Pension firm predicts serious shortfalls

| 04/03/2010

(CNS): It comes as no surprise that pension administrators have voiced their objections to the government’s pension holiday, which will take effect as soon as the new bill is gazetted. However, one of the biggest local providers has asked its experts to predict what the likely impact of a two year break in contributions would be to the money available to a contributor once they retire. Silver Thatch asked its Canadian actuarial consultants to offer a monetary value and they have predicted that a member currently aged 25 with a salary of $50,000 per annum with 40 years left to contribute could lose almost $200,000.

The consultant noted that, depending on performance and the increase in salaries over a working career, if the contribution remained at 10% the average account balance would be down $193,000 if the member takes a two year break. The impact on someone earning the same salary at 35 years old would be $100,000 and around $38,000 for some one aged 45 when they took the break.

However, with pension funds severely impacted by the world economic crisis in recent months it remains to be seen how real such a result would be as many people have already seen their funds fall dramatically, even when their contributions are being paid in.

The bill to amend the Pension Law was passed in the Legislative Assembly on Monday and it has removed the mandatory obligation of employers and employees to make pension contributions for 12 months for Caymanians and 24 months for work permit holders.

The move is designed to give the working population extra cash at a difficult economic time and is entirely voluntary, with employers having to prove their employees have volunteered to freeze their pensions. With more than 600 employers across the island delinquent on payments to pension funds, coupled with the economic downturn, many workers in Cayman are already facing shortfalls in their pension funds, even though they have had the five percent deducted from their earnings.

The minister for labour, Rolston Anglin, who brought the bill to the Legislative Assembly, said these employers would need to pay back their employees’ contributions before they could partake in the holiday, which would give them time to make up the money that is missing from their workers accounts.

The minister explained that the goal was to offer relief to people who were suffering economic hardship, and with no direct tax base to manipulate, the pension contributions offered a way to help.

“What we have struggled with is, given the set of circumstances before us, how can we have a meaningful and direct impact on business and people offering the much needed relief,” Anglin said on Monday. “We need to find a way to also get the money owed to employees back into their funds.”

Anglin explained that in some cases employers owe so much into pension accounts that, were they forced to pay back, they would go bankrupt, which would mean employees would never see the money owed to them.

 

Silver Thatch’s Board of Trustees Chairman Carlyle McLaughlin said the calculations made by the actuary were an eye opener about the risk of failing to contribute. “Though there might be an immediate, short-term gratification during the interim, in the long run, inarguably – you stand to lose by not investing.”

McLaughlin said that without understanding the long-term ramifications and seeing the broader picture people will be inclined to cut back on their pension contributions because of the current economic climate, but this can really make a difference to the pension income received at retirement. “We just want to ensure the local community is provided with the insight to appreciate the gravity of this decision,” he added.

He said it was of paramount importance members have their finger on the pulse when it comes to the facts of making this decision. It is our understanding that the only entities which can benefit from the holiday are those who are current with their contributions. Consequently, workers should ensure this is the case before making such a decision,” the chair added.

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  1. Anonymous says:

    It is easy for the Silver Thatch actuary to state that we would loose money in the long run. I hope he realises that we donot have to wait long term as we have already lost a lot money in our accounts.

    I am in my late fifties and  have seen  a significant chunk of my pension fund account eroded.On expressing my serious concern to my pension company, I was advised by them to think long term. I presume in my case I should look to my 70’s. What a joke you managers- you get paid even when the fund is draining.

    While I have nothing against the principle of a pension fund forfinancial protection in my retirement, I strongly object to the present business and inverstment model being used by the fund managers  to look after and make the money grow .

    A better option for the Government would be to have them just leave the money as bank deposits. That way our principle amounts would not be eroded.

    This will also benefit the local econony as the banks would have more liquid funds which they can, after due diligence, lend into the local economy. I definately would not sink money into the stock market and see it eroded or disappear into the sky as is happening now.

    • Chris Johnson says:

      Of course any report from Silver Thatch is self serving and I agree with the previous poster of Friday 21.26. Singapore gives you a choice of a pension scheme or a savings account.

      • Anonymous says:

        As far as I know, Singapore operates a Provident Fund that requires contributions to several accounts including housing, health, and pension. The pension fund is a defined contribution plan and the funds are invested. There is pressure on Singapore to alter how the funds are invested for better gains over the long term due to its aging population.

