Greater restrictions will be placed on the transfer of pension funds out of the Cayman Islands, particularly when those transfers involve lump sum “refunds” to individuals who have left the islands, according to legislative changes approved this week.
The amendments to the National Pensions Law, which have altered more than 50 sections of the legislation, were approved by a majority of Cayman Islands lawmakers late Wednesday.
The amendments represent the first complete overhaul of the legislation since it came into effect 18 years ago.
The National Pensions Law governs the operation of private sector workers’ retirement funds in the islands. A separate law governs regulations surrounding the three public sector retirement funds.
According to the legislation, which still requires a third reading and assent by the governor, the ability to obtain a lump sum refund from the individual’s pension fund would be removed, regardless of that person’s immigration status.
The removal of the refund provision does not mean an individual would be prevented from transferring the money into a retirement savings account overseas. However, it would prevent the person from receiving a lump sum in an immediately accessible bank account.
Also, the amended law will also require a longer time before the money can be transferred into an overseas retirement savings account.
Employment Minister Tara Rivers said Wednesday that the enactment of the new pensions legislation will not lead to an immediate halt on pension refunds. Rather, it sets an order – with a date to be determined by Cabinet – when pension refunds would no longer be available. Then, pension refunds would be available only under two specific circumstances.
The first instance would be when an employee has left the islands and their pension earnings total less than $5,000. In that case, Ms. Rivers said, it would be left to the pension plan administrator’s discretion as to whether the employee can receive a refund.
In the second instance, if a person who has left the islands is already at the age of pension entitlement – 65 under the new legislation – and due to age, cannot transfer the money into a retirement savings account, a refund would be provided.
Minister Rivers said the National Pensions Law “concept” that allowed the lump sum refund to pensioners who have left the islands seems to be “a bit of an anomaly” internationally.
“The pension process is a forced savings for retirement,” she said. “Pensions shouldn’t be seen as some lump sum windfall to begin with.”
Ms. Rivers referenced situations in the past when a worker stopped making contributions to the pension system for at least two years and left the islands for six months, then opted to receive a refund from their pension account and later returned to the Cayman Islands to start “at square one” with their retirement savings again.
Ms. Rivers said the bill has changed other rules to try and prevent this situation. The new legislation requires any person who wants to transfer the Cayman pension savings into an analogous retirement account overseas to be absent from Cayman for two years. Under the current bill, the period of absence is only six months. The person will also have to have stopped contributing to the pension plan for at least two years prior to the transfer, but that requirement exists in the current law.
The new National Pensions Law sets Cayman’s “normal” private sector retirement age at 65, up from 60. It also requires higher earners to put more into their retirement savings each year.
Age 65 is referred to as “the normal age of pension entitlement” in the legislation – in other words, the age at which Cayman Islands workers can collect their retirement earnings. It is not a mandatory retirement age, and should not be treated as such, Ms. Rivers noted.
“[Forced retirement] is not the intent of the law,” the employment minister said.
The legislation increases a worker’s maximum annual pensionable earnings from $60,000 per year to $87,000 per year. This means the employee and their employer must contribute a mandatory 5 percent of the employee’s salary to the retirement fund, up to $87,000 a year. Previously, if someone earned more than $60,000 in a year, employers would pay their 5 percent of the pension contribution directly into a worker’s salary.
Ms. Rivers said the retirement age changes in the law, as well as the increase in pensionable earnings, should serve to boost Cayman’s “income replacement” for retirees via their pensions to an acceptable international standard.
North Side MLA Ezzard Miller wondered how that could be, given that maximum withdrawals from a defined contribution retirement fund each year is $12,000. He suggested that $1,000 a month would not serve as “income replacement” for someone earning $6,000 to $8,000 a month prior to retirement. Despite the major and numerous legal changes, Ms. Rivers noted that more changes may be needed in Cayman’s retirement savings plans.
“I am under no illusions, it is not the end of the road,” she said. “We are a lot further down the road than when we first started.”
“You’re going down the wrong road,” Mr. Miller retorted. “This bill … is really nothing more than fancy window dressing. [It] will not, in any way whatsoever, improve the chances of a poor person … in this country ever earning a pension under the pensions law.”