Private pensions fall short

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Many private pension funds in the Cayman Islands don’t collect nearly enough from employers and employees to pay retirees an amount that would sustain them through their retirement, according to valuations of the funds filed with the government last year.  

The problem with private pensions has been well known since 2007, when consulting firm Mercer Human Resources studied pensions in Cayman for the government and criticized the inadequacy of the plans. Little has been done to address the recommendations in the report.  

According to the valuations, many employees with private pension funds could be left with a quarter of their salary in retirement if they do not make additional contributions. 

The amount of money people receive from their pension plan during retirement depends on how much they contributed while working, and how long they have been participating in the plan. 

Mario Ebanks, director of the Cayman Islands Department of Labour and Pensions, said he is “very concerned” about the state of private pensions. “We are going to have a lot of people reaching retirement age with a very small amount of income to rely on,” he said. 

“Unless you have an increase with investment income or contributions,” Mr. Ebanks said, retirees could find themselves with very little income. 

Of the 16 private pension plans overseen by the Department of Labour and Pensions, more than half would need to increase contributions, from the low end of 17 percent of total salary to, in one case, the high end of 193 percent, according to data obtained by the Cayman Compass from a Freedom of Information request. 

According to a full evaluation of the Silver Thatch Pension Plan, provided by the company, if someone starts a job with a pension at age 25, earning about $35,000 a year, they would have to make an average of about 17 percent in contributions over their career to be able to retire with 60 percent of their salary. The mandatory contributions are 5 percent each for employers and employees, so the employee would have to elect to contribute a total 12 percent of salary to hit the target for retirement income. As an employee gets older and, presumably, makes more money, the standard of living will increase along with the recommended retirement savings. 

Mr. Ebanks said that making additional voluntary contributions can have a significant impact on how much employees will have to live on in retirement. Based on what Mr. Ebanks sees come across his desk every day working with pensions, he estimated “probably 20 [percent] to 25 percent of people are making additional contributions.” 

Victoria Taylor, finance manager with Saxon Pensions, said, “The [2007] Mercer Report made it quite clear that these 10 percent contributions were not going to be sufficient.” 

Taylor pointed to the lock-in requirement for voluntary contributions, which means people cannot withdraw any extra money they put in the fund, as “the main driver in why we’re not seeing additional contributions.” 

“People are scared to make that commitment,” she said. People would be more inclined to put additional money in their plans if they could withdraw it in case of a medical emergency or to put toward a large purchase, such as a house, Ms. Taylor said. 

Appraising the funds 

Last year the Department of Labour and Pensions required each of the private pension plans operating in Cayman to submit an actuarial valuation, essentially having the pension funds appraised. 

Of the 13 defined contribution plans in Cayman, all would need additional contributions from employees to reach the minimum recommended 60 percent of salary in retirement. Looking at each plan as a whole, most would need the average employee to put in an additional 10 percent to 15 percent if he wants to have roughly two-thirds of his salary in retirement. Without those contributions, according to the data in the report, employees could earn only about a quarter of their salary in retirement. 

However, the numbers for individual employees vary widely, depending on how close they are to retirement and how long they have been contributing. (Note that Cayman’s National Pensions Law has only been in effect for 16 years, so there is no guarantee that employees in their 40s and older would have started saving anything toward retirement during the first years of their careers in Cayman.) 

On the low end, one of Cayman’s private funds would need only an additional 1 percent contribution for an employee to reach 66 percent of salary during retirement. On the high end, another fund would require anywhere from 31 percent to 193 percent depending on the age of the employee – that’s anywhere from a quarter of an employee’s paycheck to almost twice their annual salary, based on how long they have been in the pension fund. 

The information received by the Compass has the names of the pension plans redacted, but the newspaper has asked for a review of those redactions. The Department of Labour and Pensions has not yet made the names of the plans available. 

In Cayman, there are 13 defined contribution pension plans in which the value in retirement is based on how much employers and employees contribute. The other three plans in Cayman are defined benefit plans, in which the retirement benefits are locked in for employees after retirement. The defined benefit plans represent a small number of employees in Cayman: one has only two employees and a second has no active employees locally. The third defined benefit plan is listed as having no outstanding issues. 

Little progress in seven years 

The 2007 report found that the mandatory 10 percent pension contribution falls short of what is needed for employees to have the recommended 60 percent of their salary during retirement. Data from the Department of Labour and Pensions on private pension funds show that the shortfalls continue, and employees would need to make significant additional contributions if they want to have what, according to the report, would be considered a reasonable salary in retirement. 

The 2007 report by Mercer found the mandatory 10 percent contribution would not “provide adequate income security.” The report also cites a “lack of understanding regarding the need and level of retirement savings required to support a minimum standard of living.”  

That report made several recommendations, including increasing retirement age from 60 to 65, removing the lock-in requirement for voluntary contributions, and increasing the minimum mandatory contribution from 10 percent to 12 percent, with the employer and employee each paying half. 

None of those recommendations has made it into law. Mr. Ebanks said only one, the increase in retirement age, is up for debate in a current revision to the Pensions Law. 

Mr. Ebanks explained that the economic downturn since 2008 hampered any discussion of increasing the mandatory contribution. “The National Pensions Board found there was unlikely to be an appetite for an increase,” he said. 

“That’s a matter for the government to consider,” he said. 

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Mr. Ebanks

1 COMMENT

  1. Without a government funded pension system, most will fall far short of their basic needs in retirement through the private system. It would be incredibly difficult to implement a government funded system here without an income or payroll tax though. The figure stated above of saving 17% of your income from age 25 is probably accurate as a minimum, however this percentage increases for every year you delay. Most would be encouraged to save 25% of income and invest in mostly stocks over a long period of time. Sadly most won’t take this advice or see it as too difficult.

    Another problem the article and editorial doesn’t address is the poor selection and performance of the private plans in Cayman. High fees and sub-par returns pretty much sums up the state of them.

  2. Yes Mr Walser, a very fair summary, but I would go a bit further. The choice at the time was to allow multiple managers, with the result that a number of local businesses ran their own schemes, so a fund that could have been big enough for the best international talent was spread into tiny local funds.
    Second, there is no local inclination to save, and so even the 5% personal portion was resented making it easy for employers to persuade people that the scheme could be ignored. That, coupled with no apparent attempt to bring errant employers to book meant that it was easy to default.
    As you say, a sensible number would be at the 25% level from age 25, but given the tendency to use a monthly income to finance borrowing, then saving isn’t even part of the thought process!
    I well recall a staff member coming to me with the news that her monthly income was swallowed by the repayments for her car (Lexus, high range and loaded), mortgage, her house was twice the size of mine, and childminder ( no partner in sight). What chance of persuading her to downgrade and save?

  3. I was present – as was Mario – at the birth of the compulsory private pensions scheme, and I well remember that the intention was to provide a *top-up* for individuals’ savings. It was NEVER intended to provide 100% of what would be required in retirement.

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