As Governments face funding challenges, how important are private pension plans to the society?
Despite the various challenges facing it, Barbadians are arguably proud of the National Insurance Scheme. But with concerns about the extent to which Government has been relying on it for funding and the fact that a number of workers have lost their jobs in recent years, while others are working longer, private pension plans have become more important.
A number of private businesses in Barbados have pension plans, many where workers contribute on a regular basis, usually monthly. In recent years a number of registered retirement savings plans have also been introduced as alternatives to traditional pension plans.
According to information already released by the Financial Services Commission, which has been regulating occupational pension benefits plans since 2011, there are about 300 active plans in Barbados and these provide coverage for an estimated 28 000 workers. The majority of these workers are employed in the service sector, and there is also significant coverage for employees in the financial and sales sectors. Overall, these plans currently management between $1.3 billion and $2 billion in assets.
With Barbados and other countries in the Caribbean affected by economic hard times, indications are that these recessionary times have not only affected Government but also posed challenges to financial entities like pension plans. This was an observation made by Royal Fidelity assistant vice president Jillian Nunes, who noted that companies were shifting their focus from defined pension benefit plans to defined contribution pension plans, where employees had to take on more of the costs.
“The transfer of pension responsibility from employer to employee is happening because the investment returns realised by these defined benefit plans have not been high enough to satisfy the future obligations of the pensions. This deficit has put such a strain on company balance sheets that employers are now addressing it by switching to defined contribution schemes,” she said.
Much of what is taking place in Barbados regarding private pension plans is being done within legislation that dates back to more than ten years ago – the Occupational Pension Benefits Act. In an analysis on the issue, veteran Barbadian actuary Charles Herbert pointed out that the act was passed by Parliament in 2003, but was only proclaimed in February 2011, the same time its regulations came into force.
Herbert, who is a principal at actuarial firm Eckler Limited, pointed to positives including tax incentives, exemptions, and the availability of 25 per cent in cash tax free on retirement.
However, some draw backs, including “poor” member information and often long delays in computing benefits were also pointed to.
In many instances, such pension challenges are not unique to Barbados, as other Caribbean countries and nations beyond the region are also confronting such issues.
The challenges are also not new.
Commenting on the issue two years ago, Trinidad and Tobago’s Chamber of Industry and Commerce said: “There has been a steep upward trend from 1970 to 2010 in public spending on pension funds as a percentage of GDP in advanced economies. Also, there has been increasing ageing alongside a declining replacement rate and labour force participation. In other words, over the past 20 years there have been fewer persons employed and therefore fewer contributions to fund the growing number of persons becoming eligible to receive pensions.”
“Further, the challenge of this mismatch is forecasted to be more pronounced between 2030 and 2050. There is also consideration uncertainty and risks in these projections – a high old age dependency ratio, low productivity, and labour force participation rate and reform reversal.
“The much needed political will to deal with these issues cannot be foreseen so far into the future. In terms of pension, gradually increasing retirement ages is an attractive option rather than a substantial increase over one term; similarly so is increasing payroll contributions to help offset increasing pension spending.”
