Civil service pensions ‘protected’

As of this month, Cayman Islands civil service workers’ paycheques will be reduced by 3.2 per cent due to government cost-cutting measures.  

However, current contributions to the civil service retirement scheme will not be reduced as a result of those salary cuts.  

According to draft bills made public Friday, both government and employee contribution rates will be slightly increased from the normal 6 per cent of salary to about 6.2 per cent.  

This would “ensure the contributions paid into individuals’ pension accounts are maintained while the salary reduction is in effect”, according to a memo distribution to government workers last week.  

Also, for those retiring civil servants whose pension is determined by the final average of wage earnings, the 3.2 pay cut approved by government will be “ignored” by the Public Service Pensions Board for the purposes of calculating those individuals’ pensions.  

This would indicate that the 3.2 per cent pay cut, which was restored to government workers briefly within the last budget year and then taken away in the new budget, would be restored again at some point.  

A draft of the bill enables the increased contributions to government worker pensions to sunset – or cease to have effect – on 30 June, 2015. After that, any employment agreements would revert to the 6 per cent employee contribution and matching 6 per cent government contribution to pensions.  

The 3.2 per cent pay reduction move is expected to generate some $5 to $6 million in savings during the course of the 2012/13 budget year, which government has earmarked to assist in paying down past service pension liabilities for current public sector retirees.  

The government has not made full payments into that fund for at least the past three years and the total amount it expects to pay into that fund this year is nearly $17 million, according to budget documents.  

According to the 2012/13 budget documents, Cayman’s public sector retirement funds are still carrying a significant unfunded liability for people participating in the government’s defined benefit pensions schemes.  

Budget documents state that evaluations of the Public Service Pensions Plan, the Parliamentary Pensions Plan and the Judiciary Pensions Plan were carried as of 15 January, 2011.  

The reports have not yet been made public in the Legislative Assembly.  

“Core government unfunded pension liability [of] $207 million represents the fund deficiencies arising mainly as a result of participants having accrued considerable defined benefit entitlements prior to the establishment of the fund,” budget records state.  

The unfunded liability within the Public Service Pension system was $192.4 million, according to the budget report. The liability within the Parliamentary Pensions Plan was $14.7 million. The judicial retirement plan was fully funded.  

An unfunded liability is not an amount that is due to be paid immediately by the various pension funds. Rather, it is an actuary’s best estimate as to what the fund will owe over a set period, in the public service retirement fund’s case 20 years, to meet the needs of current and future retiree’s pensions. The liability generally only applies to the defined benefit retirement plan, not the defined contribution plan.