By John G. Leiba, ContributorAS THE life span of persons increases, it is becoming more challenging for companies and governments to keep up with the demands of an ageing population. Old age used to be a time of poverty. When people could no longer earn they had to depend on family, hence the once common practice of having many children to provide support in their old age. In 1880, Otto von Bismark came up with the notion that the state should provide pensions. At about the same time, some companies and employers began to provide for their workers' retirement. In Jamaica, our National Insurance Scheme is intended to provide a pension; however many employed persons do not look to the scheme seriously because benefits are low and have not kept up with inflation. Most persons rely on the pension scheme provided by their employers.
With the fall of stock markets all over the world, companies in many developed countries have found that their pension plans are now woefully inadequate to satisfy the need of their employees.
In the boom years, many companies removed cash from their pension schemes as there were indications that the schemes were over funded. Many of those companies are regretting this action.
PENSION SHORTFALL
It is now estimated by HSBC , an investment bank, that the pension shortfall of companies in the S & P 100 is now as much as US$340 billion. Further, the shortfall in some major British companies such as British Airways and Rolls Royce is as much as half of their market capitalisation.
The main cause of the pension problem arose from the fact that many companies offered their employees "defined benefit" schemes which pay the employees a pension based on an employee's final year salary. This may have been appropriate in a world where employees worked in one firm all their working life, but in a world where people work part time and employees commonly switch jobs, defined benefits became inequitable if persons are going to be paid the same defined benefit although they have not done the same number of years. Companies have become afraid of defined benefit schemes because they put the risk on companies rather than on the employees.
VOLATILITY
With volatility in the stock markets and general uncertainty in the world money markets resulting in an increasing level of world competition, companies cannot be certain of the profits they will make from year to year and thus are afraid of a contingent liability that will be computed on a final year's salary. What some companies have done is to shut the defined benefits to new entrants.
Because contingent liability cannot be calculated precisely, companies have to choose between putting in too much money and starving the business or putting in too little and having to face a later liability that may create greater problems when they have to report lower profits to their shareholders.
What seems to be evolving is that companies and staff agree that the employee should determine the correct amount to be saved with contributions from the companies called "defined contribution plans". Both parties make regular contributions and when the employee reaches retirement age, his benefits are directly proportional to his contributions.
This would fit in with the proposed change in our Pension law which allows for portability of pensions. An employee would not lose any benefit as his pension could be taken with him wherever he goes. This facilitates an employee moving from firm to firm without losing his anticipated pension benefit. Fitting in with the Singapore model, it may even have an added benefit with greater investments in the stock market as each person could define his holdings and may be more aggressive in the way his money is invested, proving to be of benefit both to companies and employees. One disadvantage to companies is that they may not be able to pack the pension scheme with their own shares as the employee may well see that as a risk to their investment, as in the case of Enron where the pension scheme was packed with Enron shares which proved to be worthless.
Mr. John G. Leiba is an Attorney-at-Law at Dunn Cox. Dunn Cox is located at 48 Duke Street, Kingston. For comments contacted Mr.Leiba at John.Leiba@dunncox.com.
