A three-day Public Accounts Committee hearing concerning private pension plans in the Cayman Islands last week showed how the current system, subject to constant tinkering by lawmakers, is not working well for savers, the government or the pension plan administrators.
Prompted by the failure of the Department of Labour and Pensions to release the annual reports of the National Pensions Board since 2008, the committee aimed to increase the transparency of the pension system for the public.
It looked at the annual reports up to 2016, which had only been published after a Freedom of Information request caused the ombudsman to intervene and order their release in March of this year.
Although the reports are required by law, department officials blamed limited resources, competing priorities and constant legal changes for the delay.
Government’s recent decision to allow savers the early withdrawal of a portion of their pension funds has also increased public awareness of pensions.
Committee member and MLA Chris Saunders said one of the reasons for the hearing was that, with the ability to withdraw some of their pension funds, many people are now realising just how little they have left for retirement.
In this first hearing of its kind, the regulator and all pension-plan administrators in Cayman were invited to talk about their practices.
Current plans are no income replacement
The evidence provided at the hearing confirmed once again that, in their current form, pension plans are by themselves unable to replace a working income.
Under the current law, employers and employees each pay 5% of the employee’s salary into the plan.
Pension-plan administrators say that to replace a current income in retirement, about 15% to 20% is needed for a period of three to four decades. Various consultant reports in the run-up to the introduction of the pension law in 1996 had put the needed contribution rate at between 15% and 23%.
Brett Hill, president and CEO of Fidelity Pension Services, said the pension law was set up to fail from the outset because the government of the day did not follow the advice it received.
By setting the mandatory contribution at 10%, in part to limit employer contributions, the government expected savers to make up the shortfall with voluntary contributions and additional savings.
Given the high cost of living and the reality of many workers living paycheque to paycheque, this has proven to be overly optimistic.
Stuart Dack, the head of Cayman National Corporation and chairman of the Cayman National Pension Trust, said pensions globally are facing the problem that people are living longer and the need for retirement funds is growing, while investment returns are not what they were 30 years ago.
“The one thing that I would stress to members is you can’t get out more than you pay in,” he said. “If we want to see larger pension pots for people to enjoy a longer retirement, the only way of doing that is to pay more money and that’s either got to come from the employer or the employee. There’s no magic to this.”
Interventions by lawmakers allowing for pension holidays and the early withdrawal of some of the pension savings have exacerbated the pension shortfall.
“There’s a very simple solution to this madness that is going on. If you want people to have enough money to retire on, stop giving them their money back,” Hill said.
When government in April allowed the withdrawal of $10,000 and an additional 25% of the remaining funds on top of that amount from their pension accounts, it predicted the move would inject $425 million into the economy.
Since then, more than 20,000 applications have been approved and evidence from the plan administrators shows that almost everyone who is making withdrawals is taking out the maximum amount.
There are varying estimates of the total amount in Cayman’s 73,000 pension accounts – the annual reports for the past three years have not been released yet – ranging from $1.2 billion to $2 billion.
These figures indicate that government’s estimate will not be far off.
What is much less clear is whether most of these funds are ever going to find their way into the Cayman economy.
Motivation for taking the money out
Pension-plan administrators speculated that most people withdraw the money not because they immediately need it but because they do not want it to be tied up in a pension plan.
“They do not want the money locked away until they are 65 years old,” Hill said.
The Fidelity CEO said he is fielding phone calls from people who are in genuine need. “They need the money and I get the fact this government doesn’t have a social security net and a lot of gold coins.”
But, he said, it is an “outrageous state of affairs” that he is at the same time getting calls from well-paid attorneys at large law firms demanding their cash.
Hill said, “In no way is this going to benefit the local economy,” adding that the money is very likely going to be invested outside of Cayman.
The committee also heard that several elements needed for a functioning market, in which private pension plans effectively compete against each other, are not working as intended.
Carlyle McLaughlin, chairman of the Silver Thatch Pension Plan, said the challenge is that many of the members do not really choose their plan, even though the law says they do. “In reality, it’s mostly the employers who choose, and that’s not how it’s supposed to be, but that’s the reality.”
Whether all employers, who have to pay 5% of salaries in any case, go to great lengths to identify the best plan for their employees is not clear.
In the same vein, switching between plans is uncommon. The law allows employees to choose another plan and to move their existing pension savings to another plan provider. The process is not overly onerous as it consists of a simple application form signed by the member and the chosen plan provider together with a notarised form of identification.
But it is rarely done.
Some savers are not even aware that by maintaining three separate pension accounts instead of consolidating them into one, they are paying three times the audit, administration and investment costs, said Amy Wolliston, deputy director of pensions in the Department of Labour and Pensions.
Selecting the right pension plan is also difficult without the ability to easily collate the relevant information on each available plan.
Again, the law prescribes that pension plans make their performance and expense ratios available. But finding all this information on the plans’ websites is not straightforward, said Saunders.
The pension regulator who receives all the information from the plan administrators did not publish it for years. And even today, the annual reports of the National Pension Board are of little use to those who seek information to potentially switch to a different provider, as much of the data from individual plans is presented in aggregated form.
Administrators also believe that some of their members do not show enough interest in their pension plan, unless there is a market crash. Annual general meetings are sometimes poorly attended, and indications are that quarterly pension statements are rarely accessed and read.
Public Accounts Committee members confirmed this assessment, saying they regularly hear from constituents who have not seen a pension account statement in years.
Silver Thatch’s McLaughlin said it is unfortunate that out of nearly 20,000 members, only 24 people showed up at the annual general meeting. “So, it’s all good and fine to say that we have all of this information but whether the public is really using it is hard to say,” he said.
In April, Premier Alden McLaughlin said the current pension system is not “fit for purpose”, and called for a radical rethink.
He said the funding of private pensions based on 10% of salaries was not enough and threatened to bankrupt the government if it had to take care of pensioners running out of money.
The premier also blamed the administrative costs of running the private pension plans.
He claimed the public sector had found a way to make it work. “So, we actually have a model that we can look at, and I’ve said this for years, that is the model that we ought to have adopted for the private sector pension schemes, as well,” he said in April.
In the public sector, the pension contribution is 12%. Upon retirement, public sector workers can elect to take up to 25% of the total pension fund that has been accrued, with the remainder being used to purchase an inflation-protected annuity which pays the retiree a monthly sum for life.
Pension plan providers said that was comparing apples with pears.
The committee heard that because Premier McLaughlin, who is also the minister responsible for pensions, would like to see a more “radical reform” of the system, several sections of the pension reform passed in 2016 have not been implemented more than three years later.
This includes new investment regulations, which currently are much more extensive and limiting for private sector plans.
Silver Thatch’s McLaughlin said pension regulations are very prescriptive to prevent the funds from taking too much risk. This lack of risk, however, is going to affect returns.
Local regulations and fees also eliminate certain potentially lucrative investments, such as property funds.
Hill said private pension providers, unlike the government pension plan, spend much of their time chasing delinquent employers, who either pay late or do not pay the legally mandated pension contribution at all. This comes at a cost.
The head of Fidelity Pension Services said the government plan is administered by an independent office, which he suspects is quite bloated. “They certainly don’t run it with three people,” he said, comparing it to Fidelity’s plan.
The government plan was also not accountable for any shortfalls, he said. Any underfunding would simply have to be covered by the taxpayer.
Hill said many savers were currently cashing in their pension savings, because “they also fear that the private pension plans will be done away with and the monies will be managed by the government pension plan”.