Allan Lewis, Contributor
IT APPEARS that long required regulation of the pensions industry will soon commence now that the Senate has passed the amendments to the Pension (Superannuation Funds and Retirement Schemes) Act, 2004 (the 'Act') and accompanying Regulations.
The Lower House of Parliament will soon consider the amendments and act accordingly. Notwithstanding the long delay in the process of implementation, many trustees may still not be aware of how their world will change in a few months. Trustees need to assess how they are currently operating in order to properly discharge their responsibilities to pension scheme members.
Although there are several areas to consider, the best practice principles of scheme governance, whether defined benefit or defined contribution, charge the trustees of all pension plans with the primary responsibility of ensuring that members achieve the benefits promised under the pension plan. In addition, all trustees will now have to increase their emphasis on the rights and needs of members by among other things, providing them with increased information about all facets of the operation of their pension plan.
For defined benefit plans, the trustees' prime objective should be to ensure that they can pay the promised benefits. Their role is not to maximise investment returns with minimum risk, nor to monitor their investment managers to ensure that they outperform a particular index or other benchmark, nor to try and minimise the employer's contribution. Instead, trustees must strive to match or outperform the liabilities of their respective schemes. As a result appropriate investment strategies for pension plans can only be properly conceived and implemented by considering each plan individually.
ACTUARIAL LIABILITIES
In Jamaica, many defined benefit plans reflect surpluses. In other words, the actuarial liabilities of the plan are less than the assets invested on behalf of the members. Unlike the more developed countries whose corresponding plans are largely in deficit, a significant portion of Jamaica's population is still below retirement age. The question of who owns these surpluses will likely require the consideration of the trustees of many pension plans. This controversial question has been addressed in different ways in different jurisdictions. In Jamaica, the Act and accompanying Regulations do not explicitly address this issue, and in recent times members have petitioned the courts to rule.
For defined contribution schemes, although the aim of trustees is to deliver good pensions, the individual members bear all the investment, inflation and longevity risks. Trustees should ensure their members receive access to good quality information, continuous education and appropriate advice. In addition, trustees have a responsibility to make sure that their members of defined contribution pension plans have a range of investment options available to them.
The practice of investing the entire fund in a single investment strategy does not reflect the diverse risk profiles, lifestyle choices and other characteristics of pension plan members. Many members are entirely comfortable with the business of investing for their own futures. It may be more appropriate for other members who may be less inclined and risk averse to have their pension funds invested in very low risk products where there capital is protected.
Apart from the net investment return achieved, there are two other elements that determine the level of pension received by members of defined contribution plans. Firstly, the level of contributions. Trustees should provide their members with financial planning tools such as financial calculators that enable their members to calculate for themselves the level of contributions required to accumulate a certain amount of capital at retirement. The second is the annuity purchase.
ACCUMULATED CONTRIBUTIONS
At retirement, members will typically exchange their accumulated contributions for a promise from an appropriate financial institution to pay a periodic pension for the duration of the members' life. The cost of the annuity will be greatly influenced by the competitive market. The authorities should ensure that members of defined contribution pension plans have access to sufficient choices for the purchase of annuities.
The best practice associated with the governance of pension plans requires that the board of trustees recognise and deal appropriately with conflicts of interest as they arise. In addition, the Act and accompanying Regulation will require trustees to improve communication with members, and make the business of the pension plan more transparent. In the normal course of conducting the business of the pension plan, trustees will rely on the advice of advisors (e.g. actuarial, legal, investment).
The performance of these advisors should be regularly assessed against predetermined criteria. In addition, advisors should be required to present their recommendations with clarity and with little jargon.
PENSION REGULATION UNNECESSARY
It has been suggested that pension regulation is unnecessary in Jamaica and will only increase the costs of the plan to the detriment of members. On the contrary, the business of pensions is too important to individual members and the collective community. How we provide for our later years is just as important as how we provide for the new-born. The new Pensions Act and accompanying Regulations will improve the governance of pension plans thus protecting the interests of all members.
Disclaimer. This article was prepared by Allan Lewis who a director of Prime Asset Management Limited ('Prime', and chairman of the Pension Funds Association of Jamaica (PFAJ) Prime provides pension fund administration and investment management and advisory services. The information contained in this article has been obtained from sources that Prime believes to be accurate and reliable. Neither Prime nor the PFAJ purport to be giving any specific advice, legal or financial and readers are encouraged to seek advice on any specific issues raised in this article. Prime does not deal in or make a market in any securities mentioned in this article. Please contact the author at allanl@primepensions.com with comments and questions.
