Financial Service Commission The Jamaican Pensions Landscape Scotia Insurance s Inaugural Pension Seminar Wednesday, April 14, 2010. I was very pleased to have been invited to address this inaugural seminar hosted by Scotia Insurance. I extend my congratulations to the management and staff on their efforts to create this opportunity to communicate with the Jamaican population on a topic which is of such importance. I hope that the success of this first seminar will stimulate further seminars by Scotia Insurance. In my presentation I will provide you with some insight into the current legal and regulatory framework, the local pensions landscape, and the vision of the Financial Services Commission ( FSC ) for the pensions industry. 1
The Current Legal and Regulatory Framework You may be aware that the final piece of legislation in the first phase of the pension reform process in Jamaica was enacted on the 1 st March 2006. At that date the Pensions (Superannuation Funds and Retirement Schemes) Act,( the Act ), along with four attendant Regulations empowered the FSC to commence the monitoring, registration and licensing of a pensions industry which had never been comprehensively regulated. For many decades the Taxpayer Audit and Assessment Department ( TAAD ) and its predecessors had full responsibility for the approval of occupational pension plans under the Income Tax Act. However the Income Tax Act was never equipped or intended to address the problems which plagued the industry such as delays in payment of benefits, failure of sponsors to pay over employees contributions and conflicts of interest between trustees and sponsors. A process of broad consultation over many years has led us to where we are today. In order to expedite the reform process a decision was taken to create 2 phases, Phase I being the operational phase, and Phase II which tackles matters which seek to protect the adequacy of pensions such as portability and vesting. 2
PENSIONS PHASE I REFORM Phase I is currently quite advanced and has encompassed the registration and licensing of: o Pension plans o Investment Mangers, o Administrators o Trustees and o Covered persons Processing of applications for the approval of superannuation funds and retirement schemes are quite advanced and the FSC has performed creditably over the course of 2006/2010 in processing those applications for registration that were complete. Plans and schemes which did not comply fully with the Pensions Act are reviewed and have been allowed sufficient time to upgrade their constitutive documents in an orderly fashion. To date, we have completed the review of 95% of the net applications which have all the documents required for processing. Of the total net applications that are complete 77% have been approved, that is, 205 superannuation funds, 11 retirement schemes, 1,324 trustees, 26 3
Administrators and 27 Investment Managers. (1%) has been refused, (3%) given time to satisfy the statutory requirements, (14%) are awaiting approval and another (5%) are being processed. PENSIONS PHASE II REFORM As mentioned, Phase II of the pension reform seeks to incorporate into the Pension Legislation issues relating to the adequacy of pensions, including vesting, portability and locking-in of contributions. Three years have passed since the amendments to the Pensions Act were submitted to the Chief Parliament Counsel ( CPC ) for drafting. Stakeholders in the industry might be skeptical as to whether this Phase will ever be complete. Unfortunately the CPC has been inundated with many drafting instructions from other agencies and ministries and now faces an extremely robust legislative agenda. This has led to the delays in addressing the requested amendments. However, having gained a vast insight and knowledge of the workings of the industry during the past 5 years of regulating the industry, the FSC has 4
sought to use the experience gained, to revisit and review the proposed amendments which had been submitted to CPC 3 years ago. We have now embarked on a review of these amendments and this has proven to be a very beneficial exercise. The amended and shortened drafting instructions will be submitted to the CPC very soon and we hope that with the promised lobbying by the industry associations, the legislative process will be expedited and the amendments enacted without further delay. Current Regulatory Framework The FSC has commenced the supervision and monitoring phase of its mandate. Investment Managers, Administrators and Trustees of pension plans are required under the Act to submit to the FSC both quantitative and qualitative reports at specific intervals. This allows for the examination and assessment of the activities of the plans and providers of investment and administrative services. The FSC has adopted a risk based assessment approach in assessing its licensees and registrants. This means that resources will be focused on identifying entities which are at risk of not meeting promised benefits and 5
mitigating these risks before they crystallize. In administering the Pensions Act, the FSC will concentrate on the risk profiles of the entities which have been evaluated. For low risk plans, there will be less need for regulatory attention. On the other hand where actual or potential problems are identified the FSC will focus its efforts to protect members benefits. Currently the FSC is performing desk-based reviews on the reports received and appropriate assessments are being effected. The outcome of these reviews may trigger an on-site examination which is a more comprehensive examination and which is conducted within the offices of the licensees or registrants. THE LOCAL PENSIONS LANDSCAPE. In 2004, a survey was conducted in an effort to gain some knowledge of the size and diversity of the pension industry. The results showed that there were at least 750 plans with 70,000 members. Of these plans 26% were defined benefit plans with 35% of total membership, while 74% of all plans were defined contribution plans accounting for 65% of the members. Funds under management amounted to over $100 billion. 6
As at June 2009 the following information provides the status of the pensions industry: Assets under management: $170,130,716,511 in Defined Benefit Plans $45,492,224,089 in Defined Contribution Plans $130,703,864 (unknown) Total asset values $215, 753,644,464 Membership: Superannuation funds - 63,943 Retirement schemes - 2,578 Total - 66,521 Currently, the majority of pension arrangements are superannuation funds which are private, voluntary arrangements, established by employers to ensure that their employees have the opportunity to meet their financial and domestic needs upon retirement. The FSC has observed that there has been a heightened interest in Retirement Schemes in recent months. This is evident by the number of 7
