Pending further public discussions, your pension plan remains unchanged

The National Pensions Bill, introduced in May – and reported on in our August bulletin (see On the horizon) – was recently deferred by the Legislative Assembly while it considers amendments. Designed primarily to address non-compliant employers and to raise the “pensionable age” (the age at which members are normally eligible to receive pension benefits) from age 65, the bill’s deferral means that your pension plan will remain unchanged for the time being.

The deferral is likely the product of a public commentary period, as well as extensive public discussion over the past several months. The Cayman Islands government has given no formal indication of the changes (if any) it is considering, although the amended bill is expected to be finalized in the late spring of 2013.

Of special note for Silver Thatch members, public discussion included two televised panel debates on Cayman 27 (on October 10th and 17th), called The Future of Pensions. The panelists included our own Carlyle McLaughlin Jr., Chairman of the Board of Trustees for the Silver Thatch Pension Plan, and Brian Williams, CEO of Saxon Pension Services, the plan’s client services manager. The panel also included several pension experts and Members of the Legislative Assembly, including Rolston Anglin, Minister of Education, Training and Employment. Both panel discussions are posted online and can be viewed at: www.cayman27.com.ky/?s=pensions.

The following is a guide to some of the issues raised as part of these panel discussions, and of key interest to employers and employees.

Raising the age of pension eligibility to 65

Although a controversial issue among many pension plan members, the panelists generally agreed that raising the pensionable age to 65 (up from the current age of 65) will help to improve the readiness of Caymanians to retire when the time comes. Of note, 65 is the typical retirement age in the USA, Canada, the UK (for men) and many other industrialized nations. And facing financial pressures, many of these countries are looking to extend the “normal” retirement age to 67, 68 or older.

The change recognizes that people are simply living longer and spending more years in retirement – which means they need more retirement savings than ever before. Delaying the pensionable age to 65 gives people more time to grow their retirement savings, and fewer years to rely on them.

By introducing the term pension eligibility and eliminating the term retirement age, the proposed law would also remove any notion of mandatory retirement. As is currently the case, pension plan members could continue to work beyond age 65 and make voluntary pension contributions. That said, employers would not be required to contribute to employee pensions once the member reaches the age of pension eligibility (age 65). Panelists felt that not having to make pension contributions for older members would encourage employers to hold onto these productive employees.

Clarifying participation in pension plans by expatriates

The pension bill makes clear that an expatriate employee engaged on a work permit of one year or more must participate in a pension plan. An employee on a temporary work permit of less than one year is not permitted to participate in a pension plan, although this is only for the first year of their Cayman Islands employment. Excluding short-term temporary workers helps to keep pension administration costs lower.

Once a temporary work permit holder’s Cayman employment extends beyond one year, they too must participate in a pension plan. The only foreign workers who are exempt from participating in pension plans are domestic helpers, excluding specialist caregivers.

Some Caymanians contend that expatriates should not have to participate, and that employers should be exempt from making contributions to expat pension accounts – especially since these retirement savings can be fully refunded in cash to an expat plan member after only two years of leaving the Cayman Islands. The television panelists generally took an alternative view, agreeing that expats should be required to participate, to build personal retirement savings, and to help contribute to the scale and efficiencies of pension plans. However, the panelists also supported amending the bill to require that expats leaving the Cayman Islands transfer their pension savings into a pension plan or other type of locked-in retirement savings scheme in their home country.

Designated voluntary contributions

Despite some suggestions to increase minimum employee and employer contributions (each set at 5% of earnings) and maximum pensionable earnings (set at $87,000), the new bill includes no change to the basic contribution levels. However, the bill does introduce designated voluntary contributions. These are member contributions that could be withdrawn before age 65 for several select purposes, including healthcare, education and housing. There is no plan to change the existing additional voluntary contributions, which are accessible only at the age of pension entitlement.

Silver Thatch supports the introduction of designated voluntary contributions as a progressive change. Withdrawing these voluntary contributions to buy or build a house is a better alternative than withdrawing basic pension savings under the housing withdrawal rules introduced in 2011 (see Home loan update on page 3 for more information). That said, the National Pensions Bill’s provisions on housing withdrawals as currently drafted does prohibit withdrawing both basic pension savings and designated voluntary contributions in combination.

Survivor benefits

As an important plan improvement, the bill would extend survivor benefits to protect dependent children. Where a plan member dies leaving a spouse and dependent children, 50% of the value of the pension would be paid in trust to the legal guardian of the dependent children for their benefit.

Enhanced transparency

To help improve member understanding of their pension plans, the new bill would require plans to provide quarterly pension statements. As it stands, statements must now be delivered once a year. The bill would also require plan administrators to make specified performance details available to membership applicants. While these are certainly steps in the right direction, critics argue the proposed rules don’t go far enough to help engage plan members – or to help them understand how their plan works or how it is performing.

As Mr. McLaughlin stressed to the panel, Silver Thatch is a leading supporter of improving the information and education made available to plan members, and has set an example that other pension plans would do well to emulate. For example, Silver Thatch has been providing member statements quarterly (and financial statements annually) since the plan’s inception. Silver Thatch also gives members online access to a wide range of information and tools through the plan’s website, and investment fund performance is published quarterly in this bulletin.

Investing more pension assets in the Cayman Islands

While the National Pensions Bill does not address the investment of plan funds in the Cayman Islands, domestic investment remains a subject of discussion. Some Caymanians believe that a portion of assets should be designated for local investment, possibly even in social initiatives.

As several panelists said, the Cayman Islands is a small investment market where there are few opportunities to invest pension plan assets. These are assets that plan members are depending on as a key source of financial support in retirement, and must be invested to meet high standards for risk and return as a key guiding principle.

More information

Silver Thatch will closely follow the progress of the National Pensions Bill, including proposed amendments, and provide you with updates.