Working hard all your life and diligently contributing to your pension plan means you will automatically enjoy a happy retirement, spending time doing the things you love – fishing, travelling, gardening or playing golf. Right?
Not necessarily. According to some recent research in the United Kingdom (by pension experts MGM Advantage) the average retired Brit feels they need almost CI$10,000 a year more to be financially comfortable. And remember, UK pensioners receive a state pension in addition to company and private pensions, something that does not happen here in Cayman.
Globally, pension funds are receiving a double blow – not only are people living longer and therefore needing more money for their old age, but the weakened economy has also taken its toll on the investment pot, reducing the final amount we will have available to us when we retire.
On average, in the UK, a man will live for 17 more years after retiring at 65, while a woman will live for nearly another 20 years. Here in Cayman, with the age at which pension can be drawn being even earlier at 60, savings need to stretch even further.
UK insurance and savings company LV says that since 2000, UK pensioners have seen living costs rise by 33 per cent. Their biggest expense, food and non-alcoholic drinks costs them around 14 per cent of their total annual spending, followed closely by utility bills and travel/gas. In Cayman we are feeling a similar pinch when it comes to rising food and fuel costs and these statistics are a reminder that we all need to assess our pension contributions to ensure that we have saved enough to enjoy our retirement.
Thankfully it’s not all doom and gloom. There are a number of measures you can take now to ensure that you are getting the best out of your pension.
Step one is to work out how much you think you will need to live on in your retirement. Your pension provider can help you, along with a variety of online planners, but generally you will need to work out how much you are currently saving via a pension plan and any other savings plans, how much you will likely be spending in retirement and therefore how much money you will need. The difference between how much you are saving and how much you anticipate spending may well be a surprise to you, with a possible sizeable shortfall.
There can be a number of reasons for this shortfall, one of the most significant being the length of time you have been making pension contributions. Since the Pensions Law in Cayman has only been in effect for 14 years, there will be many employees in the Islands who have worked for 20 or 30 years, but who have only been contributing over those past 14 years.
A second example of how this shortfall arises is in the case of workers who earn more than the legal cap amount of $60,000, but for whom contributions are only made up to the required cap amount.
Finally, the market will play a huge factor. In the existing very-low interest rate environment, as well as the 2008 financial crisis which drove down equities worldwide, we have all been facing an investment market headwind.
Making the right choice when it comes to a pension plan provider is crucial. According to The National Pensions Law, employers in Cayman can register their own pension plan with the National Pensions Office or participate in one of six certified multi-employer pension plans. While the choice of pension fund provider in Cayman may be relatively narrow, there is still sufficient choice to give you the ability to be pro-active in this choice, or assist your company in assessing the best choice for its employees as a whole.
There are various criteria that you should be carefully considering when choosing a pension plan provider.
Returns are an obvious starting point but you should also take into consideration administration fees, as these may vary. In addition, you must consider how the fund is managed to ensure the highest level of professionalism and therefore protection of the assets of the fund. Risk management can be just as important if markets continue to be volatile, and you should consider the level of risk taken by different Plans, particularly for employees approaching retirement age.
We also suggest that you should know if the fund conducts diligent risk management to ensure that there is a careful and rigorous selection of the fund’s investment managers.
In Cayman, by law, employees are not required to pay more than 5 per cent of their earnings into their pension plan and their employer may not contribute less than 5 per cent of that employee’s earnings into the plan. However, you can, and probably should, increase your payments into your pension plan with additional voluntary contributions.
Although people generally stick to contributing their minimum contributions it is definitely worth considering making AVCs. AVCs can boost your pension account balance to get you to a level where you are able to look forward to a comfortable and enjoyable retirement.
For more information and assistance on any of these suggestions, talk to your pension plan provider.