applications received and the anxiety to get these plans approved. To date 14 applications have been received and 11 have been approved. The media has benefited significantly by the establishment of these schemes as competitors vie for the interest of the general public in the printed and electronic media. Retirement Schemes are pension arrangements established and offered by licensed insurance companies or securities dealers. Unlike a superannuation fund, membership in a retirement scheme is open to persons who are employed but are not in a pensionable post, or to self employed persons. Retirement Schemes therefore create an extremely valuable option to a significant number of workers who are not covered by superannuation funds. I will now try to provide you with an example of how a Retirement Scheme can be reasonable option for the typical Jamaican worker. Let me use an example of John, a worker in the tourism sector who wishes to plan for his retirement. He is employed to a hotel during the tourist season from December to May, when the tourists are not in abundance he supplements his income with farming. He envisions that he will retire in 20 years and he needs to plan his pension savings now, but he is not too familiar with investment products or other options available. In addition he 8
is very wary of get rich quick schemes which have resulted in losses for some of his friends. He needs to save with a financially viable institution where his hard earned earnings will not be jeopardized when he retires and which will provide a pension based on his seasonal earnings. What is his solution? Maybe he should save with a retirement scheme. Why? Let me give you a few reasons: 1. A member of a retirement scheme must contribute regularly to the scheme, at least once per year. This arrangement would accommodate John s irregular earning pattern. 2. Having assessed his annual earnings from his activities John can contribute a maximum of 20% of his earnings and he will enjoy tax benefits on his contributions 3. He does not have to rely on any contributions from an employer, if his employer wishes he may contribute on John s behalf but the combined contributions must not exceed 20% of his annual income 4. Upon reaching retirement age John will be eligible for a pension which will be calculated on his contributions in addition to any earnings accrued on the total amount contributed. As you can see from this example, the features of a Retirement Scheme suit John s needs and the needs of many other Jamaicans in a similar work 9
situation, providing a viable and valuable pension arrangement. I will quickly mention a few more advantages: o Retirement Schemes must be approved by the FSC, however, the product can only be offered by a licensed insurance company or securities dealer o Retirement Schemes are monitored by the FSC and if a member believes that his contributions are jeopardized, he has recourse to the FSC which will carry out the necessary investigations on his behalf o Members of a Retirement Scheme must receive a Members Handbook and an Information Folder. Together, these documents disclose detailed and valuable information on the scheme s operations, the members rights and benefits, the scheme s assets and rates of return o Upon termination of employment, the Act permits a transfer of pension benefits from an approved superannuation fund to an approved retirement scheme. The FSC is cognizant of the necessity for the working public in general and members of retirement schemes to be provided with complete and accurate information on the schemes. In addition to reviewing the Information Folder 10
and the Members Handbook, providers of retirement schemes publish marketing material for prospective members, which are also reviewed by the FSC to confirm that the information disclosed complies with the Act. The FSC s Vision for the pension industry. With respect to the FSC s vision for the pensions industry. Jamaica has had a long history of managing pension funds and we have also drawn on the rich background and wealth of decisions from the law and practice of trusts in the United Kingdom and the wider Commonwealth. This background has led to the creation of a solid cadre of capable people who are now the licensees and registrants of the FSC, our investment managers, administrators and trustees. I am proud to say that you have brought to the pensions industry, tried and tested practices, which will continue to serve the industry. Through public education, guidelines and bulletins the FSC aims to keep stakeholders abreast of developments within the FSC and also the industry. Last year the FSC hosted a Pensions Expo. We intend to host another this year which will focus on retirement schemes as a means of widening pension coverage in the nation. 11
In an increasingly globalized world economy, it is important to note that the FSC, as a regulator of the pensions industry in Jamaica, is a part of an international pension community and is a founding member of the International Organization of Pension Supervisors ( IOPS ) which sets international supervisory standards and promotes international cooperation. Further to this, the FSC, along with its fellow Caribbean pension regulators, is actively initiating the establishment of a regional association, the Caribbean Association of Pension Supervisors ( CAPS ). Preparatory work is underway and Jamaica has offered to provide secretariat services to the Association. Through these collaborations the FSC will benefit from the experiences of its fellow regulators. The FSC is also actively involved in the promotion of financial literacy in Jamaica through the National Financial Literacy Programme ( NFLP ). The importance of this initiative has increased in recent years as a result of financial market developments and demographic, economic and policy changes. Financial markets have become more sophisticated and we foresee the need for Jamaican consumers to have greater access to information which will assist them in making decisions regarding investments in general 12
as well as saving for retirement. You will be hearing more of the NFLP in the near future. Conclusion In concluding, let me say, the healthy competition which is now evident amongst providers of retirement schemes augers well for the pensions industry and is seen as a very positive indicator of growth. The FSC is excited by this and is willing to work along with the stakeholders in guiding the development of a viable and sustainable industry. Confidence in the industry will be greatly influenced by the integrity, soundness and stability of the providers of the product. The FSC shares the vision of providing the Jamaican worker with viable options to prepare adequately for his retirement and is committed to ensuring that members rights and benefit are protected. We believe that events such as the seminar today provide an excellent opportunity to enlighten workers and the public of the features and benefits of retirement planning and the various available options. With increasing life expectancy it is now imperative that workers engage in long term retirement planning without relying on a national programme which was not designed to be the sole provider of their retirement needs. 13
Today I see this seminar as a response to a quest for information and I am very encouraged about the future of the pensions industry in Jamaica. Again let me congratulate Scotia Insurance on this endeavour and wish you continued success in your attempt to disseminate vital information to the public. 14