Oran Hall | NIS and approved retirement schemes: similarities and differences

The National Insurance Scheme, NIS, and approved retirement schemes – one government-sponsored, the other privately sponsored – have both come into being through laws enacted by the government.

Both are meant to give benefits to defined members of the population, who are required to make contributions, and though their scope varies, they can work well together to be of benefit to a very important, but vulnerable sector of the population, retirees.

The NIS is a compulsory contributory funded social security scheme meant to cover all employed people in Jamaica. It is administered under the National Insurance Act and offers some financial protection to the worker and his or her family against loss of income arising from injury on the job, sickness, retirement and/or death of the bread-winner.

Everybody between 18 and 70 who is gainfully occupied in insurable employment is required to be registered with the NIS. Those qualified to be insured include the employed, self-employed and voluntary contributors.

An approved retirement scheme – ARS for short – is a tax-advantaged retirement arrangement under the Income Tax Act and the Pensions (Superannuation Funds and Retirement Schemes) Act, 2004 to enable its members to save for their pension at retirement.

The scheme must be approved by the Financial Services Commission in order to operate. Membership is open to Jamaican residents who are at least 18 years old. They must be self-employed, or contract workers, or employed in a non-pensionable post, or otherwise employed, but are not members of an approved superannuation fund.

Although individuals cannot contribute to more than one pension fund or retirement scheme at the same time, upon termination of employment, members of an approved retirement scheme or approved superannuation fund are entitled to transfer their pension benefits to an approved retirement scheme.

Members of an ARS may contribute up to 20 per cent of their annual income to the scheme, but contributions do not have to be made on a monthly basis; employers may opt to contribute on behalf of their employees, but not more than 10 per cent of the employee’s salary – the maximum prescribed under an approved superannuation fund. The combined sum cannot exceed 20 per cent of the employee’s annual income, and plan members may determine how their contributions may be distributed among the investment funds.

All contributions are held in trust by a board of trustees – which is ultimately responsible for the operations of the scheme – for the benefit of the contributors, but the trustees may appoint an administrator and fund manager to assist them to carry out their duties.

The Ministry of Labour and Social Security is responsible for collecting NIS contributions and for administering the benefits under the scheme. Individuals must pay NIS contributions during their working years. For those in the employ of others, both the employer and employee pay a specified rate on a specified salary and the self-employed pays an amount equivalent to the sum of the contributions of the employee and the employer.

The contribution rate is 6.0 per cent. Of this, 3.0 per cent is deducted from the employee’s gross salary, subject to the NIS insurable wage ceiling, and the employer makes a matching contribution. The wage ceiling is currently at $5 million per annum, and the self-employed pays the full 6.0 per cent up to the ceiling.

Contributions to the NIS are managed by a special investment vehicle set up by the government exclusively for that purpose – the National Insurance Fund. It invests the contributions in several types of investment instruments by creating several diversified portfolios. The contributors have no say in how their contributions are invested and all contributions are put into one big pool.

Retirement schemes also invest the contributions from their members in diversified portfolios. They are defined contribution plans, so the pension benefits are determined by the performance of the investment portfolios, which influences the value of each contributor’s account at retirement, and are not guaranteed or based on a formula related to the amount of contributions as is the case with the NIS.

The NIS is really an insurance scheme that pays several types of benefits including invalidity benefits, benefits and grants to orphans, widowers and widows, and funeral grants, and through the NI Gold Health Insurance Plan, many health insurance benefits. An important benefit that it pays is the old age pension to contributors who attain the retirement age defined by the National Insurance Act and meet the contribution requirements during their life time.

The pensions that the ARS and NIS provide for their contributors who retire, and the other benefits paid by the NIS, directly or indirectly, help to provide the means to meet Important expenses in the final phase of the life cycle. Since only contributors ultimately qualify for benefits, it is important to make the required contributions to the NIS and to enrol in an ARS and make the required contributions.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.

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