Understanding public service pensions

There have been several articles
and news reports released recently relating to the operating costs of the
Public Service Pensions Board. The most recent article printed in the Caymanian
Compass on 24 March, 2010, titled “Gov’t pensions cost more”, attempted to
compare the PSPB to local private pension plans, specifically the Silver Thatch
and Chamber of Commerce (Chamber) plans. This article, and others printed prior
to it, has brought several important topics to the forefront. The PSPB would
like to take this opportunity to address these topics and, to clarify
misconceptions that exist in the media and amongst the public. 

Administrative complexities

A common misunderstanding is that
the PSPB can easily be compared to other pension plans on the Island. This idea
seems straightforward but is actually quite complicated. One key reason is that
the PSPB oversees the administration of both defined benefit and defined contribution
systems, while Chamber and Silver Thatch exclusively manage DC plans. In
addition, the organisation is also responsible for the uniquely separate
Parliamentarian and Judicial plans as well as the Government’s Ex-Gratia
scheme. The administration of the various plans is quite a task once all relevant
components are accounted for.

Another misconception relates to
the extent of effort required to administer the three plans. The PSPB’s
administrative functions are more comprehensive than those of the Silver Thatch
and Chamber plans, due largely to the active role played in legislative
reviews, oversight and plan strategy. As a result, the plan absorbs fund
actuarial, legal and consultancy expenses as well as employment costs for
specialized staff.

The ratio of actives to pensioners
is another important factor when contemplating administrative costs.  Retired participants require ongoing monthly
payments and administrative services including health benefit eligibility
determination and enrolment. Currently, the PSPB administers benefits for
approximately 1,250 pensioners.

An important, but frequently
overlooked fact is that the PSPB office, established in 1999, administers
benefits accruing since 1 January, 1940 – as per the Public Service Pensions
Law. This requires the verification of historical employment information which
is often a laborious, and time consuming process. 

Over the years, extensive
legislative reforms have occurred in an effort to reduce Government’s pension
liabilities. One change introduced to contain the growing Government liability
was the closure of the DB plan and introduction of the DC plan in 1999. The
administration of both introduces inherent complexities.

Understanding these facts is
crucial to developing a comprehensive view of the PSPB’s pension administration.
The bottom line however, is that the public sector DB and hybrid DC pension
plans do not fit neatly into the DC cash balance framework. It is therefore
nearly impossible to arrive at a meaningful comparison.

Transparency

With respect to its financial
reporting, concerns that the PSPB has deleted financial statements from an
online file are unfounded, as the only electronic financial information exists
in annual reports, which continue to be maintained on the organisation’s
website. The PSPB does admit to being backlogged with respect to its reporting
and has made significant progress. Working tirelessly to rectify this situation
– completing nine financial statement audits and six annual reports in the last
7 years – the PSPB is now poised to be current and compliant by December 2010.
Despite this reporting backlog, information regarding performance figures,
specifically current rates of return, have always been included in the annual
benefit statements and are now published in the recently established
newsletter.

The PSPB takes its fiduciary
responsibility to participants and pensioners seriously and is currently
undertaking its tri-annual organisational review, a testament to the
organization’s commitment to continued improvement. The PSPB appreciates the
public’s concern, and will continue to work with the Government to ensure that
public service pensions are administered and regulated as efficiently as possible,
while maintaining quality and being compliant with the respective laws and good
governance practices.

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