Sun | Dec 5, 2021

Oran Hall | Trends in the private pension industry

Published:Sunday | November 14, 2021 | 12:08 AM

The proportion of the employed labour force participating in private pension plans is on a steady increase, and a comparison of the Financial Services Commission’s private pension industry quarterly statistics for June 2016 and June 2021 shows several positive developments.

Coverage of the employed labour force in June 2021 was 11.56 per cent, up from 9.06 per cent in June 2016, which itself was lower than the 9.08 per cent in June 2015, while the coverage in June 2020 was 10.89 per cent.

There were 373 active plans in 2021 (87 defined benefit and 286 defined contribution), down from 412 (106 defined benefit and 306 defined contribution) in 2016. Membership, however, increased from 105,832 in 2016 to 139,419 in 2021.

Membership in active defined benefit plans continues to fall, from 21,201 in 2016 to 19,872 in 2021, as membership in defined contribution plans increased from 84,631 to 119,547, that is, from 79.97 per cent to 86 per cent of the membership of pension plans. Overall, membership in active pension plans increased from 105,832 to 139,419.

Retirement schemes are individual schemes. In 2016, there were 12 of them compared to 400 staff superannuation funds, which are group pension plans. They accounted for 42.14 per cent of the membership of pension plans but for only 5.02 per cent of the value of assets.

By 2021, retirement schemes accounted for 50.69 per cent of the membership of the pension plans and 8.22 per cent of assets, clearly gaining on the superannuation funds in membership, but have a very far way to go to match them with assets. Superannuation funds have been in the market for a very long time.

The investment mix of the pension industry is centred primarily on investment arrangements, government securities, and ordinary shares. Investment arrangements refer to pooled pension funds and deposit administration plans.

The former are generally unitised with unit values fluctuating with investment performance. In the case of the latter, employers place the pension contributions of their employees with life insurance companies to be invested with the general funds of the life companies in return for a pre-determined yield for each contract period.

Investment arrangements made up 34.80 per cent of the total investment portfolio in 2016 and 37.36 per cent in 2021. They themselves invest in stocks, bonds, and other investment instruments. In 2021, ordinary stocks accounted for (36.29 per cent), government securities (20.27 per cent), and ‘other investments’ for 20.27 per cent of their investment portfolios

When added to investments made directly in these instruments by the pension funds, the pension industry accounts for a very significant portion of the investment in ordinary shares and government securities.

Direct investment in instruments such as ordinary stock and government securities is made by pension funds, which act as their own investment managers or which hire managers directly to invest their funds.

Government securities accounted for 31.99 per cent of the total investment portfolios in 2016 but declined to 21.44 per cent in 2021. The proportion of stocks in the total portfolio increased from 15.34 per cent in 2016 to 23.21 per cent in 2021, reflecting to some degree the significant increase in stock prices during much of that time.

Of note is that real estate, repos, and bonds and debentures play a minor role in the investment portfolios of the pension industry overall, accounting individually for less than six per cent of the total portfolio in any single year. Mortgages and leases hardly appear on the investment schedules of the pension funds.

Just a few sectors account for the major share of the membership and assets of the pension industry. In 2016, commerce and finance accounted for 53.54 per cent of membership of active funds and 40.09 per cent of pension industry assets. The services sector accounted for 19.76 per cent of active members and 16.48 per cent of assets.

In 2021, services accounted for 35 per cent of membership and 17 per cent of assets; commerce and finance accounted for 18 per cent of membership and 37 per cent of assets. Tourism and sales and distribution each accounted for 10 per cent of membership, but neither accounted for as much as 10 per cent of the value of pension industry investment assets.

An interesting change took place in the management of pension investment portfolios between 2016 and 2021: the displacement of life insurance companies as the primary investment managers by securities dealers. Whereas three life insurance companies managed $223 billion and 17 securities dealers managed $165 billion of $425.2 billion in 2016, two insurance companies managed $256.3 billion, and 15 securities dealers managed $383.5 billion of pension assets in 2021.

There is not much diversity in the pension industry in Jamaica. In terms of investments, the focus is heavily on government securities and ordinary shares – the latter of which is assuming greater prominence and is important as a means of hedging against inflation, even for pensioners.

The commerce and finance and service sectors are the main sectors that participate in the pension market. The former is particularly important because it accounts for a meaningful share of the assets of the sector.

Regulatory requirements and a limited range of relatively safe financial instruments seem to be largely responsible for the heavy concentration of investments in just a few types of investment instruments.

The pension industry in Jamaica, nonetheless, is evolving.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.