Value of the National Insurance Fund to the National Insurance Scheme

THE NATIONAL Insurance Fund (NIF), as the investment manager of the contributions which flow into the National Insurance Scheme (NIS), donates significantly to the financial strength of the NIS and its ability to give meaningful benefits to its contributors and their beneficiaries.

The NIS is a compulsory contributory-funded social security scheme, which derives its funding from the provisions of employers and employees, the self-employed and voluntary contributors.

The latter group comprises people who are no longer required to contribute because they have become unemployed, they have retired from full-time employment before reaching retirement age, or have relocated to another country with which Jamaica does not have a Reciprocal Social Security Arrangement for an indefinite period, but wish to continue donating to the NIS.

The current contribution rate is six per cent of employment income of up to five million dollars, which is the wage ceiling, and there were more than 600,000 contributors at December 31, 2023.

One per cent of NIS contributions is diverted to the National Health Fund (NHF) to help pay for a wide range of health-related expenses. Additionally, the contributions pay for the administration costs of the NIS, and NIS benefits such as pensions, funeral grants, and disability benefits. It is then the responsibility of the NIF to invest the surplus.

It is not desirable for the benefits to exceed the contributions lest the sustainability of the scheme becomes compromised. Here is where the NIF fits in. The investments it makes and the income they generate are useful in covering any deficit that may arise and ensuring the viability of the NIS. In the event that the NIF is not able to fill this gap, the burden falls on the Consolidated Fund into which all revenues of the government are paid. The need for the NIS to be sustainable in the longterm explains why there have been recent increases in the wage ceiling and the contribution rate. This is very important considering that the population is ageing, so claims for benefits can be expected to increase significantly over time even as the beneficiaries cease making contributions to the NIS.

The NIF, therefore, has to be administered well. It must have good governance arrangements and practices, including a board of directors with the necessary competencies in investments, finance, and pensions, for example.

It must also have a strong and effective investment committee, which includes people with competencies in investment policy, asset allocation and risk management, for example.

The NIF invests the funds entrusted to it by the NIS in diversified portfolios consistent with its investment policy. Among the classes of investment vehicles in which the NIF invests are money market securities, bonds, ordinary stocks listed on the stock exchange, unit trusts, and commercial, resort and residential properties.

Although new inflows of contributions provide liquid funds to pay the expenses of the NIS, including benefits, it is important for funds to be invested in interest-earning securities to generate a steady flow of income, thereby enhancing the ability of the NIS to make payments when called upon to do so.

Additionally, interest-bearing securities like bonds and money market instruments – which mature in a year or less – give some stability to the portfolios as their prices, especially of the shorter-term instruments, tend not to change significantly, if at all.

Equities and real estate, while earning some income from dividends and rent, respectively, are primarily for capital appreciation. As their value increases, the size of the portfolio increases, but this does not represent cash.

Thus, the fact that the NIF is growing does not mean that there are significant sums of money ready to be distributed. The capital appreciation of real estate and ordinary shares only generates cash upon the sale of those assets, and even bonds may take time to be sold. Additionally, it may be unwise to sell bonds when interest rates have increased because this generally causes bond prices to fall and the fund may risk incurring losses.

The NIF is growing due to the increase in the NIS contribution rate and wage ceiling, the addition of new NIS contributors and investment returns, though stymied by soft market conditions. Against these is the ongoing addition of new NIS beneficiaries.

There were approximately 140,000 NIS pensioners at December 31, 2023, according to NIS sources. There were also other beneficiaries, such as people who received grants, employment injury benefits, and maternity benefits, so there must be strong inflows to support the outflows.

The value of the NIF to the NIS and its contributors cannot be understated. It holds the key to the long-term sustainability of the NIS and improved benefits to beneficiaries.