Pensions industry expansion linked to economic growth
IT is felt in some sectors that growth of the pensions industry can contribute to overall economic growth and that the lagging pace of pensions growth in Jamaica is doing the reverse.
Sanya Goffe, chairperson of the Pension Industry Association of Jamaica (PIAJ), says though the private pensions industry has been growing, coverage levels are extremely low, adding that the strategy of simply encouraging people to save, or employers to have pension plans for their employees, has not been enough.
“More than 17 years after the implementation of a regulatory framework for private sector pension plans in Jamaica the private market alone has not been able to solve the dire problem of low coverage, which has hovered between 9-10 per cent,” she notes.
Pensions funds are considered not only to provide a social safety net, but also as big investors, spurring economic growth as experienced in Chile, where gross domestic product (GDP) growth has been linked to reform of the country’s pensions system and an increase in pension savings.
The most recent report of the Financial Services Commission (FSC) indicates that the private pension funds industry’s assets contracted by 5.38 per cent by year end 2020 when assets totalled $663.07 billion, compared to $700.73 billion in 2019.
As at December 31, 2020 there were 377 active pension plans within the Jamaican private pension industry. Despite the entrance of nine new pension plans into the industry, 11 plans exited.
Richard Gordon, senior vice-president and deputy CEO of PROVEN Investments Limited, said that definitive data on the contribution of pension funds to economic growth is missing, but “Unlocking capital from pension funds that generally have a desire for a wide range of assets and, more specifically, a need to have long-term assets to match their liability profile can have a positive effect on the economy. It can provide the necessary capital to small- and medium-size companies, which can contribute to faster economic growth.”
He said pension reforms that allow for an increase in the range of investments, in particular, should result in easier mobilisation of capital and consequently a deeper and more efficient capital market, which can therefore speed up economic growth.
Industry chairperson Goffe said industry growth could be encouraged through auto enrolment, where a worker who is not in an employer-sponsored pension plan is automatically placed in an approved retirement scheme and must make the active choice to be taken out of the scheme.
“It is essentially a change in the choice architecture, but the ability to always opt out maintains individual choice and responsibility for the decision to participate in the plan,” she outlined.
She said another strategy to encourage savings would be the implementation of a micro pensions framework for low-income and informal workers.
Micro pensions is the concept of making very small contributions to a pension arrangement, but these contributions are made more often than you would in your traditional arrangements. Goffe said. “I know the FSC has been exploring the feasibility of micro pensions and the PIAJ stands ready to support the FSC in this regard and any other initiative that will meaningfully and sustainably improve pension coverage. The PIAJ iss separately working on a concept paper to consider the introduction of an auto enrolment programme in Jamaica.”
Gordon from PROVEN said growth in pension coverage will require a combination of incentives offered by the Government to encourage small businesses to start pension funds.
He said incentives could be offered by the Government to encourage staff members to join an approved retirement scheme. He also suggested that the Government could mandate some small businesses, based on some specific criteria, to have their staff join an approved retirement scheme.