Oran Hall | Teacher confused about pension arrangement

QUESTION: I am a government-paid teacher at a grant-aided high school. Recently, before a general staff meeting, the principal brought in a representative from one of Jamaica's largest and oldest financial houses to talk about retirement. He stated that before the Government of Jamaica implements our plan, which I believe is scheduled for April 2019, we could start our own plan with any of the licensed private companies who would then write to the GOJ explaining that we are a part of their plan, hence exempting us from the GOJ's plan since we cannot be a member of more than one plan.

I would therefore like some advice which is independent on which plan has given the best yields over the last 10 years and what is their forecast for the medium term, as well as what they invest the pooled funds in and the requirements for joining such a scheme, and what the payout would be like. I am 40 years old, and I would like to start with 1 per cent of gross salary per year and increase it gradually by 1 per cent per year until it reaches 10 per cent. If, in the future, I get a better job, I'll increase it to 20 per cent of gross income, which is the maximum.

Mendes

FINANCIAL ADVISER: Up to now, government employees, with the exception of teachers and a few other groups, have been contributing four per cent of their salary to the Family Benefit Scheme from which spouses and children under the age of 19, or up to 23 if attending university, get a monthly pension upon the death of the government employee.

Under the new pension arrangement, government employees will be required to contribute to their pension. Ultimately, they will contribute five per cent of their salary. Employees would thus stop contributing to the Family Benefit Scheme and contribute only to the pension fund.

Participation in the new arrangement is not optional. Government employees must contribute to the pension plan. And you are right employees will not be able to be members of two pension arrangements.

The Government's plan is a defined benefit plan, meaning that pension benefits are based on a formula which would take into consideration factors such as years of service and final salary.

The private pension arrangement that financial institutions sell is called an Approved Retirement Scheme and is open to persons who are not members of a similar scheme or of a superannuation fund. Members of such schemes can contribute up to 20 per cent of their pensionable salary. But these schemes are defined contribution or money purchase schemes from which retirement benefits are based on the contributions made by the member and the income earned on them.

In the defined benefit arrangement, it is the employer who takes the risk but, in the case of the defined contribution scheme, it is the employee who takes the risk.

At best, it seems that a confused person has confused you and others. In any case, I wonder how the proposal put to you and your colleagues would work.

The questions you raised regarding historical performance, projections, how the funds are invested, requirements for joining and the policy relating to the paying of benefits are all relevant questions, but I suggest that you also consider the fees the providers charge. Individuals wanting to get that kind of information would have to be prepared to do much of the legwork themselves to be able to come to a decision.

In terms of how you would approach making your pension arrangements in the event that you opt to depart from the government service, it does not necessarily follow that you could participate in any of these independent schemes for you could end up being employed by a company that has a pension arrangement in which you would be eligible to participate.

I agree with you for considering how best to make your pension arrangements, but suggest that you exercise care in the attention you pay to what is presented to you.

- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. Email finviser.jm@gmail.com