Reform pension model to secure Jamaica's future

Below is a lightly edited excerpt from a contribution by North West Manchester Member of Parliament Mikael Phillips to the parliamentary pension reform debate in November.

Over the years, the cost of pension has been increasing and is likely to continue to increase. It is the consensus inside and outside the House of Representatives that the current system is untenable and that this reform should have come sooner than later.

The unity shown on this report proves that we can come together to do what is necessary to move this country forward, and not play cheap political games, as we have been seeing in the media recently.

The expected outcome is a system that provides benefits that are adequate and consistent with human-resource policies in the public sector, yet affordable to the Government and sustainable as we try to reduce our debt.

The report suggests that we retain the defined benefit model.

I will agree that we do retain this model only for the existing employees, and would suggest that we should introduce the defined contribution model for all new pensionable employees, starting January 1, 2013.

Despite my support, I am cognisant that continuing the defined benefit model will still leave the Government exposed in the near future, with any shortfalls between future liabilities and the plan assets.

And the primary reason for introducing this reform is so that we can reduce our unsustainable public-sector obligations. We also have to remember that even though we are transitioning into a new system, there will be a huge debt to deal with the pension legacy liability.

With any shortfall that might arise, it would be left up to the government of the day to fill that gap, which would mean going to the Consolidated Fund.

With the defined contribution model, the pensioner will have to take an acceptable risk.

Research shows that the defined benefit model is not sustainable in the long term, given the size of the public sector, and the revenue flows.

Most private-sector companies, and countries, are reforming their pension system to go the defined contribution model, especially as the investment opportunities worldwide becomes increasingly challenging.

I would encourage the minister to re-examine the models closely.

I am in full agreement with the recommendations for the establishment of a segregated fund under trust. In establishing this segregated trust, we need to ensure that the construct of the implementation team consists of the required skill set to deal with the substantive matter of pension and investment.

multiple fund managers

I would go further in suggesting that we look at a model where the entire fund is not entrusted to a single fund manager, but that the various investment segments are broken down and put to tender. This would mean that no one fund manager would have all the pension funds under his control, and would increase competition for companies to deliver a return on the funds entrusted to them, and also help to increase transparency.

Also, there is the need to ensure that the future income of our public-sector body is not put at risk by the concentration in a single fund manager.

Nowhere in the recommendations being considered speaks about portability. It needs to be considered, not only in respect to movement within the public sector, but also from the public sector to the private sector. This should apply equally to public-sector workers and parliamentarians.

I would support a pension formula of two per cent the average of the last five years' pensionable pay, times years of pensionable service, for existing employees. But I would suggest a reduction of the accrual rate for all new pensionable employees to 1.8 per cent, starting January 1, 2013.

As compared to other pension schemes, two per cent that is being suggested is very generous and unsustainable in the long term.

We cannot overemphasise the importance of having strong regulations governing the funds, and to remind the Lower House that a promised review of the private pension retirement scheme is overdue. We can use this opportunity to do so now.

I am in full support of the suggested start-up date of January 1, 2013 for new pensionable employees, and would support a transition date of 2016 for existing employees.

Where entitlement of benefits is concerned, I would like us to be a bit more liberal in our thinking.

It was this Parliament that legitimised the common-law union, and ensured there is some provision that the common-law spouse receives some of the privileges extended as dictated by existing laws dealing with survivor benefit.

Again, I express my support to the reform of the public-sector pension system. Let us not miss this opportunity to use this tool to both bring the fiscal accounts in line, but also to ensure that the future of our public-sector workers is made secure. We must spend the time to balance the necessity of fiscal sustainability with worker security. None can survive without the other.

As the elected representatives of the people, and the guardian of the public purse, we have a responsibility to pursue this reform with diligence and prudence.

Email feedback to columns@gleanerjm.com and mphillips@cwjamaica.com.