Keep your retirement plan on track during pandemic
COVID-19 has not only created a health crisis but also a retirement dilemma for many.
The negative impact of the pandemic on the stock market is a contributing factor to the decline in pension funds in 2020. Pension funds suffered a loss of J$37 million and assets declined by over five per cent. As a result of the pandemic some pre-retirees plan to delay their retirement and earn additional income. Some seniors also remain on track with their retirement timeline as they believe they have enough time to ride out the periods of stock market downturns. There are seniors who have chosen early retirement due to lay-offs and redundancy exercise. Others retire early due to health risks. Unemployment is a challenge for older workers, as it is increasingly difficult to find gainful employment, which leads some seniors to involuntary retirement.
The uncertain economic climate has seen some seniors shifting their investments from stocks to bonds. This may seem like a good idea when the stock market goes through periods of decline, but can rob the investor of significant gains when the stock market recovers. The local stock market is recovering slowly. Some investors who panicked on the onset of the economic downturn in 2020 are returning to investing in stocks again.
UNEMPLOYMENT
Some employees have lost jobs or experienced salary cuts; and have cut back on spending. There are others who have acquired debts to make ends meet. In some cases, emergency funds are exhausted and money saved for a rainy day are diverted to cover current expenses. According to a Statistical Institute of Jamaica July 2020 report, “60 per cent of households experienced a decline in their income since March 2020, while income for 37.9 per cent of households remain unchanged”. Under these circumstances, planning for retirement is placed on the back burner. If you are earning less, now is the time to build up your emergency fund and reduce spending.
HOW TO PLAN FOR RETIREMENT DURING COVID-19
If you are still employed, continue to make pension contributions. You may consider reduction in monthly contributions. The unemployed cannot make pension contributions. The Jamaican law does not allow withdrawals from pension funds, neither can your pension be used as collateral. If you contributed to an approved superannuation fund and your employment was terminated, your pension benefits can be transferred to an approved retirement scheme. It is important to assess your retirement goals and review your retirement plans with your pension provider regarding asset mix and the impact that the pandemic has on your investments and the prospects for recovery in the short and long terms. The Pension Industry Association of Jamaica (PIAJ) reports that about 26 per cent of pension fund assets are invested in the stock market.
In the first quarter of 2020, the stock market declined by more than 20 per cent. The market may take another two years to fully recover. And it is likely that more persons will defer retirement and work later.
The Financial Services Commission (FSC) reported that the March 2021 quarter saw a growth of private pension assets of 1.74 pet cent over the December 2020 quarter. The report said “the industry experienced an average growth of 2.81 per cent, per quarter over the past five years”.
Membership during the March 2021 quarter increased by 3.2 per cent. The employed labour force grew by 3.53 per cent during that quarter. At the end of March 2021, total assets in the pension industry stood at J$673.97 billion.
NEW REGULATORY GUIDELINES — FOREIGN EXCHANGE CAP
The Bank of Jamaica raised the foreign exchange cap on pension funds to 10 per cent, effective April 30, 2021. This is welcome news for pension plan members and investment managers. This will see better returns on funds invested; protection against inflation and the devaluation of the local currency. Pension funds will benefit from diversification of assets and investment risks are minimised. The challenge remains to increase pension coverage in Jamaica. With many people seeing their standard of living eroded by the pandemic, there is less disposable income available to provide adequate income in retirement. As stakeholders lobby the Government for pension reform, that will provide participants in pension plans more flexibility and benefits, such as access to pension funds in times of hardship, it is hoped that contributing to a pension plan will be more attractive to individuals.the fixed income that pension funds provide in retirement is most important during times of economic downturns in the stock market.
The current economic climate calls for trustees and managers of pension funds to serve the best interest of their members by ensuring maximum returns on members investments. The most important concern is not the age of retirement but the income during retirement.
Grace G Mclean is Financial Advisor at BPM Financial Limited. Contact her gmclean@bpmfinancial. and visit the website: www. bpmfinancial.com. She is also a podcaster for Living Above Self. Email her at livingaboveself@gmail.com