Director of the Pension Industry Association of Jamaica, Desmond Johnson, has sought to assure pensioners and those on the brink of retirement that their after-work savings are not in trouble. 

Director of the Pension Industry Association of Jamaica, Desmond Johnson

Johnson was speaking on Taking Stock with Kalilah Reynolds, after the Financial Services Commission (FSC) issued a warning that some pension funds may fold due to the economic impact of the COVID-19 pandemic.  Pension funds lost J$37 billion last year, while their assets fell by over 5%.  As a result, the FSC has advised pension fund managers to ensure that they manage their portfolios wisely. 

Mr. Johnson said the negative performance of the local stock market was the main contributor to the depression of pension funds; however, he said people should not be worried as things are picking up.

He said with the stock market being a long term investment vehicle, gains are expected once the crisis settles. 

In Jamaica, pension funds have been allowed to invest in certain instruments, including stocks, bonds, Government and private sector securities, commercial mortgages, residential and commercial properties. They’re not allowed to invest in stock markets outside of Jamaica, but Johnson said efforts continue to have the approved list expanded to diversify their investment portfolios.

“That will now change the dynamic. They have widened the basket, even though not to the level that we would want but we’re still working with them to allow more investments in assets outside of Jamaica and others locally as well,” said Johnson.

Some opting to delay retirement

At the same time,  the Director noted that some persons retiring during the pandemic are likely to experience slight losses on their portfolio balances due to the lower than anticipated returns from the investments in the basket of assets made by pension managers.

“Especially for those in Defined Contribution (DC) funds, if they had started the year before COVID-19 with a balance of J$10 mllion, that fund balance would probably come down to around $9.5 million given the impact on the stock exchange and some of the assets that pension funds are invested in. So they’d be going off with less assets in their portfolio as an individual investor in a pension fund,” said Johnson.  

A defined contribution fund involves contributions of tax deductible expenses from both employer and employee. The contributions to the scheme accumulate interest over time.

Johnson said once a pension benefit is unlocked, the funds are used to buy an insurance instrument known as an annuity. That annuity allows for a fixed amount to be paid for the rest of the pensioner’s life.

Unlike DC Funds which can be impacted by the magnitude of investments, Johnson explained that persons in a defined benefit plan will get their set pensions even if impacted by shocks.

“What will happen is that the employer would have to bear the cost if the pension fund is not doing well. If the cost has been increased for the fund, the employer bears that cost,” he explained.

Meanwhile, Johnson said delaying retirement where possible would be wise for persons at this time considering the uncertainty which still remains in the environment. He said pensions remain safe in Jamaica’s well regulated environment.

“It’s not a certainty that when you’re ready, the stock market would have recovered so I would advise to delay and in fact a lot of people have been delaying because of what has been happening with their portfolios,” said Johnson.

Under the income tax law and Pensions Act, pensioners cannot cash out the entire amount owed to them all at once. They are however entitled to a 25% tax free lump sum. That means a pensioner with a J$10 million dollar balance, for example, would be allowed to get J$2.5 million tax free, with the rest to be used to purchase an annuity.

New episodes of Taking Stock with Kalilah Reynolds premiere Tuesdays at 7pm on YouTube, kalilahreynolds.com and all podcast platforms.

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