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Gov't under fire over JDX effect on pension funds

Published:Friday | February 26, 2010 | 12:00 AM
Ethlyn Norton-Coke, tax specialist. - File

THE GOVERNMENT this week continued to receive a backlash from pensioners and pension fund trustees over the absence of any protective mechanism to cushion the income fallout this segment of the investing public will suffer from the Jamaica Debt Exchange (JDX) programme, which settled on Wednesday.

It is believed that a sizeable amount of the nearly $200 billion held in private pension funds is invested in government bonds, while the Government's National Investment Fund (NIF) confirmed that up to December last year it had invested about $30 billion in domestic government bonds. The NIF invests National Insurance Scheme contributions and pay benefits from the fund, which is said to be valued at close to $60 billion at December 2009.

An aide representing Finance Minister Audley Shaw at a service club meeting in Kingston Wed-nesday evening received the full brunt of the anger of pensioners and trustees who attended to hear the Government's position on the recently signed International Monetary Fund agreement and the JDX, a technical debt default, under which more than 340 government bonds have been recalled and replaced with 23 new longer maturities and lower rates.

The participants turned up the heat on Dr Wayne Henry, technical adviser to the finance ministry, who spoke at the Kiwanis Club of New Kingston meeting on the behalf of the minister, who had reportedly left the island to attend a meeting in Washington, DC.

Lack of indemnity

Ethlyn Norton-Coke, tax expert and pension trustee, raised the issue of the lack of indemnity for pension trustees against possible legal action by pension fund investors seeking redress for the income loss to flow from the near seven percentage-point average cut on securities under the JDX.

The new instruments at various coupon rates, averaging 12.25 per cent, replace bonds with original interest rates averaging 19 per cent. And while a US$950-million support fund has been set up for banks and near-banks that run into liquidity problems arising from the debt swap, no such lifeline has been extended to pension funds, many of which have invested heavily in government paper.

When journalists quizzed new central bank Governor Brian Wynter on the matter recently, he replied, pointing out the known fact, "Pension funds are not financial institutions."

Meanwhile, at the New Kingston meeting, Norton-Coke pointed out that trustees, with a legal obligation to supervise the performance of the trust invest-ments, including assessing the Government of Jamaica's ability and likelihood to pay the promised return, may find that they are in breach of such duty. She said several trustees were at risk of being sued by pensioners as a result of participating in the JDX, which closed with near universal participation.

"What are you doing to put legislation in place to protect the trustees?" she asked Henry.

No new laws

While providing the questioners with no definitive response to questions, Henry later told the
Financial Gleaner
that no such law was being contemplated by the Government.

"As far as I know, no legislative amendments are being considered at this time. The nature of the trustee-beneficiaries relationship is such that trustees will be made accountable and to indemnify would go against the general grain of the principal-agent relationship," he said.

He added his opinion that it did not seem reasonable for persons to consider legal action against pension fund trustees who opted to participate in the exchange, which he said settled Wednesday with a 99.2 per cent participation rate.

No income-loss support

Other members of the audience who identified themselves as having money in pension funds which invested in government securities made public their displeasure at the absence of income-loss support for pension fund investors.

"There is support for the financial institutions, but where are the funds to support a person like me who has a son in university and needs to pay the tuition?" one female attendee asked.

"What do I tell the university which is on the verge of kicking my son out because I can't pay the tuition?"

Henry said while the Government was sympathetic to the concerns, the JDX was an expression of sacrifice in the national interest.

"We are grateful to the Jamaican economy and the people who participated. It is a sacrifice and, of course, the Government is aware of its own obligations under this agreement," he said, touting the government line.