Fayval Williams is mostly right about the treacle speed at which proposed legislation usually navigates Jamaica’s bureaucracy and why she is disinclined to fiddle with any bill that is already on the works. That might just drive it deeper into legislative purgatory. However, the finance minister is wrong about this danger with respect to two elements of the reform of the private pension system, once the Government embraces the logic of the idea.
The matter of having employee opt-in as the default position for workplace pension plans ought to be a no-brainer, given the small proportion of Jamaicans who have pension coverage, as well as the fact the demographic trends suggest that there might be soon too few young, working-age people to carry the burden of a fast-greying population. Further, the question of raising the proportion of foreign exchange-denominated assets pension funds they can hold in their portfolios is fundamentally an administrative/policy exercise that shouldn’t be constrained by the country’s notorious legislative inertia.
Indeed, it is for the central bank and the minister to determine whether Jamaica’s macroeconomic environment is sufficiently healthy – which most analysts would insist it is – to allow for a greater investment in foreign assets, and whether a greater carve-out should be afforded to pension funds. Again, given the demographic trajectory and the sluggish performance of Jamaica’s markets in recent years, the prevailing sentiment, including that of this newspaper, will be yes. The issue to be resolved would be the cap on foreign assets, above the current 10 per cent, pension funds would be allowed to hold and the pace at which the adjustment would be made.
PRIVATE PENSION
Jamaica has been talking about private pension reforms for over two decades, with ideas such as a portability of pensions and greater transparency in pension schemes. Movement, however, has been slow, in part, especially in the early period, of fears by unions of employers eroding or grabbing resources belonging to workers, and general distrust of the government’s motives in pursuing reforms. However, the deepened fiscal crisis of the 2010s accelerated action of what was originally the secondary element of proposed reforms of the late 1990s: the public sector pension scheme. The government subsequently raised the retirement age for public sector employees from 60 to 65 and required that they contribute five per cent of their incomes to their future pensions.
In March, during the parliamentary debate of the Government’s Budget for the 2025/26 fiscal year, Ms Williams promised that the “second phase” of reform would take place this year, but wasn’t explicit about what it would entail. However, Jamaica’s population dynamics insist that whatever is on the agenda should bring more people into pension schemes, while reasonably expanding the investment flexibility of pension funds to ensure they can achieve the best returns on their capital.
At the end of last year, Jamaica’s 357 private pension funds held assets worth $797.65 billion. But, these schemes (retirement funds and superannuation schemes) had only 164,000 members, or a mere 11.5 per cent of the workforce. Even when public sector workers are added to the pool, less than 20 per cent of Jamaican workers are part of pension plans, except for the National Insurance Scheme (NIS), to which only a small proportion of its potential members contribute.
The dilemma is that elderly Jamaicans, those 65 and over, are the fastest-growing segment of the population. Today, they account for 9.7 per cent of the population. That will double by 2050. At the same time, lower birth rates and net outward migration means that the population is in decline. With this trend there won’t be enough young people to support the island’s age-dependent population. It is in that context that a viable pension system is important, to ensure that Jamaicans have a security cushion for their old age, with the added benefit to the economy of building a pool of savings for investment.
At present though, if an employee joins a workplace with a pension scheme, the legal assumption is that the worker isn’t automatically part of the arrangement unless he explicitly opts in. In many countries, the reverse is true, which the Pension Industry Association of Jamaica wants to be the case here. But last week, Minister Williams, blaming the perils of the legislative draft when laws have to be reworked, said that this mightn’t be in the current round of reforms.
“If you see phase two advance to Parliament and there’s no automatic enrolment in it, it’s because we just want to keep that going to completion and then circle back to put in the automatic enrolment,” she said. The logic of this, with respect, is hard to follow. It is simple to ask workers to opt-out rather than having to opt-in. On the question of lifting the cap on foreign exchange denominated investments, there are obvious fears of capital flight and the potential loss of investment capital to the domestic market. But that hasn’t, over several years, proven to be the case, in Jamaica’s liberalised currency exchange system.
What, however, is true is that the domestic investment environment for Jamaican pension funds hasn’t been particularly robust. For instance, in the five years since mid-June 2020 and the same period this year, the combined index of the Jamaica Stock Exchange declined 14 per cent. On the other hand, America’s S&P 500 Index nearly doubled to 98 per cent.
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