Presentation

for

Cayman Islands

Life Underwriters Association

Certain Aspects

of the

National Pensions Law

March 2008

Presentation Outline

• National Pensions Law – history/summary/results

• National Pensions Law – Consultancy report

• Pension plan goals

• Individual goals

• Employee/Employer responsibilities

• How much is needed?

• Sources of retirement income

• How much is enough?

• Questions

National Pensions Law - history

• The Law establishes minimum standards for pension plans operating in the Cayman Islands – it onto itself is not a “pension plan” and provides no benefits

• National Pensions Law became effective July 1, 1998 for all Caymanians

• Effective January 1, 1999 for expatriate employees (except domestics employed to work in individual homes)

• Some plans “grandfathered”

• Top up plans permitted to operate

Pension Participation is MandatoryTherefore, a Condition of Employment

In the Cayman Islands

National Pensions Law - summary

• Minimum contribution of 10% of Years Maximum Pensionable Earnings - $60,000 annually

• Maximum employee contribution is 5%, minimum employer contribution is 5%

• Immediate “vesting” of contributions

• Earliest retirement age is 50 years

• Normal retirement age is 60 or by 61st birthday

• “pension” in the form of an annuity, Retirement Savings Arrangement or Individual Retirement Account

• Compulsory spousal benefits at 100% - limited benefits for dependent children (different pre and post retirement)

• If no spouse opportunity to name beneficiary

• Opportunity for Additional Voluntary Contributions

• “generous” minimum defined benefit provisions

National Pensions Law - results

• Two Basic types of pension plans

– Defined benefit – very few, usually an International Employer– Defined contribution – all the current multi-employer plans

operating in the Cayman Islands

• Cayman National Pension Plan• Chamber of Commerce Pension Plan• Fidelity Pension Plan• Silver Thatch Pension Plan

• British American Pension Plan• British Caymanian Pension Plan

• Employer chooses type of pension plan

• Employees need to be consulted and choose the actual pension plan

NPL – Consultancy Report – The Findings

• Current minimum pension contribution rules will not produce adequate retirement income

• There remain issues with Compliance and Enforcement

• Investment Regulations are too restrictive and do not reflect Global Best Practices

• There is a general lack of public understanding of Retirement Savings and Planning and Financial Planning overall

Pension Plan Goals

• Ultimate Goal Replace salary

• Focus Value for money

• Factors to consider

• Employment expenses (and tax)• Typical career path of members• Earnings level• Government programs• Workload and aging of workers• A human resource tool (?)

Individual Goals

• Goals Different for each individual

• Focus Personal and family needs

• Factors to consider

• Retirement age• Expense reductions• New expenses after retirement• Government programs• Pension plan• Other retirement income/savings• Post retirement employment

Pension Plan/Individual Goals

• Pension plan goals and individual goals are not the same

• To have a good pension from a pension plan, need long service and/or adequate contributions

Pension Plan GoalsHistorical perspective

• Prior to 1998

• Few pension plans / paternalistic view• Benefits usually low with late retirement• Recognition of shorter life expectancy• Reliance on family and government benefits

• Since 1998

• Recognition of longer life expectancy• Less reliance on immediate family• New and more pension plans• Realization of meager government benefits, if at all• Inflation protection

Pension Plan GoalsFuture issues

• Demographics

• More retirees, possibly fewer contributors (DB “problem”)• Later entry into workforce

• Phased retirement

• Late retirement incentives

• Recruitment and retention

• Benefit versus contribution balance

Pension Plan GoalsOther issues

• Expenses that may increase

• Health care• Leisure activities

• Expenses could vary greatly by age

• Expenses that could disappear or diminish

• Retirement savings• Insurance coverage• Expenses associated with children• Debt repayment (i.e. mortgage)• Work related (meals, transportation, clothing, etc.)

Pension Plan / Individual GoalsOther issues / Factors too consider

• Is it possible to save too much?

• Depends on individual circumstances• Need to balance current and future needs

• Is the return on investment worth it?

