Pension funds are among the casualties of the National Debt Exchange (NDX), resulting in smaller pension payouts, say financial advisors.
The NDX aims to lower the annual finance costs of Government by $17 billion, by shaving an average of two percentage points off interest rates on $860 billion of its domestic debt.
Janice Mills, manager of Jamaica National Building Society's (JNBS) New Kingston branch, noted that most pension funds are invested in Government of Jamaica (GOJ) bonds.
"As interest rates on these bonds fall, so will the return on pension funds invested," said Mills.
She said persons retiring in the immediate future or in the long term will receive smaller pensions.
"Not only because the rate of interest has been reduced, but because their pensions will be reduced by rising inflation due to increased taxes," she said.
The upshot, advised the JNBS executive, is that pensioners will have less money to buy food, pay utilities and pay for medical services among other expenses.
Additionally, the postponed maturity date on GOJ bonds imposed by the NDX will also create added exposure to interest related changes, placing investments at even greater risks, RBC Royal Bank's Dean White reckoned.
"The longer the maturity date, the greater the risks and this is bad because the value of the assets in the portfolio stands to be affected," the treasury manager said.
For White, financial institutions that manage pension schemes will also be hard pressed to service the payments due to pensioners as both companies and individuals grapple with the constraints imposed by NDX.
Mills further reckoned that pension schemes will also have less funds to purchase investments for their members. This she suggested would result in "smaller pensions going forward as interest rates and earnings on pension funds remain low."
The projections for less than expected returns for pensioners are however not without remedy. White suggested that diversifying into "real assets" such as real estate will help in capital preservation.
He said growth stocks also have the ability to achieve long-term capital gains while an addition of dividend paying stocks can sustain an individual's income stream.
"Diversifying into foreign currency denominated investment products can also help minimize the adverse effects of the recent as well as any future NDXs," he suggested.
Mills advised, when investing in a pension scheme, one should choose a scheme that gives the option of making adjustments over time. She suggested that unitised funds also be considered for diversity and security.