Two year pension break will hurt

An evaluation of the two-year
pension suspension or “holiday” for non-Caymanian private sector workers shows
their retirement funds would be impacted significantly by the period of
non-payment.

The review was done by actuarial
consultants for the Silver Thatch pension plan a few months prior to the
Legislative Assembly’s vote on the pension suspension last week.

The suspension period is for one
year for Caymanian private sector workers and two years for non-Caymanians. Government
employees are not included in the amended legislation that approved the payment
suspension period.

The pension suspension only awaits
final assent by the governor before becoming law. That is expected to come
within the next few weeks.

The Silver Thatch actuary’s
analysis only looked at the effect of the two-year break.

The review found that a 25-year-old
pension plan participant making $50,000 per year with an assumed four per cent
average salary increase each year until their retirement would lose $193,000 in
their retirement account balance under the “most likely scenario” with the two-year
break in pension payments.

The projected shortfall in the
retirement plan participant’s account would be between $80,000 and nearly
$700,000, depending on future investment performance.

That figure also assumes a
retirement age of 65, as well as assuming that annual account contributions
would be 10 per cent of the workers’ salary – five per cent from the employee
and five per cent from the employer – with no additional amounts contributed.

For a 35-year-old worker operating
under the same salary, retirement age and pay increase assumptions, their retirement
account balance would be $102,000 less than if there were no pension suspension.

The estimated shortfall in the
35-year-old worker’s account was between $41,000 and $218,000, depending on
investments.

For a 45-year-old worker, the most
likely scenario would be a $38,000 loss in retirement savings. The project shortfall
there would range from $23,000 and $85,000.

The greater potential losses occur
in the accounts of younger workers who have their money invested for longer
periods, according to the analysis.

“As evidenced
by these calculations, particularly as it pertains to our younger participants,
it really is an eye opener as to why they should continue to make
contributions,” Silver Thatch board chairman Carlyle McLaughlin said. “Though
there might be an immediate, short-term gratification during the interim, in
the long run, inarguably – you stand to lose by not investing.”

The two-year pension suspension
applies to all work permit holders, including those designated key employees
(who have the right to remain in Cayman for up to nine years consecutively),
and non-Caymanians who are permanent residents.

The “holiday” period must be
voluntarily entered into by both the workers and their employers before it can
take effect. The agreement means that the employer would no longer have to pay
the statutorily required five per cent of salary contribution into the
employees’ retirement account. The employee could choose to keep paying their
own five percent contribution or receive that as part of their salary.

Employment Minister Rolston Anglin
said last week that the legal requirement to make pension payments for
non-Caymanian workers was initially to have been eliminated entirely, but
government eventually decided to implement the two-year suspension period
instead.

“We see 24 months as a window that
is desirable,” Mr. Anglin told the Legislative Assembly last week, adding that
unless workers get key employee status and then successfully apply for
permanent residence they will generally not be allowed to stay for more than
seven years at a time in Cayman. There are certain exceptions to that, for
instance if a foreign national marries a Caymanian.

Mr. Anglin said government’s first
priority had to be to those for whom Cayman will be a permanent home.

“If we do not secure
pensions, the ultimate responsibility to Caymanians will fall to the government
through the Poor Persons Relief Law,” he said.

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