the employer must pay the 'balance of the cost' required to fund the member's retirement benefit."

The DAP is similar to a defined benefit scheme, which prescribes payouts to the member at retirement but offers "no absolute financial guarantee" that the benefit will be delivered at the point of retirement, Clarke told the Financial Gleaner.

"The employer may, at the point of retirement, reduce the benefit to that similar to a defined contribution benefit or provide a money-back guarantee to the value of contributions made, or guarantee a minimum level of income, or guarantee a certain level of investment return," she said.

The risk in a DAP scheme appears to fall on the plan member "since there is no absolute guarantee that the prescribed benefit will be paid," Clarke said.

Furlonger says a defined-ambition scheme offers more predictable returns, helped along by higher levels of employees' savings.

Clarke said that in general practice, Jamaican employees often contribute close to the 15 per cent limit allowed for pension savings after the employers' contribution of five per cent.

The law caps pension savings at 20 per cent of salary, which means the type of scheme proposed by Furlonger would require new legislation, the pension administrator said.