Cayman Cabinet members have approved a $16 million additional annual payment toward the “funding deficiency” in the main civil service employees’ retirement plan, to be made in monthly installments for the forseeable future.
That contribution from government – recommended in a report done by the Mercer consulting firm – is to be paid beyond the annual pension contributions made on behalf of government employees.
The government has also approved an additional “normal cost” 5 percent contribution rate for participants in the civil service defined benefit retirement plan. What that means is the total contribution paid for each civil servant’s retirement by government has gone from 12 percent to 17 percent of their annual salary.
The increases only apply to government workers who are members of the defined benefit retirement plan, which provides a monthly payment to retirees based on a percentage of their final salary with government. Civil servants who joined government after April 1999 pay into a defined contribution retirement fund that is similar to a 401K savings account and will not see their pension contributions increased.
Finance Minister Marco Archer told the Legislative Assembly in June, in a statement discussing recommendations for increased pension contributions, that civil servants would not be liable for any of these increased payments and that government would bear the brunt of any funding changes approved. That position has not changed, the minister said Wednesday.
“The unfunded liability is something that government is responsible for,” Minister Archer said. The minister also added that the pension increases only applied to the civil service retirement plan and not the plans for the legislature or the judiciary.
The Cabinet order accepting regulatory changes to increase the pension contributions was agreed Nov. 28, with an effective date of July 1, 2016.
According to the order, government will also pay slightly more [about 0.4 percent annually] for the retirement accounts of civil servants on the defined contribution scheme. Also, the pension contribution rates for four statutory authorities or government-owned companies will be increased at varying rates. Those entities include the Cayman Islands Airports Authority, the Cayman Turtle Centre, the Health Services Authority and the Water Authority-Cayman.
The Public Service Pensions Board reported in May, based on Mercer’s evaluations, that unless government increased contributions to the main civil service retirement fund, the defined benefit pension plan would be depleted within eight years.
Public Service Pensions Plan actuaries 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 additional contribution from government was recommended. The $16 million per year contribution would amount to $320 million in present dollar value if it is continued for the next 20 years.
The unfunded liability in the retirement plan is associated only with the defined benefit (monthly pension) retirement plan.
The unfunded liability, often referred to as “underfunding” or “past service liability,” is not a debt 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.”
The Mercer report did not blame the operations of the Public Service Pensions Board for the deficit. Rather, it congratulated 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 stated.
“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.”