Pension funds benefit employers, employees and the nation
PRINCIPAL of The University of the West Indies Professor Densil Williams, in an address recently at the 31st Heads of Caricom Social Security Organisations Conference, made some interesting comments that raised eyebrows in some sectors of society.
He expressed concerns regarding the sustainability of “generous post-employment benefits” (pension benefits) by employers and that these funds represent a “significant cost driver” on companies’ profit and loss statements.
Today I will examine the benefits that both employers and employees derive from pension plans, whether it is a superannuation fund (company-sponsored) or an approved retirement scheme (ARS), known as an individual or personal pension plan.
What is a
This is an employer-sponsored pension scheme that provides a safety net for employees in the form of replacement income upon reaching retirement age. At retirement, pension benefits are paid monthly for the lifetime of the pensioner. However, the pensioner has the option of taking a 25 per cent tax-free lump sum and receive a reduced pension. The lump sum option is also applicable for the ARS.
There are two types of superannuation funds: the defined benefit (DB) and the defined contribution (DC). Retirement payouts under the DC are calculated based on a prescribed formula. Both the contributions and the benefits are defined. Employees’ basic/compulsory contribution rates are clearly outlined in the superannuation plan’s rules. Also, employees can make additional contributions known as the voluntary contribution rate. The employer is responsible for funding the retirement benefits of the employees and matching the compulsory contributions of all members of the pension fund. All contributions to the fund plus the income earned on the investments will provide the pension income for employees upon retirement. Funds may pay out a maximum of 75 per cent of the employees’ pre-retirement income as pension benefits upon retirement. All risks are borne by the employer. Some pension funds are indexed to inflation.
In regard to the DC superannuation fund, the employer matches the compulsory contribution of the employees. The pension pay-out upon retirement is based on the investment performance of the fund. If the performance of pension funds is poor the pension pay-out would be low for the pensioner. Therefore, the management of the investment is crucial, as in the case of DC funds, the investment risks are borne by the employees and not the employers. Superannuation Funds are invested tax-free.
For employees whose employers don’t provide a Superannuation Fund, there is the ARS that offers the same tax-free benefits as the Superannuation Funds. The funds invested are used to provide the employee with lifetime pension income. All risks are borne by the employee. The size of the pension income is determined by the investment performance of the contributions invested.
Based on the Financial Services Commission (FSC) industry statistics report for the year 2022, the number of superannuation funds stood at 355, and there were only 13 approved retirement schemes. Of the 355 company-sponsored plans (superannuation), 255 were DCs. My research has revealed that, over the years, more employers have shifted from DB plans to DC plans. The FSC’s report showed that DB plans still accounted for more than “50 per cent of total private pension assets”.
With the advent of personal pension plans and the fact that most company pension funds are invested in DC plans, and with the investment risks shifted to employees, more employers should encourage their employees to make maximum contributions to their respective pension funds which will go a far way in giving employees the best pension payout possible upon retirement.
The post-employment benefits negotiated years ago in some DB plans formed part of the employee income benefit and employers are obligated by law to honour these commitments. Many employees have made significant contributions to the growth of companies, industries, and Jamaica as a whole, so it’s only fair for them to be rewarded with a decent pension income when they retire. After all, employees should benefit from the wealth and financial growth that they too helped to create.
Whereas there are obvious pension benefits for employees who can save for retirement tax-free, the employers likewise benefit as their contributions are also invested tax-free and in addition employers’ contributions to pension funds are tax-deductible. Employers’ contributions to pension funds are deductible as business expenses. The long-term time horizon that pension funds offer can boost a nation’s economy. I think it’s imperative that any pension reform by the authorities should consider ways to auto-enrol working adults in a pension plan.
Grace G McLean is a 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 email@example.com