Gov’t must pay more to support retirement plans
The government will have to increase payments to its main public sector retirement plan in each of the next two financial years to ensure a funding deficiency is addressed, Finance Minister Marco Archer said Wednesday.
The increased payments would come from government coffers, not from additional salary contributions by government workers, Mr. Archer said. Currently, civil servants contribute 6 percent of their salary toward the retirement system and government contributes a matching 6 percent.
According to an actuarial review of Cayman’s three public retirement systems, projected liabilities were outpacing projected assets in the retirement funds by some $178.3 million in a 20-year rolling period. That’s according to an evaluation of the funds conducted as of Jan. 1, 2011 – the latest data available.
This means Caymans’ public sector retirement system has an unfunded pension liability. If the country were to continue along the same path with pensions, the system would eventually run out of money.
However, Minister Archer said Wednesday that is not going to happen. “[The unfunded liability] is not a reason for immediate concern because the government does have some time to address it.”
Mr. Archer said Cabinet had accepted some recommendations with regard to future pension liability payments.
He said government made a “short term financial arrangement” that involved putting more cash into past service pension liability payments. In the current budget year, Mr. Archer said government would pay $19.7 million into the civil service retirement fund, including civil servant salary contributions. For the next two government budget years, that payment would increase to $23.75 million each year, including worker contributions.
There are currently two retirement plans for civil servants. Those who joined the service prior to April 2000 are in a defined benefit retirement plan and receive monthly pension payments, similar to salary, for the remainder of their lives upon retirement. Their spouses would also continue to receive the same benefit – if they outlive the retired civil servant – for the remainder of their lives. Those who joined the civil service after that date participate in a defined contribution plan, which operates more like a savings account from which withdrawals can be made at various times after retirement. This plan does not apply to any civil service employees who were hired after April 2000.
The unfunded liability of the public retirement system applies only to the defined benefit plan.
A Cayman Islands Public Service Pensions Board evaluation made public in January noted that massive increases in pension contributions would be required to keep the government’s civil service retirement fund afloat over the next decade.
As of Jan. 1, 2011, the pensions board actuaries noted that the actual cost of the defined benefit portion of the civil service retirement plan would require government to increase employee contributions to the fund from the current 12 percent of salary to 44 percent of salary.
The retirement plan is for all government workers. Separate plans for members of the Cayman Islands judiciary and elected lawmakers operate under different laws and have different funding requirements.
“The actuary has determined that a continuation of the current level of contributions to the defined benefit plan is projected to result in the depletion of the defined benefit allocated fund by the year 2026,” the board’s evaluation, contained in an annual report, noted.
To offset those concerns, Minister Archer said the Public Service Pension system would continue generating “robust” earnings in its investments to complement government increasing payments into the retirement fund.
The following recommendations were made regarding pension payments for participants in the public sector retirement plans, Mr. Archer said:
Payments for members of the judiciary in the defined benefit plan would be 10.7 percent of pensionable pay, while payments for those in the defined contribution plan would be 30 percent of pensionable pay.
Payments for members of the parliamentary pensions plan would equal 119.15 percent of pensionable pay for the defined benefit participants and 12.4 percent of pensionable pay for defined contribution plan participants.
Payments for civil servants in the defined contribution retirement plan would be 12.4 percent of pensionable pay.