Government pensions liability grows again

The unfunded portion of the Cayman Islands’ main public sector retirement plan rose from about $191 million in 2015 to $220 million in 2016, according to financial statements reviewed by the Cayman Compass.

Public Service Pensions Board Managing Director Jewel Evans-Lindsey said last week that while the figures in the statements are just best estimates, worldwide financial market struggles have hit Cayman’s public sector retirement plans.

“The deterioration in the estimated unfunded liability … is mainly driven by lower investment returns than assumed in the Jan. 1, 2014 actuarial valuation,” Ms. Evans-Lindsey said. “This is not unique to the Public Service Pensions Board. Deterioration in the funded status of pension plans is being experienced by public and private sector plans across the globe.”

The government’s pension evaluation for 2014 noted this prediction about the state of public pension funds in Cayman: “The actuary has determined 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.”

Those estimates, made before Jan. 1, 2014, do not include increases to the monthly pension contribution rate for public sector employees last year, Ms. Evans-Lindsey said. They also do not include an $18 million contribution the government made to the fund in 2016.

The government pension fund consultant opined that “most public service pension plans around the world” have no assets set aside to fund members’ retirement benefits, and that these pensions are generally paid entirely from government funds, according to Ms. Evans-Lindsey.

“Although our investment returns were lower than the assumption, our fund continues to experience positive investment returns throughout the very volatile economic environment of 2014 and 2015, where a number of plans saw negative or very low investment returns,” she said.

Those positive returns were not high enough, in the view of pension plan actuaries, to keep the unfunded liability in the plan from growing.

An unfunded liability in a pension plan represents the amount it estimates it will have to pay over a certain period – in the public service plan’s case, 20 years – to meet the monthly pension payments due to retirees. The public service plan’s liabilities (payments expected to be due) outstrip the assets in the plan by about $220 million as of the year 2016. These are not amounts the pensions fund must pay immediately, but financial consultants have made suggestions as to how to fix that deficit in future years.

In the Public Service Pensions Board’s case, the unfunded liability applies only to the “defined benefit” portion of the plan – participated in mainly by older civil servants and retirees who receive a monthly pension check until their death, regardless of how much they contributed to the plan during their working years.

That section of the public retirement plan was “cut off” for new participants in 1999. Civil servants hired since then pay into a “defined contribution” fund for retirement, which operates similar to a 401K savings plan.

As of July 1, 2016, the government increased the amounts paid on behalf of civil servants in the defined benefit retirement plan from 12 percent of annual salary to 17 percent. The cost of that increase is being paid entirely by government, not the individual plan participants, Finance Minister Marco Archer has said.

The finance ministry also agreed to pay an additional $18 million in 2016 into the retirement fund to cover liabilities of retired civil servants, according to Mr. Archer.

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