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
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