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ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER

Oran Hall | Don’t just depend on a NIS pension

Published:Sunday | July 3, 2022 | 12:11 AM

It is not unusual to hear complaints about how small the National Insurance Scheme or NIS pension is. Honestly, I do not foresee the day when it will be anywhere close to being adequate. The NIS is a compulsory contributory funded social security...

It is not unusual to hear complaints about how small the National Insurance Scheme or NIS pension is. Honestly, I do not foresee the day when it will be anywhere close to being adequate.

The NIS is a compulsory contributory funded social security scheme for all individuals 18-70 years of age who are fully occupied in insurable employment, which includes the employed and self-employed, as well as voluntary contributors.

I have identified 14 different types of benefits that it pays, including a retirement pension, orphan benefit, employment injury disablement benefit, spouse allowance and widow’s/widower’s benefits. An important benefit is the NI Gold – a health insurance scheme offering comprehensive medical coverage for all NIS pensioners, who are not required to pay a premium.

These are wide-ranging benefits which are not confined to the pensioner and are not limited to the lifetime of the pensioner. This thus puts a limit on how much is available to pay retirement pensions.

At 2018, there were 124,000 beneficiaries of the NIS, and the number of contributors has been increasing. More contributors means more contributions, but also more beneficiaries ultimately.

An actuarial valuation done in 2013 concluded that the NIS was not sustainable over the long term at the existing contribution levels. Two actions were taken to correct the situation: increases in the contribution rate and the wage ceiling, being the maximum level of income to which contributions would apply.

The contribution rate was increased to 6 per cent in April 2020, up from 5.5 per cent in April 2019 and 5 per cent in April 2018. The wage ceiling was increased to $5 million in April 2022, up from $3 million in April 2021 and $1.50 million in April 2018.

These changes should mean more serious inflows into the scheme with the potential to earn more income, thus potentially making more funds available for benefits to contributors.

The NIS invests the contributions it receives through the NIF or National Insurance Fund – a division of the NIS set up solely for that purpose. The value of the investment portfolio was about $121 billion in March 2019. It includes real estate, ordinary shares, money market securities and bonds. The investment portfolio generates funds to pay all benefits and to cover the administrative expenses incurred in managing the portfolio.

The ability of the NIS to pay benefits hinges on the inflow of contributions and the level of income in the form of interest, rent and dividends that the portfolio generates. But, at the same time, it is necessary for the value of the portfolio to grow.

Such growth comes largely from appreciation in the value of real estate and equities. These are not values that can be distributed in the short term as such assets are required to yield significant long-term returns and are generally sold as and when necessary to generate tangible benefits to the scheme and its contributors.

It is important for the NIS to collect more new contributions than the benefits it pays out. That has not always been the case. In fact, even as recently as March 2019, the net contribution was negative.

Generally, pension funds, including the NIS funds, in Jamaica have been invested very conservatively. Although this has kept the risk exposure of the portfolios low, it has kept returns low in an environment in which the yields on interest-bearing securities are far from what they used to be.

The old age, or retirement, benefit is small. The full rate is $3,400 per week, the three quarters rate is $2,550 and the half rate is $1,700, resulting from increases in April 2018. The primary consideration in determining these payments is the number of contributions that the contributor makes.

The benefit to larger income earners is pitifully low, but I doubt it matters much to them. Contributors who earn lower incomes see more value in the benefits and, sadly, many seem to have no source of a retirement income outside of the NIS benefits.

There is not much that can be done regarding the past, but those individuals who are looking forward to retirement can take action. There is a growing level of awareness about preparing for retirement because of the many programmes being promoted, but more needs to be done.

Additionally, much is being done in financial education and a wider range of products is being made available to the market. The advent of approved retirement schemes for individuals who are not members of employer-sponsored pension arrangements is also creating opportunities for individuals to save for their retirement years. Nonetheless, more needs to be done.

It will take much effort, but even individuals who earn low incomes can learn to prepare for retirement and rely less on the NIS for income in their retirement years.

- Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. finviser.jm@gmail.com