Unless government increases employee contributions to the main civil service retirement fund, financial advisers estimate that the pension fund for most older government workers and current retirees could be depleted by 2024.
The projection involves the “defined benefit” portion of the civil service retirement plan managed by the Public Service Pensions Board. The defined benefit plan, which provides a monthly payment to retirees based on their final month’s government salary, was closed to new government employees in April 1999. After that date, the vast majority of government hires have contributed their pension to a defined contribution plan, which operates more like a 401k retirement savings account and does not secure a “lifetime” benefit for plan members.
As of Jan. 1, 2014, Public Service Pensions Plan actuaries estimated that the civil servants retirement plan was underfunded by more than $226 million, meaning the plan’s assets would be significantly lower than its liabilities when estimated over a 20-year period. It is not a debt or shortfall that government has to pay immediately. However, actuaries were concerned enough about the status of the fund to determine 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 2024.”
That comment was contained in the Public Service Pensions Board’s annual report for government’s 2014/15 budget year. The unfunded liability in the civil service pension plan is largely attributed to the defined benefit, or monthly pension portion of the plan.
The financial evaluation of the fund recommends that government increase its 12 percent of salary contribution toward civil servant retirement plans to between 16 percent and 19 percent of salaries. If such action were taken, it would represent a 4 percent to 7 percent pay cut for civil servants.
Now, the government is putting in more than $11 million each year, in addition to the 12 percent contribution for civil service employees, to make up the projected shortfall in the retirement plan. Financial Secretary Kenneth Jefferson said Friday that amount is likely to be required in future years to ensure the retirement plan remains solvent.
However, the Public Service Pensions Board stated in the annual report that its objective is to make the civil service retirement plan “fully funded in 20 years” from the Jan. 1, 2014 actuarial report date. The board indicated that contribution rates for retirement plan members on the defined contribution scheme would not have to increase, but payments to the defined benefit plan would likely have to increase.
Acting Auditor General Garnet Harrison, who evaluated the pension plan’s financial statements, urged Cabinet to issue regulations prescribing the new contribution rates.
The current 12 percent contribution rate, he said, is based on a financial evaluation that is more than a decade old.
“The continuation of the current scenario….for the Public Service Pensions Plan will be insufficient to meet benefit payments and expenses,” Mr. Harrison said.
Problem gets worse
Between the actuarial report dated Jan. 1, 2014 and the Public Service Pensions Board annual report, dated June 30, 2015, the unfunded liability in the civil service pensions plan increased.
“The funded status of the pension plans has likely deteriorated further since the beginning of the year,” government’s financial advisers indicated. “Funded position is likely to continue deteriorating unless contributions are increased significantly.”
The unfunded liability in the civil service retirement plan between 2014 and 2015 was estimated to have increased by some $25 million.
Retirement fund losses were blamed on lower-than-expected returns, as well as on lower contributions from fund participants.
The separate pension plan that provides retirement benefits to Cayman Islands legislators is “severely underfunded,” according to actuaries.
As of Jan. 1, 2014, the plan listed assets of nearly $8.5 million against liabilities of more than $22.5 million.
That means the plan is only 36 percent funded, according to the 2014 estimates.