MEMBERS of the Pension Industry Association are eagerly anticipating legislation promised for the new fiscal year, which is intended to make pension savings more attractive, contributing to the overall growth of the sector. Currently assets under management in the private pensions industry are valued at just under $700 billion, but they represent the savings of less than 13 per cent of the population.
Low coverage is linked to changes needed such as vesting (entitlement to the employer’s share of pension savings) within a reasonable time frame and pension portability, or being able to transfer savings to another management entity. The Ministry of Finance and Public Service has indicated that Private Pension Reform will move forward in 2022 with the repeal and replacement of the Pensions (Superannuation and Retirement Schemes) Act, 2004. The Act will be drafted during the upcoming fiscal year and will be tabled by the end of the fiscal year 2022/2023.
Changes will address matters such as vesting, portability, indexation, and other reforms all aimed at addressing the low levels of retirement savings. Vesting, or the date when employees are able to benefit from pension savings made by employers, will become mandatory after five years under proposed legislation. This decision and other promises are being celebrated by the pensions association.
This is a change that is in keeping with international standards, albeit more and more countries around the world have been reducing statutory vesting periods to shorter than five years and in some cases eliminating vesting periods altogether. For instance, in Barbados the [vesting] period is three years, in Bermuda it is the first year and there is immediate vesting in Australia. Nothing prevents a plan, even now, from having a shorter vesting period and most defined contribution plans already have vesting periods of five years. Where this is not the case and the vesting period is longer, changes will have to be made to the plan’s constitutive documents to reduce the same once the new legislation is in place. Given the rapidly increasing changing nature of work, and with more people frequently changing jobs, vesting periods need to be flexible and shorter vesting periods will help to improve retirement benefits.
Under the new Act, pension rights will be portable and individuals will be able to carry his/her pension with him/her, including the contributions of their former employer, once they have worked for a prescribed period of time. The new Act will also lock in mandatory pension contributions after a certain period of time while allowing for refunds of voluntary contributions. Jamaicans will also be less able to collect pension refunds before a certain period. The new Act is also expected to allow for simultaneous membership of a pension scheme and an individual retirement scheme, which is prohibited today.
Contributions will be able to be made to more than one retirement scheme or superannuation fund up to the maximum allowed under the Income Tax Act, currently 20 per cent of earnings. Presently, an individual cannot be an active contributor to more than one retirement arrangement. This recommendation would give members greater options and flexibility when planning for their retirement coverage. Also expected to be included in the new Act is the allowance for innovation in pension payout products. In his recent address to Parliament, the Minister of Finance and Public Service Dr Nigel Clarke outlined that the traditional life annuity, by paying a fixed amount over the life of a pensioner, protects against longevity risk. However, it does not allow the pensioner to leave an inheritance no matter how much his pension savings are. Annuities stop the moment he/she transitions. This too is a disincentive. Contemplated changes were in response to the need for additional pension options, stating she expected the new Act to facilitate the licensing of investment managers to offer the new products.
Understanding Pension Payout Products
A pension payout product is a form of structured pension payment arrangement which guarantees for the life of the pensioner a series of fixed or variable payments. All pension payout products will have to be approved by the FSC (Financial Services Commission) before being marketed or issued. The introduction of pension payout products will aid in developing the local private pensions market, will encourage financial innovation and result in the expansion of the range of retirement products and choices for Jamaicans. Other forms of pension payout products will be allowed under the new Act, broadening the appeal of pensions. Clarke stated in last week’s address, “By making pensions more attractive, we increase the pool of long-term savings in the country while strengthening the social safety of the society.”