Pension expert warns of major losses during holiday
(CNS): Local pension experts have warned that the two year pension holiday could result in fund losses close to $200,000 for those aged 25 and under who decide to take advantage of the break. Government recently passed legislation removing the legal obligation of employers and employees to pay pensions if the employees are in agreement, not surprisingly, the pension industry has been warning that the two year holiday if taken will have a serious impact on people’s future financial security. Brian Williams, CEO of Saxon agent for Silver Thatch Pensions recently told members of the human resources industry what he believed the negative implications will be.
Last week Williams warned the Cayman Islands Society for Human Resource (HR) Professionals that based on projections by Canadian Actuarial Consultant Eckler the impact on participating employees’ cash balances with 40 years until retirement would be to reduce their account balance at retirement by $193,000.
Amendments to the pension law which were recently passed in the Legislative Assembly have now come into effect and employers who are up to date with employee contributions and who get the agreement of their employees can now take a holiday from their legal obligations to pay into pensions schemes. The goal was to reduce the burden on employers as a result of an increase in work permit fees and to give employees who are also feeling the economic pinch access to the 50% contribution they are asked to make under the law. Government also hopes it will give the numerous delinquent employers time to catch up on thesignificant outstanding payments.
“Given the economic hardship at the moment, people have been asking for some form of relief,” Rolston Anglin the minister with responsibility for private pensions told the LA recently. “We don’t have an income tax that we can use to manipulate the economy … we needed to find a mechanism by which we could help and we will see if a change in this law will have the desired effect.”
However, emphasising the importance of pension contributions Williams said Saxon was keen to keep residents educated about the developments in the pension industry and equip them with the knowledge to make sound investment decisions for their future given the implications of the holiday.
“It is essential that the local community isinformed and equipped with the knowledge and insight to appreciate the long-term ramifications of their decision to participate,” Williams said. “There is no better channel than to ensure that the HR professionals have their finger on the pulse to answer employee queries and make informed decisions. With this change in law, due to the current economic climate, many people will be inclined to cut back on their contributions, but this can hugely impact pension income received upon retirement, and it is our mission to make certain that Cayman has access to this information.”
Williams covered various topics of interest including the intention of the amendments, the impact on the economy, the impact on plans, the pension suspension application procedure and approval process and the implications upon the expiration of the pension holiday were explored.
“It was a highly informative session and …. I greatly appreciate the opportunity to meet with our community of professionals and share my insight as well as learn their viewpoints on these developments.”
Since the economic crisis however, many people have seen their pension statements go into serious decline which has made them question why they should be forced to pay into schemes which appear to be losing money. Government is expecting that there will be a significant take up of the so called holiday freeing up the money to be spent in the local economy. According to the amendment Caymanians can take a break of up to 12 months and non Caymanians two years. Government has also indicated its intention to review the legislation after its first year.
Category: Business
The pension holiday truth:
While everyone seems to be complaining about the pension investors losing a good percentage of our pensions we should remember 2 things, 1 we are only just coming out of a recession and 2 Pensions are long term investments where value it looked at over decades.
I started working in Cayman 6 years ago and currently my pension provider has lost around 15% of the value of my and my employers contributions. (at one stage they had lost 40%, but markets bounce back).
If this carries on then and for example I earn US$50,000 then over the two years of the Pension holiday (if I don’t take it) I would have $8,500 put away for a rainy day.
If I do take the pension holiday I immediately lose my employers contribution so after 2 years I would have $5,000.
Immediately you can see that NOT taking the pension holiday will earn me 70% more money than taking it.
The desicion is yours, but at the end of the day the biggest winners of the pension holiday are your employers as you are effectively taking a 5% pay cut.
I guess some people will probably wish that they did take the pension holiday, now that Mac is thinking about charing us all a ‘payroll fee’ or VAF "value added FEE" or some other kind of tax… lol
That would a very considerate thing to do Mr. Premie… allow us to keep our 5% pension contribution and then take it (back) away from us to feed the Government! What happended to "oh it would be a nice break for people, and it would allow them to have a little extra cash in their pockets. to maybe put into the economy…" blah bleh bleh….
"Local pension experts have warned that the two year pension holiday could result in fund losses close to $200,000 for those aged 25 and under who decide to take advantage of the break."
And that would be assuming annual 10% growth for the next 35 years. So in real terms the difference would be very little indeed.
