CURRENT STATE OF PENSIONS AND WHAT S NEXT. CAA 2008 Conference

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1 CURRENT STATE OF PENSIONS AND WHAT S NEXT CAA 2008 Conference

2 AGENDA WHERE WE ARE The system The legislation WHAT IS OUR RESPONSIBILITY AS INDIVIDUALS/A PROFESSION ACTION ITEMS 2

3 WHERE WE ARE NOW THE PENSION SYSTEM SAME IN ALL THREE ISLANDS JJ; BB; TT NIS GOVERNMENT PENSIONS PRIVATE PENSIONS 3

4 NIS - BARBADOS > Old Age & Disability 40% earnings plus 1% each week for over 500 cont ns Minimum: BD$123/wk Maximum: 60% earnings Survivors Pensions Spouse 50 yrs & over ½ OA&D Spouse 45 yrs & over and Child 1/6 OA&D Child (Orphan/Invalid) 1/3 OA&D > Earnings Cap BD$3,100 p.m. from 2003 (indexed) > Contributions 14.25% 6.75% employees > Unemployment for up to 26 weeks 4

5 NIS - TRINIDAD >Old Age, Survivor & Disability Pensions >Old Age & Disability 30%-48% weekly wage >Surviving Spouse 60% of disability >Earnings Cap TT$4,377 p.m. >Contributions 11.4% Employee : Employer 1/3:2/3 >Minimum OAP TT$2,000 p.m. 5

6 NIS - JAMAICA 6 Old Age & Disability Pension flat rate based on record of contributions plus a career average accrual 1.2% to 2003, &1% since Surviving Spouses ½ WR + Flat Rate Salary capped J$500,000 p.a. (since October 2003) No guarantees, but periodic increases of the flat rate pensions (WR not increased) Wage based accrual reduced in December 2003 to give 1% of contribution to the NHF Contributions 5% (2.5/2.5 EE/ER) up to salary cap.

7 7 NIS - JAMAICA

8 8 NIS - JAMAICA

9 WHERE WE ARE NOW LEGISLATION BB drafted since 2003; not yet promulgated; new plans being drafted to comply TT coming JJ in operation since 2004 More reporting annually in JJ and BB; twice per year in TT 9

10 LEGISLATION JAMAICA PENSIONS ACT Passed in November 2004 Greater accountability and definition of duties/ responsibilities of Trustees and other major players in the industry Framework requirements for investments of pension schemes Increased Administration Increased communication to members 10

11 LEGISLATION JAMAICA PENSIONS ACT Increased the maximum pension from 2/3 to 3/4 Final Salary after 37 1/2 yrs service i.e. 2% per year accrual rate Removed $ cap on lump sums Effect smaller pensions a 30% replacement ratio immediately becomes 22.5%, but all take the cash Requires that retirees be given option of full lump sum distribution if pension less than 1/2 minimum wage J$8,000 p.m. Next phase should address vesting, solvency 11

12 LEGISLATION JAMAICA INCOME TAX ACT Recently amended Maximum pension and lump sums same as Pensions Act Pension increases restricted to change in CPI Maximum Employee contributions increased 20% less amount paid by employer 12

13 JAMAICA LEGISLATION WHAT'S GOOD Mandatory Enrollment of Employees if employer sponsored plan available Employers Required To Contribute No Minimum, But Must Pay Members entitled to information about their pension benefits handbook, benefit statements, etc. Complaints register Greater accountability and definition of duties/responsibilities of Trustees, Investment Managers & Administrators 13

14 JAMAICA LEGISLATION WHAT'S GOOD Portability of benefits Mandatory vesting is coming FSC approval of surplus distribution?? Member and possibly pensioner representatives on Trustees boards employer nominated trustees cannot exceed 50%+1 of total, rounding down Members must approve plan changes that can affect their accrued or future benefits, including use of surplus. 14

15 JAMAICA LEGISLATION WHAT S BAD Slow pace of approval of pension schemes by the FSC Documents must include the language not enough to refer to the Act Cash out of small pensions Annual licensing fees Plan Terminations burdensome admin and related costs No concessions for small plans In the last two years we ve wound up 14 plans. 15

16 JAMAICA LEGISLATION THE TEETHING PROCESS The teething process has been painful True Stories: The Case of the Trust Deed: Case of the Surplus Share: Case of the Empty Plan: 16

17 WHERE WE ARE NOW GOVERNMENT PENSIONS Accruals vary by group central government, teachers, JDF, etc. Minimum Pension across the board based on service $8K/m 10 to 20 years; $12K/m over 20 years Annual pension increases after 2½ years on pension 22,000 receiving pensions Annual Pension Payroll $7B p.a. 17

18 WHERE WE ARE NOW OCCUPATIONAL PLANS In All Three Islands Increase In DC Plans New Plans and Conversions Higher Normal Retirement Ages Primarily 65 in JJ & TT for Males and Females Increasing to age 67 by 2018 in BB 18

