The Cayman Islands government has been advised to pay an additional $16 million a year for the next 20 years to help settle funding deficiencies in one of its civil service pension plans.
The total bill for the period at current dollar values would be $320 million, according to financial advisers’ estimates in a report on the Public Service Pensions plan obtained by the Cayman Compass under the Freedom of Information Law.
The recommended $16 million per year contribution by government would be in excess of normal annual pension contributions made on behalf of employees during the period.
The annual payments are estimated by the Mercer consulting firm based on lower estimates of what the civil service’s defined benefit retirement plan will owe. Consultants noted that if higher estimates of the plan’s unfunded liability were used, the payments would be $21 million each year.
Most older civil servants and retirees are members of the defined benefit plan, which provides a monthly pension based on ending salary. Younger civil servants, or those who joined the service after April 1999, are in a defined contribution plan which operates like a retirement savings account or 401K account.
The unfunded liability in the retirement plan is associated with the defined benefit [monthly pension] retirement plan.
The Mercer report does not blame the operations of the Public Service Pensions Board for the deficit. Rather, it congratulates fund managers for “strong investment performances” in recent years.
However, those strong earnings were offset by retirees living longer than expected, the cost of benefits provided and the lower contributions made on behalf of employees.
“For many years, the contributions made to the plan have been very low relative to the cost of benefits that have been accruing under the plan,” the Mercer report states.
“The [defined benefit] plan has reached a mature stage where the benefit payments being paid out of the fund are expected to grow rapidly and will begin to exceed the contributions being made into the defined benefit part of the plan. “By 2024, benefit payments are projected to exceed contributions by about $15 million per year and by 2024, this difference will have grown to $35 million per year.”
The pensions board reported just last month that unless government increases employee contributions to the main civil service retirement fund, the defined benefit pension plan would be depleted by 2024.
Public Service Pensions Plan actuaries have estimated that the civil servants’ defined benefit retirement plan was underfunded by between $166 million and $226 million, meaning the plan’s assets would be significantly lower than its liabilities when estimated over a 20-year period. This is why the $16 million per year contribution from government has been recommended.
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 in the Public Service Pensions Board’s annual report for government’s 2014/15 budget year.
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.