Public pensions urge government support for funding plan

Cayman’s Public Service Pensions Board said Tuesday that it is “looking forward” to government’s continued cooperation to ensure long-term stability in the three public sector retirement plans it manages.

The board’s statement was made in response to a Cayman Compass article published Monday which revealed a consultant’s estimate that the main civil service retirement fund for most older government workers and current retirees could face depletion by 2024.

The projection involves the “defined benefit” portion of the civil service retirement plan. The defined benefit plan – which provides a monthly payment to retirees based on their final month’s salary with the government – was closed to new government employees in April 1999. After that date, the vast majority of government hires have contributed their pension into 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 financial advisers estimated the civil servants retirement plan was “underfunded” by more than $226 million. That means the plan’s financial assets would be significantly lower than its liabilities when estimated over a 20-year period.

“The Public Service Pensions Board has developed a funding proposal for government’s consideration,” the board statement indicated. “This proposal, once approved, is expected to service the deficit not only for the main public service pensions plan, but also for the parliamentary pensions plan.”

The statement did not indicate any details of the board’s funding proposals.

The Public Service Pensions Board stated in its 2014/15 annual report that its objective was 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 attributable to the defined benefit plan would likely have to increase.

The financial evaluation of the fund recommended that government increase its 12 percent of salary contribution toward civil servant retirement plans to between 16 percent and 19 percent of salaries. If that were taken from government workers directly, it would represent a 4 percent to 7 percent pay cut for civil servants.

The board’s annual report for 2014/15 urged the government to make pension contributions “in accordance with reliable actuarial valuation requirements.”

Now, the Cayman Islands 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.

According to the pensions board annual report: “A current surplus is maintained through receipt of payments from the Cayman Islands government against past service [pensions] liabilities. The greatest risk the board faces, other than market related risks in terms of its investments, is the possibility that there could be some form of pension contribution holiday. Should this happen it would seriously impede the board’s operations.”

The government implemented a two-year break for employers’ pension payments in 2010-2011, but the current administration has not suggested any such plan.

In its statement, the pensions board noted that many public service pension plans around the world are “completely unfunded” and that payments due to retirees are taken entirely from government revenues.

By contrast, the board statement indicated the public service pensions plans in Cayman have more than $500 million worth of assets under management to be used for future pension benefits.