Towards a brighter financial futurePension Reform in Jamaica, Lessons from ERISA

Melanie Kamilah Williams | Hubert H. Humphrey Fellow – Jamaica, FSC

Global Trends – Aging Population (65 years and older)Country 2015 2030 2045 2050Brazil 7.8 13.0 18.7 21.2Bulgaria 18.9 22.7 28.2 30.0China 9.4 15.7 21.8 22.5Colombia 6.5 11.0 15.3 16.6Jamaica 8.1 12.6 17.0 18.2Mexico 7.2 11.8 18.8 20.2Nepal 4.3 5.8 9.1 10.6Pakistan 4.3 5.7 8.3 9.6Romania 15.4 18.8 26.3 27.8South Korea 12.7 22.6 30.9 32.7USA 14.0 18.6 19.4 19.8

Save for retirement - Time changes everything

Retirement Savings Equation

Jamaica’s Macro-Economic Landscape Upper Middle Income Country of 2.712 million people Annual population growth since 1991 – 0.36% (now 17.4 births per 1000)

GDP of US$14.76 Billion (based on US dollar value in 2012) – World Bank

Negative growth in GDP from 2008 – 2012 (Global recession)

GDP driven by services (tourism and finance), remittances, manufacturing

Jamaica’s Macro-Economic Landscape GDP driven by services, remittances, manufacturing

Projected GDP Growth of 0.3% in 2013 - 1.3% by 2016

Unemployment Rate: 9.4% - 2007, 1.4 % - 2009 13.7% - 2012

Informal Economy is sizeable

Macro-Economic Factors affecting pensions

Population growth is slowing Longevity increasing Relatively young working age population – 1.3 million between 15 – 44 years;

Older working population - 480,240 persons between 45 – 64 years

Macro-Economic Factors affecting pensions

Women are more educated than men, fewer children

Brain Drain Poverty Rate 9.9% in 2007 to 17.5% in 2012 (based on US$1.25)

Second highest rate of poverty is among elderly 16.8%

Jamaica’s Societal Values Family-oriented (remittances) Community (Church is safety net) Saving Education and hard work Prize home-ownership Leave an inheritance

Profile of Person who saves for retirement Works for an employer who offers a superannuation fund Higher education (Tertiary) White-collared or pink-collared employee Long-term attachment to labour force Long tenure in current job (in excess of 5 years) Has sought a job with an employer offering a pension Union-represented Home owner

Features of a successful private pension system

Adequate benefits

Sustainability Coverage Cost

effective

Pillars of a successful pension system First – mandatory public pension (PAYG, social pension)

Second – mandatory public DC plan (fully funded)

Third – occupational pension schemes or individual retirement accounts

Private savings for retirement income

Features of Jamaica’s pension system Mandatory Public Pension Plan PAYG – National Insurance Scheme

Civil Servants receive non-contributory DB pension from Consolidated Fund

Private Pension Plans Private savings

Types of Private Pension Plans in Jamaica Employer-sponsored pension plans (superannuation funds - SFs)

Defined benefit plansDefined contribution plansEmployer required to make annual contributions

Employees may have to contribute

Types of Private Pension Plans in Jamaica Retirement schemes –

Individual retirement accounts Employee or self-employed persons eligible

Civil servants, SFs members currently ineligible

DC plans No employer contributions are required

Types of Private Pension Plans Specified Pension Plans (public industry pension plans)

Not regulated by FSC created by statute No tax-preferential treatment

Top-Hat Pension Plans

Fundamental Themes of Private Pension Plans in Jamaica Preferential Tax Treatment for SFS and ARS – EET

model is used Employee/Employer contributions are exempt

from income-tax Earnings are exempt Benefits are taxed on payment Trust arrangement

Private Pensions Regulation Pensions (Superannuation Funds and Retirement

Schemes) Act and Regulations Tax issues – Income Tax Act Regulators – Financial Services Commission, TAJ

Solutions for increasing pension coverageImproved GDP

Incentives for Employers

Pensionable Employment

Financial Literacy

Targeted Regulation

Diversified Pension Products

ERISA, IRC – Main Goals Balance the interests of Employers and Employees

Business approach to pensions Pensions protection is a national investment in social cohesion – EBSA, DOL

Safety net for defined benefit plans – PGBC (Pension Guarantee Benefit Corporation)

ERISA – Protection of Workers Pensions is deferred compensation How do we ensure a wider cross-section of employees are covered?

