REFORM CHALLENGES

Quite a lot has been said about the new regime, some uncomplimentary and some praising it.

However, the pension industry and all its stakeholders, for want of a better word, will have to come to terms with these changes.

The first challenge was the registration deadline.

All pension funds, retirement schemes, and trustees had until September 29 to register with the Financial Services Commission (FSC).

This process, which members in the industry referred to as 'transitioning', included the following:

Elections to select member nominated trustees. Sponsor (employer) nominated trustees should comprise no more than 51 per cent of the board of trustees;

Elections to select pensioner-nominated trustees, where the pension plan had more than 30 pensioners;

Submission of police records for all trustees;

Completion and submission of various forms such as 'fit and proper questionnaire';

Review of trust deed and rules to ensure they were compliant with the Pensions Act;

Submission of actuarial valuations and members handbook;

Submission of written policy documents to the FSC within 60 days approval of the pension plan.

TRANSPARENCY

From all indications all pension funds made submissions but only a handful provided all the required information.

One may ask, why all this? One of the most important developments in the new dispensation is the requirement for all pension funds and retirement schemes to have the members elect a member-nominated trustee.

This is a first step in improving governance and transparency as persons were (and to some extent are) of the view that this business of pensions benefits only the company (employer/sponsor) and not the members. It is hoped that with the participation of members at the decision making table, transparency will be improved and that those elected will act and make decisions to the benefit of the membership.

The trustees are charged by law with the fiduciary responsibility for the management of the assets of the plan. In exercising this fiduciary responsibility, the trustees are governed by the 'prudent man' rule, which requires the exercise of that degree of judgment and care under the prevailing circumstances that persons of prudence, discretion, and intelligence, who are familiar with such matters, exercise in the management of their own affairs. The rule discourages speculation, requiring instead that the trustees consider the probable income to be derived as well as the probable safety of their capital.

EVENTS SHAPING SECTOR

The following is a chronology of other events that shaped the pensions sector during 2006:

March 23: JNFM Pension Fund Management hosts a seminar entitled 'The impact of governance and investment decisions on the solvency and sustainability of pension funds'. Presenters included FSC executive director Brian Wynter, actuary Daisy Coke, and UWI Fellow Edward Seaga as guest speaker.

April 21: At a meeting chaired by Minister of Finance Dr. Omar Davies it was resolved that a technical committee be formed to consider the issues surrounding phase two of the pension reform. Another committee would be formed to discuss the harmonisation of the Income Tax Act and the Pensions Act.

June: Prices on Government of Jamaica U.S. dollar global bonds - an area in which pension funds invest - fell to their lowest level in years as institutional investors overseas reduced positions on concern of a continued increase in U.S. interest rates.

The yield on the 2036 and 2025 bonds fell to $86 and par, respectively, yielding on both instances above 9.0 per cent.

June 19: The phase two pensions committee convened its first meeting. Seven meetings followed between July 3 and December 5.

July: The Supreme Court handed down judgment in the case of the Workers Bank Pension Fund. The question before the court was whether workers who took their contribution with interest and left either upon resignation or upon redundancy could now share in the surplus of the plan which was in the process of being wound up.

The court ruled that the trustees acted in the best interest of the members who had three clear options at date of termination: take contributions with interest, take a deferred pension or have contribution used to purchase annuities. Since there was no evidence of coercion, the employees were found by the court to have selected the options at their free will and had to abide by their choice.

Only current members, pensioners and surviving spouses were entitled to a share on winding up.

July: The Jamaica Stock Exchange Index fell to its lowest level today at 80,414 points, representing a 23 per cent decline in value since the start of the year. Pension funds with exposure to equities continued to feel the pinch. However, due to the decline in interest rates, this was partially offset by higher bond prices.

July 30: The Supreme Court threw out a claim by members of the Desnoes and Geddes Pensioners' Association that the pension plan should be wound up and the $1.1 billion surplus in the fund paid out to them.

In the class action brought by four members of the association for the court to terminate the pension plan, the claimants had asked the court to rule that the four amendments made to the trust deed between 1979 and 1995 were invalid.

The court stated that the claimants were estopped from challenging the validity of the amendments to the D&G pension plan.

It ruled that none of the amendments had adversely affected the benefits of the members and that some were beneficial to the members and employees.

In her decision, the judge said there was an express power to amend the 1971 trust deed by virtue of the rule which empowered D&G to change the plan.

August 30, 2006: It was revealed that the Government of Jamaica owed billions of dollars to pension funds for unpaid withholding taxes dating back, in some instances, three years.

Analysts argue that this delay was costing pension funds in unearned interest, negatively impacting the pension fund members and pensioners.

September 1: Pension plan providers appeared disappointed at the FSC for refusing to grant licenses for new retirement schemes. However, even though the New Pensions Act makes clear provisions, it appears that the FSC is putting in place the regulatory framework before issuing any new licences.

September 19: Duggan Consulting and DunnCox hosted a seminar "Protecting your future, Understanding your rights" with presenters Astor Duggan, Dennis Edmonds, Brian Denning and Geoffrey Melbourne as guest speaker from Watson Wyatt Worldwide (Canada).

September 29: D-day for Jamaican pension funds and retirement schemes to submit documentation for registration with the FSC. The deadline passed without much fan-fare, with a large number of pension funds submitting the required documentation.

MORE REFORM TO COME

The phase two pensions committee chaired by the Minister Fitz Jackson has made good progress in addressing a number of outstanding issues. These include:

Porting: Members will be permitted to transfer their benefit from one pension fund/scheme to another.

Currently, these funds are refunded when an individual changes jobs and is usually consumed, rather than reinvested, leaving many persons without an adequate pension at retirement.

Locking in: Requiring that member's compulsory contributions be locked in, or unavailable to contributor, after five years of membership in a pension plan.

There would be a transitional period of one year after which no withdrawal can take place except if the member is diagnosed with terminal illness and terminates membership prior to normal retirement age.

Indexation of Pension: Pensions are allowed to be indexed to inflation subject to the resources of the pension plan and sponsor, and made with reference to the Consumer Price Index (CPI).

Retirement Schemes: There is ongoing discussion to increase the amount that can be contributed tax free to a retirement scheme from $6,000 to 20 per cent of remuneration. The previous limit was outdated.

This change should stimulate demand from self employed persons for this retirement vehicle.

One of the key challenges for the future will be encouraging Jamaicans to begin saving more for retirement.

This task will be borne by the investment managers and needs to be flexible to adapt to the various needs of potential savers.