Give Pensions Law a chance

It seems that those who are petitioning against the amendments to the National Pensions Law (NPL), which was recently passed in the Cayman Islands Legislative Assembly, may have a deficit of facts, especially on two material areas, of which I will now briefly comment and seek to clarify. As the former Director of Labour & Pensions and the Superintendent of Pensions, I was the “caretaker” of the US$1 billion in Assets Under Administration in the combined pensions funds by all Pension Plan Administrators (PPA’s); however even despite this large sum I understood that it is a far cry from what is needed in order to give retirees (Caymanians and non-Caymanians) a meaningful income replacement ratio and therefrom a decent life in their “golden years” … when they are unable to work.

Those individuals, or organizations, who object to a review and better monitoring and management of our national pensions regime administration and financial performance are simply oblivious to the realities in life, and may be sub-consciously condoning poverty (“bread”) lines for our retirees, the likes of which have not been seen since the Great Depression.

To begin to, finally, address this matter the current government has at long last brought some amendments to the NPL. Two of these involve increasing the “retirement age” (meaning the normal age of pension entitlement) from 60 to 65. A second amendment is to increase the annual pensionable salary limit (or “year’s maximum pensionable earnings”) from $60,000 per annum to $87,000 p.a. Therefore the annual deferred Savings for Pensions, based on the 10 percent combined contribution will be $8,700 p.a. as opposed to the current $6,000 p.a.

Based on research conducted last year, it was determined that currently the “income replacement ratio,” which is the percentage of their current earnings/salary that retirees will have on retirement compared to what they currently earn as an employee is only at a range of 24 to 50 percent. This means that at the forecasted current pensions funds available to retirees, they will have less than half of their income to live on when they retire. With the cost of living, healthcare, etc., who can afford to retire in such circumstances?!

The normally accepted and adequate Income Replacement Ratio is at a range of 60 to 70 percent. Once the NPL amendments are in place and begin to take root, along with other improvements in pensions supervision, it is expected that the Income Replacement Ratio will track upward to a range of 57 to 78 percent. Now that’s better … That’s what I’m talking about!

These amendments were suggested by the international firm Mercer, from its review and report of 2007, so already we are late. Additionally, many progressive and first-world countries are also increasing their retirement age to well beyond 60. Our people have no income tax, no Social Security, and not much other liquid assets to sustain them during retirement. It is therefore imperative that we maximize the return available to them upon retirement. The increase in the retirement age and the YPME is a bold step in that direction. If the petitioners and their advisors have a better solution to address this large socioeconomic hurdle, let’s hear it.

I am not ignoring or discounting the many long-standing problems, and negative perceptions, which exist in the pensions arena in respect to: supervision, governance, controls, rogue employers who deduct from their employees but do not pay into a pension plan, or the historically large levels of delinquent employers.

There are clearly many issues to be addressed, and some of these, with the proper focus and resolve of policymakers and pensions regulators, will be addressed in the recently passed (interim?) amendments and other companion legislative and institutional strengthening which are required. Here are a few of the innovations which are needed in order to maintain the momentum and to take pensions to a new platform in these income-tax-free islands:

Work with industry partners, particularly the CFA Society of the Cayman Islands, and introduce a “standardized investment performance reporting protocol,” which will allow the common pension member/employee to better understand and compare the performance of his/her pension plan, including administration and investment fees and expenses, against customized but internationally recognized benchmarks.

Consider establishing a sliding scale for retirement savings arrangements payments, instead of the fixed $12,000 p.a. which is now the case, and this sliding scale would depend on the value of the person’s fund together with mortality tables and other demographic factors.

The regulator, now being the National Pensions Office, should be allowed (from its $1 million in fees and revenue collected each year) to secure the services of an in-house or an outsourced dedicated legal counsel as well as appropriate resources to monitor and analyze the investment performance and financial performance and compliance of each registered pension plan. The absence of these resources and the chronic delays with receiving legal opinions or assistance from within government, as well as the delays in the prosecutorial infrastructure and the courts, seems to embolden the law-breakers and the unscrupulous employers.

Statements must be more frequent and more reader/user friendly, and incentives should be introduced to encourage members to attend the meetings and become more active in their pension plans.

In closing I wish to remind and encourage all employees, employers, and other stakeholders in the pensions arena that pensions or retirement normally takes a long view; we must therefore be cognizant that there will be the normal peaks and valleys in the investment life cycles, normally within every 10 years. However, properly equipped investment managers and advisors can normally anticipate and mitigate the negative impact of most of this, working within the various asset allocation and prudence as prescribed in the regulations.

It is important that we do not panic when there is a normal downturn in the market or in the investment performance, and where this happens ensure that you get an explanation from your pension plan or make representations to the regulators. Pensions and effective retirement planning are crucial to building a nation, let’s move forward and do not “throw out the baby with the bath water!”

Mario E. Ebanks