Qualification Rules for employee pension plans

Participation Rules - not just Highly Compensated Employees can be covered

Eligibility Rules – 1000 hours in a year

ERISA & IRC – incentives to employers Built in safe harbours or “shock absorbers” for Employers

Preferential tax treatment (EET) Limits on Employer’s fiduciary responsibility for investment

Bottom line: Employers must want to offer pension plans to employees

ERISA and IRC – incentives to Employees Non-forfeitability of benefits (Vesting) – ERISA § 3 (19)

Vesting on Normal Retirement Age Defined Benefit plan: Cliff vesting at least 5 years, or Graduated vesting - Year 3 – 20%, by year 7 - 100%

ERISA § 203 (a) (2) (A)

ERISA and IRC – incentives to Employees An individual retirement account plan (DC): Cliff vesting at least 3 years; or Graduated vesting - Year 2 – 20%, by Year 6 - 100% vested

Vesting rules do not apply IRA plan - IRC § 408

ERISA § 203 (a) (B)

ERISA and IRC – incentives to Employees to save Participation rules (Eligibility) ERISA § 202 (a) (1) (A), IRC § 410 (a) General rule – 21 years or completes 1 year of

service, whichever later Cannot exclude persons who have attained a

certain age [IRC § 410 (a) (2)]

ERISA and IRC – offering incentives to Employees to save for pensions Benefit accumulation rules – to minimize back-loading benefits

Financial Hardship withdrawals Employer contributions to an IRA for employees [IRC § 408 (c)]

Tax penalties for withdrawals – distribution is taxed as part of gross income [IRC § 408 (c), § 72]

ERISA and IRC – offering incentives to employees to save for pensions Diversified retirement savings arrangements (target

funds, employer stock, etc) Roll-over (transfer) of accumulated benefits to IRA (401

(k) plan) - Permitting after-tax dollars to be used for pension

savings (ROTH IRA) Now principal protected My RA accounts Bottom line: Employees will save, if given good choices

ERISA’s protection of accrued pension benefits Vesting schedules No ‘bad-boy’ clauses – preventing forfeiture due to

misconduct Preventing “claw-backs”, undermining accrued benefits

through plan amendments Minimizing “back-loading” of benefits – benefit accrual rules Funding & Solvency for DB plans Tax penalties when plans do not meet qualification

requirements

Diversified Pension Products – Employers’ choice

Employee stock purchase plan

Profit Sharing plan SIMPLE Plan Target Plans

Diversified Pension Products – Employers’ choice

Money Purchase DB plan SEP Plan IRA plan

Practical Solutions to encourage private pension savings – short term solutions

Understand employee’s behavior (Behavioral Economics) Motivate them through retirement product design Encourage employers to establish SFs (e.g. reduced statutory filings)

Financial Literacy Control investment management costs - fee caps Portability of benefits

Short term solutions Mandate retirement counselling advice to plan for retirement

Investment Manager, HR as conduit Happens at least at the following stages:

beginning of career – 21 - 22 mid-career - 40 - 45Nearing end of career – 55 - 65

Medium term solutions

Revised tax qualification rules (eligibility) Vesting schedules Use a ROTH IRA type model (TEE) to promote additional pension savings

Investment menu Default investment option in DC plans

Long term solutions

Economic development - job creation and pension savings

Encourage SMEs and entrepreneurial spiritPension reform - societal value adjustment

self-reliancetax compliance increasing birth rate

Long term solutions

Flexible investment options Encourage people to save through DC funds by:

Relationship between contributions and benefits

No obligation to subsidize others (no DB) Fiduciary duty of investment managerYou keep the investment return

Practical Solutions to encourage private pension savings – Long term solutions

Funding and Solvency rules for DB plans Accept DB plans will become extinct PBGC model to provide safety net for remaining DB plans

Practical Solutions to encourage private pension savings – Long term solutions

Creation of new retirement products Investor protection through conduct of business regulations

Emphasis accountability of the individual – you must be your own fiduciary

Long term solutions

Encourage contributions to DC plans and retirement schemes Participation Rules – not just HCEMobile phone platform to make pension contributions (India and Kenya)

Limited Financial Hardship Withdrawals

Above all else, get saving for retirement

Thank You!

Appendix Investment Company Institute World Bank –

www.worldbank.org Inter-American Development

Bank www.iadb.org ERISA and Employee Benefit

Law – The Essentials (ABA); David A. Pratt and Sharon Reece, 2009

Statistical Institute of Jamaica http://statinja.gov.jm Laws of Jamaica http://moj.gov.jm/laws