New pensioners facing 40% cut
Sabrina Gordon, Business Reporter
Pension fund trustees and other representatives are seen here at a meeting at the Jamaica Conference Centre on Wednesday, organised by the Financial Services Commission to explain the Jamaica Debt Exchange programme. - Rudolph Brown/Photographer
Jamaicans heading into retirement this year are likely to see a reduction of up to 40 per cent on private pension income after the Government's debt-swap transaction closes, according to the estimates of local actuaries.
But the fallout is likely to affect only persons with membership in 'defined-contribution' (DC) pen-sion schemes, according to Cathy Lyn, president of the Jamaican chapter of the Caribbean Actuarial Association.
"For members of DC-type arrangements who retire soon after the swap, their pensions could be 30 per cent to 40 per cent smaller when their account balances are converted," said Lyn.
"For DB (defined-benefit) pensions, they are not affected, since the shortfall from the lower-than-expected income is a cost borne by the employer."
At June 2009, the Financial Services Commission (FSC) re-ported that 34 per cent of private pension funds were held in defined-benefit plans, with the remaining 66 per cent were defined contribution schemes.
At September 2009, pension fund managers had some $216 billion of funds under management in 507 superannuation and retirement schemes.
Approved pension funds and retirement schemes currently cover about 60,000 persons with the funds holding over $100 billion of government debt.
"I don't know if we can quantify the 30 or 40 per cent, however, yes - we are well aware that with the lowering of interest-rate annuities are going to be more expensive to purchase ... so, therefore, when a pensioner retires the amount that can be purchased in terms of annuities is going to be affected," concurred Nicolette Cupidon-Jenez, senior director of pensions at FSC.
"A DB plan is the promise of a pension based on a certain per-centage of your salary and the employer undertakes to pay whatever the cost, in a DC plan you save towards retirement ... . You have a pot of money and that money is used to buy your annuity when you get to retirement age," she said, explaining why members of DB plans would not be affected by the debt-exchange transaction.
Pension fund managers themselves say they are still calibrating the full effects of the debt plan on the value of their portfolios, but one company said industry portfolios are likely to see a 10 per cent to 20 per cent reduction in interest income.
Interest income decline
"It's a mixed bag and it's not expected that we will see an impact on portfolio value," said Carl Aldridge, pension fund manager at Jamaica Money Market Brokers.
"There will be a decline in interest income, so the nominal interest income on funds will go down but the real value impact depends on the inflation rate going forward," he said.
The impact on individual funds also rests on individual situations, he added.
"For companies that rely heavily on government securities, in longer-term GOJ bonds, they will see income being affected. It generally may fall, but a net US-dollar securities holder may not take a hit or companies that are net borrowers may see improvement in bottom line," he added.
The FSC estimates that 40.7 per cent of the $215.6-billion pension sector was invested in government securities up to September 2009.
However, the market is not static, and the level of investment income depends on the movement of interest rates in the future, said Lyn, who further recommends that funds in the process of winding down should be allowed to cash out their existing holdings rather than swap them for new securities.
Prime Minister Bruce Golding, however, at a meeting with pension fund trustees and other repre-sentatives to explain the debt-exchange programme, said there would be no room for individual dealmaking.
"I have not come here today to say that there is an alternative, because there is none," Golding told the gathering of pension fund managers, trustees and administrators.
"We have indicated to you that we have spent an enormous amount of time developing the programme - stress-testing it from every direction and angle - trying to determine where there are going to be stress points that we need to take into account and for which we need to make provision and provide support where required."
While voluntary participation in the programme among the funds is expected, the prime minister said that harsh penalties will be meted out to those who opt not to participate.
"There are options that the Government has under the terms of the contract that we will not be unwilling to exercise if indeed we have to take that course," he said.
"I don't want to sound threatening - I am just indicating to you that we have a responsibility to level the playing field," said Golding in a very stern presentation.
"Bear in mind that the exemp-tion to taxation that applies to pension funds is an executive decision taken by the minister of finance and that exemption will continue to be provided, if it is consistent with the levelling of the playing field," the prime minister said.
A removal of tax-exempt status for bondholders who decline to participate in the exchange could hurt the sector, said a represen-tative of the Jamaica Pension Fund Association, who asked for anonymity.
"A tax on pension funds would be entirely detrimental to the pension fund industry because the attractiveness of pension funds as a long-term savings vehicle for individuals would be undermined," he said.
"There are few, if any, countries that do not accord pension funds tax-favoured status. Altering the tax-favoured status of pension funds is the worst possible choice that could be made."
The debt swap is a precondition to an International Monetary Fund agreement which will give the Government access to US$1.25 billion of balance-of-payment support, and multilateral loans of up to US$1.1 billion.
The offer must have at least 90 per cent take-up to succeed.