19 WHERE WE ARE NOW DB PLANS JJ Big surpluses high interest on government securities and strong stock market performance over several years Contribution Holidays Reporting of pension fund asset/ liability on corporate balance sheet since 2001 Generally Pension Assets, but Volatility on Company s Balance Sheets Some companies have seen the assets increased efforts to take cash from plans Incentive for plan conversions to DC 19

20 20 WHERE WE ARE NOW DB PLANS JJ

21 WHERE WE ARE NOW - DC PLANS - JJ New plans in the last ten years have been primarily of the DC type Conversions to DC plans In many instances design takes no account of anything just 5%/5% DC plans in the government sector - for the Executive Agencies and Regional Health Authorities. Big weakness loss of ancillary benefits and subsidized early retirement pensions No Employee choice 21

22 WHERE WE ARE NOW THE DATA ON OCCUPATIONAL PLANS Around 150,000 in JJ in Occupational Plans Many small pensions due to lack of continuity of service, little preservation of vested rights Exacerbated by the maximum pension rules under the ITA and PA 2% per year of service Little facility for someone who began preparing later for retirement to save more and still receive a good pension 22

23 WHERE WE ARE NOW THE DATA ON OCCUPATIONAL PLANS Few deferred pensioners Until recently long vesting periods up to 15 years Forfeit employer s contributions if take refund of own contributions Non-vested mostly compelled to take contribution refunds 23

24 WHERE WE ARE NOW THE DATA Number of Private Schemes approx 520 Number of members of private schemes around 150,000 Percentage of DB plans 25% Percentage of DC plans 75% Number of pensioners? No idea Based on sample data 2,047 Retirees: % of Retirees receiving less than: $5K p.m. 7%; $10K p.m. 15%; $20K p.m. 41% Average pension $40K p.m. Average DC pension $11K p.m. (139 persons) 24

25 WHERE WE ARE NOW THE DATA Number of Persons Total Monthly Pension ($ 000) Average Monthly Pension ($ 000) Total Account Balances ($ 000) Average Account Balances ($ 000) Retirees Beneficiaries DVPs DB DVPs - DC 2, ,599 3,886 14,052 N/A N/A N/A N/A N/A 118,548 N/A N/A N/A

26 26 WHERE WE ARE NOW THE DATA

27 27 WHERE WE ARE NOW THE DATA

28 28 WHERE WE ARE NOW THE DATA

29 29 WHERE WE ARE NOW THE DATA

30 WHERE WE ARE NOW WEAKNESSES OF THE SYSTEM Large number of persons with no pensions not even NIS Many pensioners live in poverty combined pensions and NIS well below minimum wage $16,000 p.m. A seeming disconnect between those employees with pensions and their pension entitlements Many seem not to think about it until retirement 30

31 ISSUES Who s Really Responsible for Retirement Income Security: Employee? Employer? Government? What should our role be: As a profession? As individuals? 31

32 WHAT IS AT STAKE? Before sharing responsibility can we agree on what is at stake? How do we define retirement security Starting pensions how much is enough? Pension increases? Disability? Early Retirement? Personal savings do these really exist on a wide scale? 32

33 ISSUE HOW MUCH PENSION 33 Limit on contributions made to a pension scheme Limit on pension - 75% FS, but only if you have 37 ½ years of service in the Plan. Is this enough? What income replacement ratio is relevant? NIS provides a maximum monthly pension of around $12,500 With final salary of $100,000 per month, the NIS pension replaces 12.5% salary For 75% IRR the plan pension needs to provide 60% salary i.e. 2% FS plan for 30 years Job changes, late career starts, non-pensionable service, disability, early retirement lead to many retirees having way less than 30 years of service AVCs don t always help

34 ISSUE MAXIMUM PENSION 34 Most pensions will be less than necessary for maintenance of lifestyle. Even where sponsors want to pay minimum pensions this is not always possible, since the minimum exceeds the maximum. Is it even rational to expect pensioners to maintain a lifestyle? Should the maximum pension have a floor maybe the minimum wage? Accrual rate in the civil service has already been increased to 2.2%; should the same rate apply in the private sector? Can we take this on? Study of Required IRR; Removal of maximum pension limit?

35 ISSUE MAXIMUM PENSION Basket of Goods for Typical Pensioner & Spouse 35

36 ISSUE ANCILLARY BENEFITS Whose responsibility: Pension Increases Early Retirement Pensions Disability A real case: Age 50+; retirement due to ill-health 10 years service Voluntary Contributions only in final year of service Monthly pension $15,000; Replacement Ratio 7.5% 36

37 EMPLOYEE RESPONSIBILITY Requires a degree of simplicity a) Easily understood system b) Ease of investing Fair high quality, low cost vehicles Ability to choose and to switch from scheme to scheme Intermittent contributions Variable Contribution rates Good returns Regular statements 37

38 EMPLOYER/TRUSTEE RESPONSIBILITY Automatic investment of workers in ageappropriate "lifestyle" funds, if no choice; Provide employees with easy-to-use savings options and allowing them to be a part of the investment decision making Encourage employee participation in ARS by matching contributions Allow payroll deduction of ARS and other savings Hold participant meetings with trained, experienced presenters 38

