Forex cap said to hobble pensions

C ATHY LYN, a past president of the Caribbean Actuarial Association, is suggesting that pension funds should be given the same priority as other investor groups for which restrictions on foreignexchange investments are soon to be lifted by the Bank of Jamaica (BOJ).

The central bank will be lifting the cap from its current five per cent in phases, starting later this year, and will eventually eliminate the restrictions.

The central bank will first lift the cap to 7.5 per cent at mid- year, then 10 per cent and up to 25 per cent by yearend 2015. The restriction is expected to be eliminated by the end of 2016.

Lyn says pension funds should immediately be allowed to have up to 20 per cent of their investments in foreign exchange.

However, the Financial Services Commission ( FSC) has said that pensions funds will not benefit from the lifting of the cap immediately. FSC regulates pension funds, insurance companies and securities dealers. It oversees 803 pension plans with assets totalling $303 billion.

Senior deputy governor of the BOJ, John Robinson, said the central bank will first address firms heavily invested in repos and deal with pension funds later.

“The lifting of the ceiling on investments in foreign- currency assets, which was announced at the end of December 2013, was aimed primarily at facilitating the transition of investments that are now funded by repos into collective investment schemes,” said Robinson.

“Revised limits for pension funds and insurance companies will follow after discussions with those firms and their regulator, the Financial Services Commission, to determine an appropriate timetable for such adjustments,” he said.

Lyn says pension funds should be allowed a 20 per cent limit rather than five per cent, saying it could boost returns and enrich pension payments.

“Poor pensions being paid today result from savings that are too low; but then, what is the incentive to save if the real returns on domestic instruments is poor after expenses are deducted?” she said.

“If BOJ is worried that large sums will migrate overseas, then the amounts being saved now are just a fraction of the population’s needs for retirement, so perhaps the actuaries could do some projections to estimate the figures to support the present population when they grow old. Also, BOJ could bear in mind that people who live and work here are likely to stay here in retirement, so the money would come back to pay pensions,” the actuary said.

From 1960 until 2012, Jamaica GDP averaged US$5.2 billion, or 0.02 per cent of the world economy.

According to FSC data, less than nine per cent of working Jamaicans in the private sector have formal pension savings.

Those numbers, according to Lyn, are indicative of the need to entice more retirement savings.

“The percentage of people getting pensions from the formal arrangements is another powerful point to lobby for higher overseas limits to prove the need for more saving within the formal arrangements,” she said.