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Civil servants deserve balanced pension reform

O’Neil GRANT

Monday, December 30, 2013    

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THE White Paper on Pension Reform we tabled in the House of Representatives on Tuesday, December 17, 2013 presents the proposals for reform that were put forward by the Joint Select Committee on Pension Reform arising from feedback and discussion on the Green Paper.

Pension reform is a noble thing, reform of any nature is something to be pursued; and inherent to reform is the need to make things better. A pension is a regular monthly payment made to a person of or above the retirement age from a fund to which the employee and/or employer would have contributed during that person's working life.

A pension scheme must have the characteristics of fiscal sustainability, adequacy, affordability, robustness, equitability, and predictability. Within this context I shall attempt to break down the reform of public sector pensions and you, the reader, can determine if the proposed is better and for whom.

Now, the current proposal for the reform of pension focuses strongly on reducing the liability of pension on the Government to the extent that it will require mandatory contributions into the scheme of 5 per cent for all eligible contributors. However, the employer is not proposing to match that contribution. The white paper is proposing only 3.5 per cent, subject to the availability of funds. Existing liabilities, which amount to $24 billion, will be funded to the tune of $17 billion, making it clear that current contribution will help to fund the $7-billion difference.

The gradual movement of the retirement age to 65 years is a welcome and reasonable idea, coupled with the proposal to allow persons to retire early. However, early retirement puts the pensioner at a disadvantage in terms of the quantum of pension received due to not completing their full working life. To complicate this, the white paper is suggesting that for each year that the member shortens their working life they will be penalised by a one per cent reduction in pension.

It must be borne in mind that the rate of accrual (the annual rate at which pension accumulates) will move from 2.2 per cent to a low of 1.8 per cent. Thus, the rate of accumulation will be lower, but the extension of the working life should balance this out and, consequently, no advantage will be gained by employee or employer. The one per cent penalty for early retirement is neither reasonable nor justifiable. This must be viewed in the context of low and stagnant wages and steady growth in unemployment.

The white paper suggests using the last five years as an average to compute pension benefits instead of the final salary that is currently being used. Again, low and stagnant wages will adversely impact the calculation for the pensioner. The person who retires in 2016 would not have had a salary increase for the periods 2010 to 2015, and for the decade before that would have had only four years of salary increases with the discontinuation of the 80 per cent of market agreement which occasioned the first MOU. So, 11 of the last 15 years would not have seen any rise in salary for public sector workers, outside of those resulting from realignment.

Also, one of the most confusing aspects of the white paper is the period for vesting. Vesting is the minimum period in years that a person must work in order to qualify for a pension. Most retirement schemes operated within the public sector have a vesting period of five years, whilst the non-contributory scheme is at 10 years. This has implications for the portability of pensions and will impact the withdrawal of contributions from the fund. This does not speak well for a robust pension scheme.

A dedicated and well-managed scheme will improve the rate of saving by the country and reduce the burden on the Government in providing a pension for its retirees, thus reducing the growing numbers of indigent poor.

We are, however, disheartened that there is no indexation in the proposals given the fact that, if the election is taken to receive a lump sum and a reduced pension, there is no return to full pension after 12.5 years. Indexation, as proposed by the unions, means a growth in the pension based on upward movement in wages and the Consumer Price Index, and is a natural trade-off for removing the return to full pension after 12.5 years.

More can be said, but I trust that I have done enough for one to determine if the white paper focuses on all the characteristics of a reformed pension system or is just primarily concerned with lowering expenditure to the detriment of the pensioner. Reform should make things better not worse or win-lose. Balance must be sought.

O'Neil W Grant, MBA, is president of the Jamaica Civil Service Association. oneil_w_grant@yahoo.com

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