The Cayman Islands government will give an extra $18 million to its Public Service Pensions Board to “catch up” what a 2014 financial evaluation said it should pay toward the main civil service retirement fund for most older government workers, Finance Minister Marco Archer said last week.
Financial advisers from the Mercer consulting firm recommended in January 2014 that the government increase the amount paid on behalf of civil servants participating in the defined benefit portion of the government’s retirement savings plan. The defined benefit plan provides a monthly pension for civil service retirees and their surviving spouses. In April 1999, it was closed to incoming civil service employees.
Mercer actuaries noted in the January 2014 report that government should be paying 16.3 percent of civil servants’ salaries toward the pension contribution, rather than the 12 percent it was paying for members of the defined benefit plan. The report did not recommend increasing contributions for the defined contribution part of the plan, which operates like a 401K savings account.
Mr. Archer said Cabinet had accepted the increase to the contribution rates recommended in the Mercer report and that an additional payment of $18 million would be made by June 30 “in order to catch up with the increased contribution rates as recommended.”
The $18 million should “make whole” the additional contributions needed for the 2013/14, 2014/15 and 2015/16 budget years, the finance minister said.
No pay cut
Mr. Archer stressed that none of the additional contributions to the pension system would be coming from civil servants’ pockets.
“This is the liability of the Cayman Islands government and not a liability of the civil servants and public servants,” Mr. Archer said. “It will not result in a pay cut.”
According to Mercer estimates, the taxpayers will be receiving a hefty bill for the payment of civil service pensions over the next two decades. The consultants advised the government to pay an additional $16 million a year for the next 20 years to help settle funding deficiencies in the civil servants’ defined benefit retirement plan.
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 unfunded liability in the retirement plan is associated with the defined benefit (monthly pension) retirement plan.
‘Strong investment performances’
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.
“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,” the Mercer report indicated. “By 2024, benefit payments are projected to exceed contributions by about $15 million per year and by 2034, this difference will have grown to $35 million per year.”
Depleted by 2024
The pensions board reported just last month that unless government increased 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.