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The new face of public sector pension

Sunday, December 22, 2013    

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PUBLIC sector workers will get a pension equivalent to the last five years of service under a reformed system to be implemented by April 2016.

The new pension scheme might result in worse retirement terms for many, given that pension benefits are presently computed on final salary.

"This has affected not only the unaffordability of the public sector pension system but can also lead to a decrease in transparency with the practice of increasing workers salary immediately before retirement," said the pension reform white paper that was tabled in parliament last week. "Several countries with a defined benefit scheme have moved away from a final salary computation to the average of salaries ranging from three years to a

career average."

On the other hand, the Government currently pays its retired workers on an ad hoc basis.

In 2009, approximately 83 per cent of retired public sector workers received $33,000 or less per month, while the average pension of $29,000 per month was just $12,720 more than the minimum wage at the time.

It is not clear how much the average payout has increased by since then, or if it has at all.

However, teachers and other public sector workers who currently don't contribute to their pensions will be required to start paying over five per cent of their salaries when the Cabinet determines a date, while civil servants who now contribute four per cent to the Family Benefits scheme will only have to pony up an additional one per cent

of salary.

For the police, who currently contribute 1.7 per cent, they will have to forego a bit more of their current income to meet the five per cent requirement.

Moreover, starting in 2016, the retirement age will be increased from 60 to 65 years old, moving in monthly increments as of April 1 of that year. For example, the retirement age as at November 1, 2016 will be 60 years and eight months.

Government employees will have the option to take early retirement, but their pension will be reduced by one per cent a year for each year they retire before the new retirement age.

Soldiers will become eligible for pension upon the completion of at least 27 years of service under the reformed system, while constables and special constables may retire after reaching the age of 60 or after the completion of 35 years of service.

Public sector pension reform is a requirement of the International Monetary Fund under Jamaica's Economic and Financial Policies.

The Government will have to put in place interim legislative amendments as well as the enhanced administrative system by April 2016.

What's at stake is an implicit pension debt — pension payments due to current and future pensioners -- that hit 40 per cent of GDP this year, and which will probably reach 3 per cent in 2016.

Furthermore, Government expenditure on public sector pensions rose from $16.7 billion (6.2 per cent of total non-debt expenditure) in 2010/2011 to $24.1 billion (8.8 per cent of non-debt budget) last fiscal year.

Put another way, pension expenditure increased from 0.4 per cent of GDP in 1990 to approximately 1.4 per cent of GDP in 2010, according to the green paper on the options for reforming the public sector pension system, which preceded the white paper now before parliament.

But the reforms doesn't get the Governemnt, and ultimately taxpayers, entirely off the hook.

It will still have to finance the difference between the total contributions and the pension benefits as the need arises from the Consolidated Fund, given that the total amount that will be paid by the employees will not be enough to pay current pensioners as well as new retirees.

"For example, projections show that if all employees that are currently in the pension scheme were to start contributing, five per cent of salary as of April 2013, it is estimated that contributions would amount to $4.4 billion at March, 2014," said the white paper. "However, the pension expenditure is estimated at $23.1 billion for the period. This would require an additional amount of $18.7 billion from the consolidated fund to finance this expenditure.

Periodic reviews will be conducted to determine if pension increases can be granted, given the Government's fiscal standing.

The Government is the largest employer of labour in Jamaica. Presently, 80,971 public sector employees may be eligible for a pension — 37,465 persons employed to Central Government, 16,835 employed to the security forces and 26,671 employed as teachers.

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