A few months ago a retiree and reader of this column expressed concern that pensions in Jamaica have no provisions for any cost of living adjustments (COLA). This concept refers to an increase in salary or benefits due to inflation.

COLA is designed for incomes to keep pace with inflation. But as prices increase retirees are finding it difficult to maintain their standard of living. The reader went on retirement in 1999 when the Jamaican dollar was J$40 to US$1. This year his pension has already lost 75 per cent of its purchasing power. He raised questions regarding the implementation of COLA for the benefit of the average Jamaican pensioner as incomes have been affected by devaluation and inflation. In addition, he observed that in Jamaica there are a few executives and politicians whose pensions have provisions for automatic adjustments, based on inflation and devaluation in the economy.

Today I seek to shed some light on the benefits of COLA and indexed pensions for retirees. Many retirees live on a fixed income and COLA is a valuable tool that, if implemented, can benefit retirees whose many years of hard work would not be wasted by the loss in value of their pension income. An individual who retired 10 years ago has a pension income that is much less than a current employee who occupies the same job. The implementation of COLA requires careful analysis as it can prove very costly. Funding of COLA requires careful examination. The trade unions and policymakers have a key role to play in any implementation or legislation of COLA for retirees.The Consumer Price Index is the official measure used in calculating COLA.

The central bank’s inflation-targeting approach can help in slowing price increases and ultimately offer some ease for retirees on a fixed income. Inflation targeting is a strategy used by central banks with a goal in maintaining price and economic stability.

I believe that the best approach to dealing with the cost of living challenges that retirees will have to contend, is an indexed pension. There is no need for new legislation. How does it work? At the time of retirement, insurance companies are contacted to provide quotes on annuities. An annuity is a financial product or contract with an insurance company that provides a fixed or constant stream of income in retirement. The annuity is purchased using the accumulated pension savings and interest. Usually the quotes given reflect a fixed income for life with an option for a lump sum payout.

However, with rising prices and the erosion of the purchasing power of retirees’ income, an indexed pension is the ideal option. It involves periodical increase in pension income throughout retirement instead of having a fixed monthly payout. The pension is indexed to inflation. The insurance companies are tasked with making the necessary calculations and providing the quotes for the clients to choose the plan that best suits them. Pension trustees, sponsors/employers, and pension administrators should actively recommend indexed pensions to pension contributors/employees. Retirees with an indexed pension would have a better standard of living compared to those having a fixed monthly pension that is not able to keep pace with inflation. Indexing the pension income would not be a financial burden to employers or employees. The issue of funding the pension increases throughout the retirement years would not exist for employees or taxpayers. Currently, there are retirees in Jamaica who are benefiting from indexed pensions.

For an indexed pension to be most meaningful in retirement, employees/the self-employed or pension contributors should endeavour to contribute the maximum required by law to their pension plan. The earlier this is done the greater will be the compounding effect and the retirement nest egg would be more substantial. Based on budgetary constraints some pension contributors may start with the basic five per cent of their salary. My recommendation is to increase contributions gradually before reaching retirement age.

Everyone should aim to have a pool of retirement funds for abundant living. This means having a portfolio of assets that will provide streams of income in retirement. Therefore, employees/workers should contribute to a registered pension plan as well as secure long-term investments such as investing in stocks and or real estate. Having an emergency fund consisting of low-risk instruments such as bonds, and government securities, is a component of the retirement portfolio of assets. Passive income in retirement can help retirees improve their standard of living in retirement or maintain the standard of living they once enjoyed while working. Indexed pensions and streams of income are necessary strategies to beat inflation and create financial freedom.

– Grace G McLean is financial advisor and retirement specialist at BPM Financial Limited. Contact her at: gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com