Practically there is no real point in making pension contributions before you are 30 or 35. If you are under 25 spend your money and have fun. That was the best advice I ever received directly from someone who was very successful in the pensions industry. Remember the pension guys are on commissions and earn management fees.
You are wrong, any respectable finnacial planer knows about the time value of money the longer the investment period the more money you will have later.
The older you are when you start the more you have to contribute to get the same money. It is always better to start at 25 and under than 35 and older.
Just look at a mortgage ($300,000 @ 5%)a 40 year loan your monthly payment is about 1450 aprox and a 15year mortgage your monthly payment is 2370 aprox.
The same principal applies to savings 40years more time to save but less money monthly to deposit versus saving for 15years less time but have to deposit more money to get the same ammount
I always tend to listen to views on financial planning from people who can spell the word "financial". I am fully aware of the how time value works but also that the pension model assumes a static income level from the age of 20 onwards. That is not true in my life and in many others’ lives. At 20 I was earning a fraction of what I earned at 30 and even smaller fraction of what I was earning at 40. And in cases like that there is far less sense in making contributions until after the fun years are over.
In Cayman the loss of the employer contribution does mean it makes sense to stay in the system. My point was the headline $200,000 was typical pension industry voodoo.
Hmm, wonder why the pension planers didn’t object like the civil service did when government tried to take their pension. Now its too late for those people who’re bamboozled into taking a holiday. (Of course, bamboozled may not be the right word if your pension provider is doing as badly as some reportedly are, instead of break-even+ like the PSPB reports they are.)
yea right, we need this break. we already losing big money with them investing it. one example i had 21000 in november 2008, february 2009 i went to check it out i had only 13000 and i told them i would move it somewhere else and they said you can go ahead but we cant give you back what you have lost. i think its unfair we work so hard and cant enjoy not one penny of it. but yet they can invest and do only god knows what else with it.
if you work in the private sector then you only contributed10,500, which mean you still have a 1,500 "profit" of going for the holiday, as you lose your company 5% contribution.
Also you may not have noticed but the world markets crashed between those months. Check your pension now and you’ll find it probably close to 21,000 again. Feb 09 was over 14 months ago now
Its a pension that mean you look at the long term picture. Th economy’s will grow again and your pension will flourish
you work so hard for it so you have a little money when you can’t work anymore, instead of retiring in to poverty and then complaining about it and becoming a burden to the state.
They forgot to mention the potential savings of whatever you are putting in. Good try.
The potential losses as described in this article are better than what is happening now, i.e. we are paying into these pension funds that are still losing value. In the last quarter of 2009, my pension decreased by US$2,000 as a result of poor investing by the fund managers. I would have been better off keeping this money and spending it on my family, at least I would have something to show for it, or at the very least, know exactly where the money went.
Thanks for nothing pension fund managers!
AN if you take the holiday you immediately lose 50% of what would be going into your pension, think about it
Even at the lowest point my pension was still at 65% of the total contribution, but that is still 30% more than my own contribution at present with the rebound it’s at 85% of my contribution.
So good luck with trying to take you contribution through the pension holiday and finding 85% returns on it
The holiday makes little sense, the only benefactor is your employer who saves themselves 5% of their salary costs (ie bigger bonuses for management)
CNS – Please correct me if I am wrong. is the 2 yrs suspension for work permit holders?
CNS: As it says in the final sentence …..
Biased!
I don’t believe you need to wonder who they really believe will lose money.
It would be nice to hear from someone who is independent.
I would not waive my pension entitlement.
The saving grace of the Cayman pension scheme is the employer matching employee contributions. Otherwise the scheme ends up pretty stacked against the employee contributor – generally requiring a significant equity allocation which is exposed both to high risks and high fees.
How they get from $12k in contributions (3k by the employee each year for two years, matched by the employer) to $193,00 suggests a critical assumption that is missing from the article: an assumed rate of return of @ 7% (by my guess). This isn’t completely unreasonable, but to the extent that there aren’t constant positive returns at the outset the target is probably unlikely. The other point, is inflation – although perhaps they have assumed that away (or as part of the rate).
Still, as suggested above, even if a dumb-ass pension manager loses you 10-20%, the matching contribution by your employer should make up for the on-going losses – at least for a while, but is probably worth it and you should have socked a way something for a rainy day on the beach. (of course, the groups who win either way are the pension and fund managers)R