  2. Anonymouse says:

    I dont know who did that calculation but they must have used their toes for a calculator

  3. Anonymous says:

    CNS, can you seek some clarification for readers on the proposed details of the Civil Service Pension Holiday, salary cuts and health insurance changes?  Currently, civil servants’ pension contributions are fully paid by government.  Technically, government adds the civil servant’s 6%  as well as their 6% to the base salary and then deducts it and pay over to the fund.  So in essence, government is the one contributing the 12%.  If there is a pension holiday for civil servants, will government add that 6% to the civil servant’s take home salary so that they can have it to inject into the economy?  If the answer is no, then how will the civil servant benefit from the holiday? In the private sector, the intention is to free up money from both ends, the employer and employee, in order to inject into the economy.  In this case the holiday will temporarily benefit the private sector employee. The other question is one of the legal implications of a cut in salaries and benefits for contracted officers in the civil service.  Wouldn’t both parties have to agree to this?  Wouldn’t the terms of the contract change?  Finally, when the government states that civil servants may have to contribute a percentage of their health insurance, does it mean percentage of the insurance premium or a percentage of the actual health care cost? If it is the latter, then that can be quite expensive pending the procedure the civil servant has to take.  If you can seek some clarification on this, I am sure many people will be appreciative.  It is good to be clear on what is expected.  People need to plan for changes, particularly significant ones like these.

    CNS: Wendy is working on this.

    • Real Tea says:

      Nope – doubt it very much…  I think this mve is designed to help both employee and emplyer – so Government is bound to keep their half in the name of "saving".

      Because, of course, you cannot save by trimming the fat…

       

  4. Alan Roffey says:

    An employer that has taken pension contributions from its employees and not paid them in to the pension fund is at least technically insolvent, if not actually bankrupt. In construction we suffer cash flow problems when our clients don’t pay us but as shareholders we are obliged to find the money somewhere.

    If some employers have been allowed to continue this behaviour to the point where they can’t pay without shutting up shop then I say they are actually bankrupt and should be shut down and declared unfit to be directors in a business.

    Whatever market they were serving will move to their rivals who are hopefully more responsible towards their employees

    The sooner this cycle is forced to reach its logical conclusion the less the employees will lose.

    The implicit tolerance of such behaviour, by failing to prosecute offenders, is the real enemyhere.

    What we need is for such employers to be driven out of the marketplace, not a pension holiday.

    • Rhum-point-pole says:

      This is not America.  Companies don’t go bankrupt.  Nor do we have a regime to declare directors unfit. 

      • noname says:

        Cayman companies can and do go bankrupt, i.e. insolvent or not able to discharge of its liabilities. I think you might be confusing bankruptcy protection legislation as exists in the US and other countries. As well, directors can be held liable for their actions. To say that there is no regime to declare a director unfit, is not completeley accurate 

        • Chris Johnson says:

          Cayman companies actually go into liquidation not bankruptcy and Mr Roffey ought to know this. Directors can be held accountable under the Companies Law in certain circumstances when a company goes into liquidation. However any liquidator will need a large cheque book to pursue directors under the law. Now for the cruncher: because our Companies Law is so archaic there are provisions to indemnify directors against almost everything except fraud. The indemnification of directors has been made illegal in almost all countries yet Cayman has ignored this facet.Moreover certain associations have expressed opinions against making indemnities illegal as they would lose their protection.

          Many of those persons supplying directors to clients in particularly hedge funds are collecting directorships rather like postage stamps. Several local persons have in excess of 100 appointments and at $10,000 plus per appointment you can work out the numbers! If a director has been merely negligent or reckless forget suing him as he will have his indemnity.This is wrong as third parties such as auditors may be sued whilst those persons at the helm are not accountable.

          Moreover unlike the UK and many competing offshore financial centres there are no provisions under the law for directors to be disquailified.This must be in the public interest.

          It is seriously time to address the directorship issue and other shortcoming under the law by amending the Companies Law part of which stems from the UK Companies Act of 1862. If the BVI has modern day Companies Laws why can Cayman not have the same. Perhaps CIMA could be persuaded to start the ball rolling.

           

  5. Anonymous says:

    I would like to see the employers who are not paying into their employees pension plan given a short amount of time to make it right or sent to jail.

    Of course the rule of law in the Cayman Islands is selective as we all know and I am not naive enough to believe that this could really happen. Enforcement of laws is such a silly idea.

    It makes me chuckle to even think about it.

  6. Wake me when it's over says:

    Anglin explained that in some cases employers owe so much into pension accounts that, were they forced to pay back, they would go bankrupt, which would mean employees would never see the money owed to them.

    There you have it!  Rather than enforce existing Pension’s Regulations this move appears to be designed to give non-contributing employers (those that have made deductions and not submitted them) more leeway to hum and hah about maybe sending them in sometime within two years. 

    Gee

    Or, possibly not at all.

    Very many employees know that already. This does not improve their situation.  Except that they are not now obligated to assist the theft of their wages.

  7. Curious says:

    One of the criteria for a refund is that the account, if over CI$5,000, remain inactive for two years. Wonder if in two years time there will be a stampede for refunds and what impact this would have on the pensions remaining in the fund.

