A report that was withheld from public release for more than three years has revealed that both the government workers’ main pension plan and the parliamentarians pension plan were “severely underfunded” and that the problem was likely to grow within the next decade.
The report – dated 1 January, 2008 – was completed by a consultant for the Public Service Pensions Board in March 2009. It was only released this week following two open records requests made to the board by the Caymanian Compass.
“Pension amounts are expected to grow very rapidly over the next 20 years as the majority of the DB [defined benefit retirement plan] participants approach retirement ages,” the report, completed by pension board actuary Subramanian Sundaresan.
The report noted the public service retirement fund would continue to remain underfunded in the foreseeable future, but that liability for inactive members – current pensioners and their beneficiaries – is covered for the time being.
That’s not the case for the parliamentary pensions fund; the fund that pays retirement benefits to legislators, according to Mr. Sundaresan.
“Assets allocated to the plan cover only 24 per cent of the past service obligations,” the actuarial evaluation noted. “The plan’s assets are also insufficient to cover the benefits currently in payment.”
The parliamentary pensions plan had about $4.7 million in assets as of 1 January, 2008 with $19.4 million due in past service liability. Those figures created an unfunded liability, or actuarial deficiency of $14.7 million.
The main public service pension plan had assets of $174.3 million and past service liabilities of $366.7 million; for an unfunded liability of $192.4 million.
An unfunded liability is not an amount that is due currently. Typically, it is a rolling estimate of how much a retirement plan would have to pay to meet its projected obligations going a certain number of years into the future. For the civil servants and parliamentary retirement plans, those estimates are done on a 20-year basis.
However, if the liability is allowed to grow unchecked, the retirement system will run out of money and will not be able to pay pensions it owes. For both retirement plans, the 2008 report noted that the “funded ratio” – the ratio of available assets to liabilities – had improved.
However, the actual unfunded liability figure for the civil servants’ retirement plan grew by approximately $39.5 million between 2005 and 2008. This was blamed on higher than expected salary increases, pension increases and less contributions received by the fund.
This was identified as a major problem in Mr. Sundaresan’s evaluation.
“Non-payment of contributions on time can affect the funding of the plan adversely and the trustees and the Public Service Pensions Board should devise means to ensure that this is kept to a minimum,” the 2008 report noted.
Since the 2009/10 government budget, past service liability payments to the pension system have been reduced to almost nothing. Previously, government was paying $12 million to $14 million per year into the fund.
It was recommended that the Public Service Pensions Board perform an updated evaluation of the retirement system before the next review was scheduled for 1 January, 2011.
However, that was not done. The current actuarial evaluation from the board is nearing completion.
The “funded ratio” for the parliamentarians retirement plan also improved – from 14 to 24 per cent – between 2005 and 2008.
However, the asset value of the plan by 1 January, 2008 was actually $1.9 million, the report states, not the $4.7 million stated.
“An additional $2.980,538.66 was paid into the fund on November 25, 2008 in respect of contributions for periods prior to January 2008,” Mr. Sundaresan noted.
“The resulting discounted value of this additional contribution was $2.8 million.
The total value of assets taken into account for this valuation was thus $4.7 million.”
Mr. Sundaresan continued that the parliamentary plan’s financing was “very sensitive” to contributions being made on time as well as “the incidence of retirements and the consequent lump sum commutation being paid”.
“This needs to be constantly monitored,” he said.