• Other sources of income

• Replace all or a portion of net salary

• Prioritize pension plan features• Form of lifetime pension / survivor benefits• Indexing• Retirement rules / ages

• Consider salary level, work pattern and typical career of plan members

Employee’s responsibilities

• Take an interest in what pension plan your employer has

• Ensure your employer is providing you with a plan

• Ensure payroll deductions are being taken, if applicable

• Ensure contributions are going to the plan administrator

• Save any payroll slips and compare pension deduction amounts to pension plan statements – insure you receive a statement

• Notify the pension plan administrator of changes in personal information such as address, phone numbers, marital status, beneficiaries, etc.

• Plan to attend your pension plan’s annual general meetings and information sessions

• Be aware of your employer’s responsibilities, your responsibilities and discuss these with co-workers

Employer’s responsibilities

• Be aware of the provisions of the Law and that they are a condition of employment in the Cayman Islands

• Be aware of the employment circumstances of people in your employ – be wary of employees not wanting to pay and of employees where others actually hold their work permits

• Provide a pension plan or make contributions to a pension plan for every person employed by the employer in the Islands.

• Ensure that the employee and employer pension contributions are paid into the appropriate pension fund by the 15th of the month following the month for which the contributions are attributable.

• Advise the pension plan administrator of changes in employment status of employees and provide administrative information required, such as contact details, employee information, etc.

• Provide any information requested by the National Pensions Office and comply with their orders and directives

How much is needed?

• United States• AON Consulting / Georgia State replacement ratio study

(2001 edition)– 69% to 78% of gross salary for salaries in $30,000 to

$90,000 range– Higher %’s for higher salaries

• Historical range 60% to 85%

• Canada• CIA 1995 study

– 70% to 80% of gross salary– 75% to 100% of net salary

• Recent analysis suggests as low as 50% of gross salary for middle to high income earners

• General consensus – 70%

How much is needed?

• 2001 Retirement Confidence Survey (USA)

• 25% of respondents thought 50% to 59% was sufficient• 14% of respondents thought 60% to 69% was sufficient• 21% of respondents thought 70% to 79% was sufficient• Overall 60% thought 50% to 80% was sufficient• 8% had no idea, 16% thought < 50% and 16% > 80%

• Three phases after retirement

• High cost active phase – up to age 75• Slower paced less active phase – age 75 to 80• Declining health phase – over age 85

• Income needs decline by as much as 25% after age 75 (health care most significant risk)

How much is needed?

• Cayman Islands– Consultancy Report March 2007 based on CI’s 2005 Annual

Economic Report and CI’s 2004 Compendium of Statistics

• Someone currently earning $30,000 would require 70% to 75% at retirement for minimum benefit adequacy

• For someone earning $60,000 replacement ratio for minimum benefit adequacy would drop to 55% to 65%

– Ratios achieved by current National Pensions Law (at age 60) range from 24% (salary $60,000 age 25) to 50% for “full career” employees (salary $20,000 age 18) – DC component only

– If Consultancy Report’s recommendations for benefit adequacy are adopted ratios improve to 45% to 63% at age 60 (NRD) and 68% to 94% at age 65 (NRD) – DC only

Sources of retirement income – Cayman Islands

• Benefits compulsory under National Pensions Law (substitute PSPP Benefits) – employer sponsored pension plan

• Investment income from personal/retirement savings and principal (rental income)

• Post retirement employment

• Benefits from Family and Children services

• Additional sources of income as a result of recommendations and action forthcoming from National Assessment of Living Conditions, if any

• Highly likely first two bullets only (perhaps 3)

Sources of retirement income – Other parts of world

• Some form of state paid / tax supported Social Security

• Some form of government run basic pension scheme

• Optional employer sponsored pension plan (contributory on e’ee’s part or not)

• Some form of voluntary personal savings / investments encouraged through tax relief

• Voluntary savings / investment outside of tax system – Principal

• Post retirement employment

How much is enough?Annuity factors from Sagicor – cost per $1,000 monthly income - April ’07)

Age

Sex/Form of payment

55 60 65

Female

Life only

GTD 10 year

$151,939

$153,158

$142,863 $131,723

Male

Life only

GTD 10 year

$141,585

$144,146

$131,144 $118,451

Questions

? ? ?

www.npo.gov.ky