  8. Fuzzy says:

    Mr Anglin is quoted as saying that if some employers were made to pay back what they owed for contributions they would be bankrupt.Is he saying that these people will not be prosecuted because they are unable to pay back what they stole?When an employee is caught stealing from his employer he usually has to pay it back plus pay a fine or more likely serve time,so why doesn’t this rule also apply to employers.At the very least a list of these employers should be readily available to anyone seeking employment in the Cayman Is.

  9. Anonymous says:

    Anyone who takes the pension holiday is a fool – taking a short term small gain and having to pay heavily for it in the future.

    Why do you think that caymanians can only do this for a year and others for 2?  because they know it will be detrimnetal in years to come, that’s why…

  10. Anonymous says:

    Open question for the Actuarial consultants ??

    What percentage of the peoples pension has been lost to poor investments and or bad judgement on the economy ??

    • Anonymous says:

      With pensions you must remember that they are long term investments. If the markets go down 20% generally a year later they are back up to the historic level. In fact if you are able to put more money into the plans when markets are rebounding then you will gain overall. The other consideration is looking at asset allocations.

      I would be more intersted in seeing performance against realistic benchmarks and to understand the risk profile of the funds. If you are invested in these Plans and you dont know that then you should ask the questions of the Trustees.

      • Wake me when it's over says:

        True what you say.  This begs the question then…why are Civil Service pensions guaranteed to retain their value?  (it’s in the fine print which the public is just now becoming aware of)

        If everyone else must undergo ups and downs with regard to their pension investment seems rather absurd one portion of the working public has to grin and bare it while the other just grins.

  11. Anonymous says:

    I say yes to the Pension holiday hoping they will do away with it altogether. We work hard to pay pension and when we’re ready to retire we don’t get what we put in. That’s robbery!  I say if we’re going to continue with pension may it be invested in Cayman  and no where else.

    • Anonymous says:

      I agree with you 100% and you could not have said it better. I think that whoever the company bank with there should just take out a seperate account and deposit it to the bank in the long run what we put in we will get back and further more the company will also gain from it cause they would be getting the interest made. as long as i know i put in $25,000 i want back $25,000 and not put that amount in and later down find out you loss $6000 or $8000 because of stock..

  12. CSI says:

    Silver Thatch didn’t need to go to a Canadian expert for this information.  The local pension providers made a similar statement last year when this hairbrained idea was first announced.  Nobody listened then, and they’ve gone ahead with it, so nobody is listening now either.

    • Anonymous says:

      The politicians have made up their minds, facts proving otherwise have nothing to do with their decision.

      "I have made up my mind,  do not confuse me with the facts."

      What a way to run our Islands.

  13. Anonymous says:

    Personally, I would prefer to have my contribution AND my employer’s contribution going directly to the bank that holds the mortgage over my property. If an employee has a property in Cayman they should be allowed to direct their contributions to pay off a real asset in Cayman and invest in Cayman instead of a pension fund. Then, instead of leaving my contributed funds to date in a pension fund that is just losing value, allow me to cash it in BUT to cover the outstanding mortgage on my property – again, buying a real asset in Cayman and investing in Cayman.

    • Anonymous says:

      You know what, that is actually a great idea.  

    • Anonymous says:

      Wow, I love this thought!  Brilliant!!!  We all need a lil help at the bank, less stress.  Yup, I’ll take my pension this way anytime.

  14. Anonymous says:

    I keep reading how people have lost money in their pensions and I have to say my pension has gone up in the four years almost five I have been here and I have been with two of the plans – one larger and one smaller. I think this is a rotten idea and will only cause long-term hardships for people who will look to the government for hand-outs later in life that won’t be there. Also, if the government thinks this is going to off-set the increased costs in permits then they obviously have been speaking to the wrong businesses. What they should have done is relax the regulations on pension investments and allow more leeway for the investors to invest the money in more diverse funds than the restrictive regulations they have now. I’m not talking high-risk such as hedge funds, but according to the investors there are other investment opportunities out there they are not allowed to invest in due to the restrictions. This is a knee-jerk reaction only the people are going to have to pay for in the end.

    • Anonymous says:

      You may have some good ideas, please explain what can the pension plans invest in now be stopped and what other alternative investments should they be allowed to invest in?

  15. slowpoke says:

    If you are making $50,000 at age 25, you are on a career path which should easily let you recoup $200,000 over 40 years.

  16. Imagine That says:

    Who woulda thunk it? Welfare state here we come, Im in for the ride! Yee Haaw

  17. Anonymous says:

    The example about someone @ age 25 losing almost 200K.  I have seen a decline in my statement for a number of years now, we may lose this regardless as it seems our monies are not vested properly anyway.  I say yay for the Pension Holiday.   =)

    • Anonymous says:

      You are in the wrong plan then.  Shop around for a better pension plan – they are out there!