Pension holiday could hurt employees

Employees who take advantage of the
pension holiday could be putting their future livelihoods and the country in
economic danger, a presentation by the administrator of the Silver Thatch
pension plan has shown.

Illustrating that one or two years
of not contributing can have a significant impact on the final pension pay-out
for individual savers, Brian Williams, the CEO of Saxon Administration,
presented several scenarios.

Assuming a $50,000 annual salary, a
salary increase of 4 per cent per year and a retirement age of 65, Mr. Williams
estimated losses from $23,000 to $85,000 for a currently 45 year old to losses
ranging from $80,000 to $697,000 for a 25 year old, depending on the future
investment performance of the pension plan.

The impact on Cayman’s economy, in
terms of lower spending during retirement, would be corresponding, he said.

For pension providers lower pension
contributions will mean higher expense ratios, which could affect returns, he

Mr. Williams was speaking at a breakfast
session hosted by the Cayman Islands Society for Human Resources Professionals on
Wednesday 5 May.

The event explained the purpose of
the National Pension Amendment Law (2010) and the implementation of the pension
holiday in terms of the application procedure and other issues.

Asked what he would recommend
employers and employees to do, Mr. Williams said: “From an employee point of
view you can only continue [contributing] because you lose 5 per cent [employer

Central to most questions of the 50
attending HR professionals was the voluntary nature of the law and the timing
of any pension contribution suspensions.

Mr. Williams explained that the
amendment of the pension law still requires every employee, including new
employees, to be members of a pension plan, even if employee and employer agree
to the pension holiday.

To take advantage of the pension
holiday both employer and employee need to sign the application form.

As the pension contribution is
entirely voluntary for both parties, employers cannot dictate the pension
holiday to their employees, emphasised Acting Superintendent of Pensions Amy

Faced with the scenario where an
employment agreement explicitly states that the employee agrees to the suspension
of pension contributions, Mr. Williams stated that in his opinion this would
violate the Pension Law’s requirement to be member of a pension plan.

If employees signed such an
agreement they would have signed under duress, added Ms. Wolliston and asked
pension administrators to direct such cases to the National Pensions Office.

Ms. Wolliston said employers needed
to have a discussion with their employees asking them whether they would want
to discontinue pension contributions for the time period allowed by the law.
The period ends on 25 April 2011 for Caymanians and on 25 April 2012 for

She recommended that HR
professionals should take the necessary discussion as an opportunity to explain
why a suspension of pension contributions is not in the best interest of the

Administrators are required to
approve an application within seven calendar days. If approved the pension
holiday will take effect on the date the application was received by the
administrator, who will issue a certificate showing the effective date.

Once the approval has been given it
is not possible to reverse the decision, for example if employees change their
mind about the pension holidays.

In practice employers and employees
could only agree to make voluntary contributions instead.

Mr. Williams pointed out that
delinquent employers would not be able to apply for a pension holiday. Once the
pension plan provider receives an application for pension contribution
suspension signed by the employer and the employee, the administrator will only
approve the application if there are no outstanding pension contributions.

 In addition the approval can be revoked if
future contributions for those employees still participating are late, he said.

The obligation of pension plan
administrators to notify the NPO of any delinquent employers is still in
effect, said Ms. Wolliston.

The minister responsible for
pensions, Rolston Anglin, is contemplating changing the fines process from a
court action to an administrative action to give the regulator more power, stated
Mr. Williams.

In his experience take-up of the
pension holiday has been quiet so far, because most people realise that they do
not want to lose the employer contributions, Mr. Williams said.

Local Story

Brian Williams, CEO of Saxon Administration
Photo: Michael Klein