39 ISSUES - GOVERNMENT RESPONSIBILITY - LEGISLATION ARS Begin to approve ARS. Should legislation require employers/ employees without plan to contribute to ARS and if so how much? Any size limit on # of employees. Essential Elements Low annual management fees Flexible Portable Intermittent contributions Employer contributions 39

40 ISSUES - GOVERNMENT RESPONSIBILITY - LEGISLATION ADMINISTRATION Keep simple and not too costly Differences based on size? BENEFITS Should employers contributions for employees with less than 5 years be vested? Reduce/Remove # of years for maximum pension? Should investment choice be mandatory in DC plans? Provide assistance for workers, especially those nearing retirement, in making decisions about managing their savings? 40

41 ISSUES - GOVERNMENT RESPONSIBILITY The case for NIS The biggest source of retirement income for many persons; Already includes mandatory vesting Tendency to use funds for other than pension NHP since 2003 December Cap on contributions last increased in 2003 October could be indexed to inflation; Higher NIS pensions would partly resolve the declining private pensions; Higher contribution rate? Investment of fund critical. 41

42 42 ISSUES - GOVERNMENT RESPONSIBILITY THE CASE FOR NIS

43 ISSUES - OUR RESPONSIBILITY Design Alternatives to DC - Are there workable models that don't put all the financial risk on workers If decide on DC a flat contribution rate is usually not the best option Important that for the same contribution rate a DC plan can always be structured so that those who need more get more and our legislation does not hinder this. If DC consider employee choice of investment options Consider how to add ancillary benefits disability and early retirement - very important Disability can be solved via insurance an important under-developed market Early retirement more difficult, but with higher employer contributions possible. 43

44 44 ISSUES - OUR RESPONSIBILITY

45 45 ISSUES - OUR RESPONSIBILITY

46 DC PLAN ISSUES - INVESTMENTS Trustees Responsibility Credited Interest Rates -In many cases still not Net Fund Yield Most Funds not unitized Audited accounts often not done until well after year end (expected to improve to comply with PA) Should employees have choice? Requires Employee education Bear investment risk but have neither choice nor input Choice difficult if funds not unitized On-line switching??? 46

47 DC PLAN ISSUES SURPLUS & PENSION INCREASES Typically not possible under DC plans, but common in JJ Paid for from Plan Surplus What is interesting is one of the main sources of the surplus a rob Peter, pay Paul philosophy? Vesting means you may receive the employer s contributions, not that you must receive it In fact, if on termination you choose to take yours then you lose the employer s and this becomes plan surplus. This surplus is later distributed to active members, deferred vested pensioners, pensioners (even where annuities have previously been purchased from insurers) and maybe the employer. 47

48 DC PLAN ISSUES SURPLUS & PENSION INCREASES Mandatory Vesting of Contributions under Phase 2 of the Pensions Act This will also mean the employer s contributions will be vested. There will eventually be small/no surpluses The other main source of surplus is fund yield above credited interest on members accounts Is this even fair/equitable? Unitized Funds & Employee choice (necessary for successful DC Plans) will reduce/eliminate interest surplus From whence the pension increases to counteract inflation? 48

49 DC PLANS OTHER ISSUES 49 Triennial Valuations By the time Trustees get the reports they are of little value Appropriate for DC plans? Annual valuations could be less costly and coincide with the annual statements Payment of Pensions Should retirees have the option to draw down on their account balances directly from the plan rather than annuity purchases? Extends their risk

50 DC PLAN ISSUES SOLUTIONS Ancillary Benefits: One of the positive features of the DB plans is the ability to provide subsidized early retirement; disability and surviving spouses pensions? Possibilities: Supplemental DB benefits on top of the DC can be under the same or separate plan; Separate DB plans for employees who satisfy certain criteria, job levels, age, service NIS loses value as income increases 50

51 DC PLAN ISSUES SOLUTIONS Long-Term disability insurance products Hybrid Use individual DC accounts but with fixed versus actuarial annuity conversion factors Will enable disability and early retirement pensions that are not actuarially reduced. Annuity conversion factors based on conditions to meet employer s circumstances/ concerns graphs show effect Would need to do IAS 19 valuations of these plans but the volatility should not be as severe Pension Increases AVCs? Participants must be encouraged to contribute more and use for future increases 51

52 TECHNICAL ANALYSIS 52 Living Conditions of Retired persons Spending Needs of Retired Persons/ Required Income Replacement Ratio or Minimum Pension Levels Employee Savings for Pension/Other Incentives for participation in ARS what will make Ees/Ers contribute? Longevity are they dying as fast as we expect? What will this mean for the DC Pensions?

BT PENSION SCHEME SECTION C. Explanatory booklet for Members who joined Section C of the BT Pension Scheme between 1 April 1986 and 31 March 2001

BT PENSION SCHEME SECTION C. Explanatory booklet for Members who joined Section C of the BT Pension Scheme between 1 April 1986 and 31 March 2001 BT PENSION SCHEME SECTION C Explanatory booklet for Members who joined Section C of the BT Pension Scheme between 1 April 1986 and 31 March 2001 (and Section B members who elected to be subject to Section