Bob Marley: pensions expert ahead of his time

Bob Marley was one of the most innovative and well-known reggae musicians of all time. He had a passion for social change, and with a stroke of genius, got his fans to dance their troubles away.

Although some were love songs, much of his music dealt with the struggles of the poor and the powerless. He would have been of pensionable age now at 70 years old. So as a fan of his, I sometimes wonder what he would think of modern times and the new economic threats that face us.

Talking about the poor and powerless, the pensions poverty trap in Jamaica is very real. Less than 30 per cent of the elderly receive a pension; and those who do have a pension complain that it is not enough for them to sustain themselves. So, the elderly in Jamaica are floundering on low incomes. And most working adults in Jamaica either don't care about pensions or don't have enough money, and so are worried about lack of money in retirement. This is staggering.

We also know that the world economy is not in good shape. The news from America and Britain has been reasonably positive, but Japan's economy is struggling and China's growth is now slower than at any time since 2009. Unpredictable dangers, including stagflation or deflation in the developed world, wars, terrorism, and epidemics like Ebola, are rife.

And Europe is one of the biggest economic threats - by far. The Eurozone is on the verge of tipping into its third recession in six years. Despite the European Central Bank recently announcing a massive quantitative easing programme to stimulate spending and avoid a deflationary trap, it is unclear whether, and to what extent, it will be successful.

Bob Marley once sang, "One good thing about music, when it hits you, you feel no pain." Have the intermittent market recoveries in recent years dulled the painful memories of the crises and hindered pension fiduciaries from taking precautionary actions?

The big picture is sometimes forgotten: when running a pension plan, the main aim is to ensure that members' promised pensions are secure and adequate, irrespective of the strength of the economy. Workers need to be able to retire with the amount of money that they reasonably expect to receive or was promised.

What are the possible solutions?

Pension plan fiduciaries should focus on the things that matter. For example:

1. Set realistic and aligned funding and investment goals.

2. Make it compulsory for employees to become pension members.

3. Diversify investment strategies for defined benefit pension funds.

4. Do all it takes to provide increases to vested pensions.

These are crucial in order to survive the 'new normal' world that we live in.

FOCUS ON WHAT MATTERS

Employers and trustees are increasingly worried about the impact of members living longer than expected (longevity risk). It is important to manage this risk appropriately. What is appropriate differs from one pension fund to another.

That would help, but it's not enough. More attention needs to be paid to the investment strategy, which directly affects the pension cost to the employer. The focus should be on strategic risk management. This involves managing the main assets, liabilities and (in many developed countries) employer covenant risks - putting the necessary measures in place to reduce these risks.

It may not be glamorous; but the pain that we feel on the downside can be a lot more intense and longer-lasting than the thrill that we feel on the upside. After all, members panic at the doomsday scenario where there is a big funding hole in their pension plan and their employer can no longer support it.

INCREASE PENSION COVERAGE

It is surprising to see such a low proportion of the workforce (less than nine per cent) that have a pension in Jamaica. While some may have other investments (e.g., property) to rely on for their income in retirement, this very low level of pension coverage means that the Government will have a large portion of society reliant on them (or their families) for a pension for many years. This is unsustainable, especially at a time when the Government's finances are currently in dire straits.

The Government could also help by focusing more on improving the long-term strength of the Jamaican economy, ultimately encouraging the workforce to have more faith in saving and investing for their future.

Many other countries, e.g., the USA, UK and the Netherlands, offer some form of compulsion. For example, it is compulsory for companies in the UK to offer automatic pension membership for their employees. This has increased awareness, engagement and the level of UK pension coverage significantly. Could pension-saving compulsion work in Jamaica? It's certainly worth exploring.

And this should happen soon; waiting too long to implement this compulsory change would be like Bob's lyrics, "I don't wanna wait in vain ... ."

DIVERSIFY INVESTMENT STRATEGIES

More than 80 per cent of pension funds in Jamaica invest only in government bonds. This is a staggering statistic. From the pension funds' perspective, that is too much concentration in one asset class. It is important to ensure that not all eggs are in the same basket.

The regulations need to be amended soon to encourage greater diversification, e.g., allowing pension funds to invest globally and in a wider range of asset classes. This helps to reduce risks, and very likely will enhance investment returns, which ultimately, could be used to finance those pension increases mentioned earlier. Lifting the current five per cent limit in global investments sooner rather than later is a sensible first step. And providing the means for Jamaican pension funds to invest globally is intricately linked to this first step.

It would also help if new regulations in Jamaica could be brought in to enable pensions to retain their purchasing power. There is no point working for a company, and when you leave or retire, the pension that you earn ends up frozen - for life. For example, $10,000 per month was a reasonable income in 1995. Now, 20 years later, that money can barely cover groceries for a month for one person.

Providing no increases to pensions (at least in line with price inflation) before or after retirement is a recipe for failure and keeps our current and future retirees destined for poverty. Much of these increases can be funded from the surpluses that exist in most defined-benefits pension funds in Jamaica.

HIGH TIDE OR LOW TIDE

Bob Marley's song So Much Trouble in the World sounds appropriate for the recent dark clouds of economic crises, wars, terrorist activity and epidemics around the world. The global market outlook might be positive in some places, but there are looming dangers in the local Jamaican economy. And things can go from bad to worse very quickly.

The pensions management industry in Jamaica should work with the pension regulators, the Bank of Jamaica and investment practitioners to take action to improve the financial strength and security of so many Jamaicans that rely on their decisions.

- Norbert Fullerton is an investment and pensions actuary and partner at Mercer Investments, London. Email feedback to columns@gleanerjm.com and nwfullerton@gmail.com.