Public Service system in deficit
An actuarial valuation tabled in the Legislative Assembly last week of Public Service Pensions as of 1 January, 2005, showed that it had a deficiency of CI$165.7 million.
The actuary firm Watson Wyatt Worldwide performed the actuarial valuation, which is required every three years by the Public Service Pensions Law (2004 Revision).
The conclusions and recommendations stated in the actuarial valuation were blunt:
‘The Fund continues to be severely underfunded with respect to the benefit obligations in respect of service to date and without allowance for future pay increases, but allowing for future cost-of-living increases to pensions,’ the valuation stated. ‘It will continue to remain underfunded for the foreseeable future.’
The report did point out, however, that the liability for inactive members – which was CI$93.9 million at the time of the valuation – was more than covered by the fund’s CI$134.9 million at the time.
Financial Secretary Kenneth Jefferson said there was a plan in place to eliminate the actuarial deficiency over a 20-year period. In order to eliminate the deficiency, contribution rates will be increased.
‘The public should not jump to the incorrect conclusion that the actuarial deficiency is a matter that would need to be eliminated within a very short space of time,’ he said.
Mr. Jefferson explained that pension plan participants are of a considerable range of ages, meaning only a percentage of them will reach the age of eligibility for benefits in any given year.
In addition, the underfunding relates only to public servants who have the defined benefit plan. Defined benefit pension plans were no longer offered after 1 January, 2000; instead new public servants have defined contribution pension plans.
‘It’s a finite population of public servants that are linked to an actuarial deficiency,’ Mr. Jefferson said. ‘That figure is not increasing.’
However, the actuarial deficiency did grow CI$1.4 million since the 1 July, 2003, actuarial valuation, which was done but never tabled in the Legislative Assembly. Poor investment performance was mostly to blame.
‘The fund assets earned an annual rate of 3.23 per cent during the 18 months prior to the valuation date, compared with the expected rate of seven per cent,’ the valuation stated. ‘If the asset performance had been in accordance with expectation, the deficiency would have decreased by CI$7.8 million.’
The actuary valuation assumes certain figures agreed on by the Public Service Pensions Board and the actuary, including a seven per cent interest rate/return on investment, a 2.5 per cent rate of inflation, salary increases at four per cent, pension increases of 2.5 per cent, and a retirement age of 57.
‘The interest rate assumption is very crucial to the liability position and ongoing funding requirements,’ the actuary valuation stated as a conclusion. ‘Consequently, continuous monitoring of investment performance and portfolio composition will be needed in order to ensure that investment rates of return and the actuarial valuation interest assumptions are aligned properly.
‘Continued poor investment returns will also be directly detrimental to defined contribution participants.’
Mr. Jefferson said the Public Service Pensions Board has recommended to Government it adopt the contribution rates set out in the actuarial valuation.
Under the recommendation, those on the defined contribution plan would pay 13 per cent of their salary.
Those on the defined benefit plan would pay their normal cost plus amortization of deficiency. What exactly that would mean in the way of increased contributions by those on defined benefit plans is unclear, and efforts to obtain an explanation from the Public Service Pensions Board were unsuccessful through press time.
Mr. Jefferson also tabled actuarial reports in the Legislative Assembly last week on the Parliamentarians Pensions Plan and the Judicial Pension Plan.
The former was found to have an actuarial deficiency of CI$13.3 million, while the latter had an actuarial surplus of CI$55,325.