PENSION POVERTY
FOR RETIRED CIVIL SERVANTS CAN BE REDUCED
RECENTLY, civil servants have been lamenting the lower standard of living they are now experiencing in retirement.
There have been complaints of pensioners waiting for an unduly long time to start receiving their pension from the Government. Situations such as this result in undue hardships for retired public servants who have loyally served their country for many years.
Based on the Pensions Public Sector Act 2017, the Public Service Pension Scheme is a defined benefit plan and its purpose is to provide all pensionable officers with a pension, allowance, or gratuity upon retirement. The normal retirement age for civil servants is now 65 years (since 2021). Faced with the challenge of an ageing society and the growth in employment within the public sector, funding employees’ retirement is a grave concern as governments have been challenged in funding pension payouts. The Pensions Public Sector Act 2017 has, however, provided some changes to the defined pension plan.
It’s necessary to understand the two main types of pension systems that exist in Jamaica and globally and how they impact employees’ pensions. One type is the Defined Benefit and the other is the Defined Contribution scheme. The Defined Contributions (DC) scheme is a retirement plan consisting of regular contributions from both employers and employees. Employers in the private sector prefer the DC plan as the responsibility of retirement planning and investment risks are shifted from the employers to the employees. The funds are invested tax-free to provide a pension upon retirement. In Jamaica, the defined contribution plans allow a maximum contribution of 20 per cent of employees’ income to be invested.
With A Defined Benefit (DB) Plan, pension calculations are based on a predetermined formula that offers guaranteed lifetime income upon retirement.
DB plans are known as traditional pension plans. The employers’/government’s major responsibility is to ensure that sufficient funds are available for pension payouts upon retirement. These DB plans are not as common in the marketplace as in former years and are mainly found in the public sector. There are several advantages of the defined benefit pension plan, which are beneficial to public sector workers. Minimum contributions are required by the employees, as the onus is on the employer/government to secure the employees’ pensions. A worker’s pension payout is not directly related to the individual’s contribution. Both employers and Employees may contribute to the fund. Employees are vested (eligible for a pension) when they worked for 10 years in the Jamaican Government service. Workers in Jamaica’s public sector who choose early retirement will see their pension losing one per cent per year for every year they retire before age 65. This is a deterrent to early retirement. In the police force, members may retire either at age 60 or after working for 35 years.
Government employees are required to make pension contributions of five per cent of their salaries, while parliamentarians and councillors contribute six per cent of their earnings.
The pension calculation formula uses an accrued rate (interest rate earned by an individual in a pension plan), the number of years of service, and the average income of the last five years worked by the government employee. Workers can also access lump sum payouts and accept reduced pensions upon retirement. Pre-retirees are, therefore, advised to think critically about their retirement and avoid making mistakes that can prove costly in the future. Careful consideration must be given to the pros and cons of receiving lump sum payouts. Lump sums once elected, should be invested or used wisely, as this payout can drastically reduce monthly pension payouts which will likely remain unchanged throughout retirement.
With public sector employees’ pension contributions placed in the Consolidated Fund, the joint select committee of Parliament has proposed a segregated fund to manage pension fund contributions. This will allow pension contributions to be invested, promote transparency and enhance good governance. The Government has not yet given a timeline for the implementation of the Segregated Fund. Indications are that the Segregated Fund will not be established until the nation’s debt is at 60 per cent of gross domestic product (GDP), as the authorities contend with fiscal targets. In 2022, debt to GDP stood at 86.2 per cent. Pension contributions in the Consolidated Fund are not invested. Therefore, if pension payouts fall short, the Government will have to provide the shortfall from the Consolidated Fund.
The Jamaica Confederation of Trade Union recommended that pension income be indexed to the Consumer Price Index to reflect any increase in inflation during retirement. This measure would provide income protection for many retirees. A professionally managed segregated fund and an indexed pension fund may just be the answer to reducing pension poverty for retired civil servants.
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. E-mail her at livingaboveself@gmail.com