Report: Pension, health care debts must shrink

Combined liabilities of well more
than US$1 billion have amassed in Cayman’s public sector pension and health
care systems, according to an independent report compiled for the local
government.

“A liability has been incurred
which future generations will increasingly have to meet in cash terms for which
an inadequate provision has been made,” stated the report completed last month
by US economist James Miller III, UK conservative party lawmaker David Shaw and
Cayman Islands Financial Secretary Kenneth Jefferson.

As previously reported in the
Caymanian Compass, estimates put the unfunded liability for the three Public
Service Pension plans administered by the Public Service Pensions Board at
nearly US$325 million by 30 June, 2009.

That is not an amount which comes
due immediately. Rather, it operates on a rolling 20-year period based on how
many people are participating in the pension plans and what estimated benefits
will have to be paid out.

The unfunded liability portion of
the pension plan only applies to those civil servants in the defined benefit
part of the plan – those who will receive monthly pension checks when they
retire.

However, according to figures from
the Public Service Pensions Board which were confirmed by Mr. Jefferson last
week, total pension plan assets were estimated at US $295 – well below the
unfunded liability amount.

According to the independent study
– dubbed the Miller Commission report – cash payments to support annual benefit
payments to the public pension system were due to increase from CI$20 million
this year, to CI$50 million in 2020, to CI$100 million in 2040.

That $100 million figure would be
approximately 43 per cent of the civil service’s annual payroll.

Moreover, the report states that
government retirees to date have been relatively few in number, and have caused
pension costs to increase slowly.

According to the Public Service
Pensions Board figures, there are a total of 8,341 people in the three pension
plans administered by government, including the Parliamentary Pensions Plan and
the Judiciary Pensions plan. Just 1,239 of those are currently retired.

Roughly half of those in the
pension system – about 4,200 workers – are participants in the defined contribution
pension plan; which means they will receive a lump sum pay out upon retirement
and do not add to the system’s current unfunded liability.

“As no current audited financial
statements are available, we are unable to comment on the ability to meet
future payments other than to say that it appears the government will have to
provide substantial and increasing funds if it wishes to support past pension
expectations,” the independent report read.

“This increasing annual cost would
have an impact on limiting the government’s capacity to spend money on new
policy initiatives…or it would require a continuing substantial increase in
revenues from new taxes, duties, fees or asset sales.”

The report recommended that
benefits accrued to those civil servants still in the defined benefit portion
of the pension plans should be revised to “reflect their average lifetime
earnings”. Right now, defined benefit plan enrolees receive two-thirds of their
final salary in pension payments. So a civil service employee who finished
their career making $60,000 a year would receive $40,000 a year in retirement.

The report also recommended that
there should be no difference in contributions required from government workers
in the defined benefit plan and those in the defined contribution plan.

Recommendations were also made that
the annual cost of living increase in pensioners’ benefits should continue,
based on a reasonable inflation index.

Health care benefits

The Miller Commission report noted
that a 2004 valuation of post-retirement health care benefits for retired and
current civil servants, as well as those no longer working in the Cayman
Islands, indicated the accrued liability for those payments had reached US $798
million.

That liability figure is now
expected to have exceeded US$1 billion.

However, the independent report did
not vouch for the accuracy of any recent estimates on health care liabilities.

“An up-to-date legal opinion and
actuarial report should be published immediately,” the report stated.

Currently, the government pays for
100 per cent of all civil servants health care premium costs.

“Benefits under the program should
be reduced to affordable levels, with some (co-payment) contributions required
for treatments,” the Miller Commission Report read.  

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1 COMMENT

  1. OH!! lets sell the government building while we keep our cushy jobs and fantastic perks. As long as I get mine, I don’t care where the desk sits . Matter of fact if they talk about me paying pension or medical, I will quit and go work in the real world and pay 50% pension and 50% medical; I cant wait to be competitive and customer focused.

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