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Henley Taylor: That bothersome issue of pension surplus

Published:Monday | April 11, 2016 | 12:00 AM

Pension surplus represents the excess that accrues, over time, by capital accretion, less the standard financial obligations that are discharged to beneficiaries and active stakeholders, such as fund managers and trustees.

Capital accretion refers to the growth of funds within the pension scheme. This can occur via a number of investment options and strategic actions.

All pension schemes invest combined contributions in a number of different investment instruments, to diversify and minimise risks to these funds.

In Jamaica, the surpluses so generated have proven to be the source of much contention between employer and employees. This is so because the rightful designation of these surpluses have often been blurred, presenting great controversy and acrimony. Equally, the sheer magnitude of these surpluses have caused many companies to get 'green-eyed', and to use every possible means at their disposal, to selfishly and exclusively secure for themselves.

Indeed, most pension schemes have an employee and employer component, in some predetermined ratios, based on the particular scheme, and the trust deed that governs how such schemes are to be operated.

Essentially, there are two types of pension schemes: the defined-benefit (DB) scheme and the defined-contribution (DC) scheme.

The defined-benefit scheme is one in which there is a defined benefit to contributors upon retirement. And this defined benefit is calculated, based on total contribution, last income upon retirement, and the number of years worked. Based on normal contributions, a pensioner can only receive a maximum of 66 2/3 per cent of last income. The primary sponsors of such schemes are the workers, and they have the option to contribute an additional five per cent of their income to take them to the maximum allowable 10 per cent of income.

In a defined-contribution scheme, both workers and employers contribute jointly to the pension of workers, in a matching way. Like the defined benefit scheme, employees also have the option to contribute the optional five per cent of income to take them to the maximum 10 per cent allowed by the pension rule.

In both types of pension schemes, huge overhangs or surpluses generally accrue, and this, quite often, is the source of much vitriol. In most defined-contribution schemes, the issue of the surplus, is less contentious because, such scheme requires joint participation between the employer and the workers. Consequently, such surpluses are usually shared upon the winding-up of this type scheme.

On the other hand, the defined-benefit scheme usually presents greater problems. And this is so unfair because, while the workers are the principal or exclusive sponsors of the scheme, some employers have sought to control the surpluses so generated by the workers' own contributions. Indeed, it must be noted that, there has been at least one celebrated case where an employer has sought to challenge the legitimacy of workers to claim such surplus that their own contributions have generated. In fact, such employer has sought to use ultra vires means to coerce worker trustees to control the surplus.

This case records the fact that this employer sought to control the surplus on the basis that it was the self-appointed guarantor of the funds, that is to say, if the fund ran into a deficit, it would be its responsibility to return it to a surplus. Yet, such employer did seek to influence and coerce worker trustees to sign a document stating that in the event that the pension fund is wound up, such surplus should automatically revert to the employer, NOT the employees.

Clearly, if such ownership of the surplus was bona fide, why would the employer seek to coerce worker trustees to sign such document in an attempt to give it exclusive control over the surplus? The matter of surpluses in pension schemes, particularly defined-benefit schemes, must be resolved in a legal and equitable manner.

Injustice must not be allowed to triumph. And employers with deep pockets, global connections and high-profile lawyers should never be allowed to use such strengths to cheat workers who have taken all the risks to invest their incomes in pension schemes.

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