ECCU PENSION REFORM
RECOMMENDATIONS
1
PENSION REFORM COMMISSION
Order of Presentation
2











Why are Pensions Important?
What are necessary to ensure Adequate Pensions?
Make Your Money Work for You!
Summary of Major Recommendations of the ECCU Pension
Reform Commission
Essential Structural Design Features of Tier Two and Three
Schemes
Recommendations on Operational Matters
Details of The Four Tier Arrangement
Implementation Issues
Time Allocation of Income to the Four Tier Programme
Why are Governments so Concerned About Pension Reform?
Conclusions
Why Are Pensions Important?
3
 Setting aside for the rainy day: practical and biblical (Genesis






Ch. 41: 34-36)
Increasing life expectancy: from 69.6 to 76.1 by 2050 for
Grenada
Increasing dependency ratio ( number of workers to
dependants): currently the ratio is 1 dependent to 2 workers
but this is expected to move to two dependents per worker.
Reduced dependence on children, family and society.
Governments do not have the resources to take care of that
need.
Avoid/minimize poverty amongst senior citizens is an
increasing responsibility of governments
One of the most important sources of long term savings for
economic development.
What are Necessary to Ensure Adequate
Pensions?
4
 Setting aside a fixed proportion of income to savings for




retirement.
Commencing from first employment and continuing
diligently during working life
Ensuring that the administrative cost of managing it is
not too high.
Ensuring that the managers get the best returns on your
savings.
Ensuring that the economy is well run so that you get real
goods and not financial paper returns on your pensions.
Need low inflation and a stable dollar.
Make Your Money Work For You
(One dollar per day)
5
0%
(mattress
)
3%
(savings)
5%
(bonds)
8%
(equities)
10% (own
business)
10 years
$3600
$4,127
$4,528
$5,215
$5,737
20 years
$7200
$9,673
$11,904
$16,474
$20,619
30 years
$10,800
$17,127
$23,918
$40,782
$59,218
40 years
$14,400
$27,144
$43,876
$93,445
$159,297
50 years
$18,000
$40,607
$98,176
$206,558
$419,004
Summary of Commissioners’ Recommendations
6
 Establish a four tier Social Assistance and
Retirement Programme
:
Tier One: Social Assistance to the elderly and challenged
 Tier Two: Social Security or National insurance
 Tier Three: Supplementary Pension Schemes

 State
Pension Schemes
 Private Occupational Pension Schemes

Tier Four: Voluntary Savings Programmes
 Savings
for Higher Education, Residential Housing,
Investment,
 Reverse Mortgages
 Establish a government department to take
care of the needs of the elderly.
Essential Structural Design Features of Tier Two
and Three Schemes
7
 Adequacy, of the objectives and of the provisions to meet these





objectives
Affordability, to the beneficiaries of the Schemes provisions and
costs
Sustainability, of the Scheme to deliver its provisions and
promises to all its beneficiaries and stakeholders.
Robustness, to withstand the inherent vulnerabilities and possible
associated fluctuations that the Schemes would inevitably face.
Equitability and fairness, such that the members’ benefits are
transparent and based on their relative contributions to the
Schemes and subject only to natural randomness. It should not be
used, or seen to be used, as a policy instrument for social and/or
political engineering.
Predictability, to deliver on the promises, whatever their
longevity, without surprises, bearing in mind that the arrangement
is over a long time spanning many generations
Recommendations on Operational Matters
8
 Use regional arrangements wherever it is possible to do so to gain
economies of scale, risk diversification, minimize political
interference, and enhance returns on investments
 National and regional schemes can and should run side by side to
give governments an option and also to highlight the better
performance of regional arrangements
 All tier Two and Three Schemes must be:







Contributory in equal proportions between employer and employee
Contributed to from first employment and continuing to final employment
Portable between employer and country
Immediately and fully vested in beneficiaries
Integrated so that the combined benefits from both can provide a pension of up
to 85% of final salary.
As standardized and uniform as possible to create better public understanding
and to facilitate and reduce administration costs.
Based on a standard retirement age for all employment and to provide an average
retirement period of 15 years.
Details of the Four Tier Arrangement: Pillar One
= Social Assistance
9
 For financial support and/or care to the indigent elderly to




bring income to an affordable level between the indigent and
poverty lines.
To provide skills training to the indigent and unemployed of
working age to obtain employment at least to the level of the
minimum wage.
To provide income support to the other indigents to an
affordable level between the indigent and poverty lines.
Funding for this to come from an annual 2.5% allocation from
revenue and from fiscal incentives provided to social groups
and the corporate sectors to sponsor homes for the elderly.
Managed by either National Insurance and/or a designated
government department
Details of the Four Tier Arrangement:
Pillar Two = National Insurance
10
 To ensure a basic post retirement income that is reflective of




years of service and contribution levels to a maximum that is
related to a percentage of per capita income.
To provide some income support to contributors who
experience sudden interruptions in employment earnings and
to partially cover them for 5 months of unemployment and on
a reducing basis during a maximum 6 month period.
Compulsory equal 5% contribution from employer and
employee and 10% for self employed.
Defined benefit scheme with national and regional portability
and managed by National Insurance.
Could be run as either a national or regional schemes with the
latter being the much superior option.
Details of the Four Tier Arrangement:
Tier Three = Supplemental Pension Plans
11
 Integrated with National Insurance to bring combined retirement






income to between 75% to 85% of “final income”
Defined Contribution arrangement
Equal contribution of 5% from employer and employee and 10%
from self employed.
Applicable and continuing from first employment to retirement.
Public sector employers in regional and/or national State Pension
arrangement.
Private sector employees would participate in strongly closely
regulated specialised financial institutions operating at both
national and regional levels.
Both schemes would have virtually identical features to allow free
transferability between public and private sectors and among
countries.
Details of the Four Tier Arrangement:
Tier Four = Household Savings and Investment
12
 Private Savings and Investment




Optional but essential
To meet individuals and household need for savings for home
ownership, further education of self and dependants, speculative
investments, precautionary balances
A 25% of income if properly timed and commencing from first pay
and continuing should meet these investment goals.
Needs professional and objective regulation, close monitoring and
strong penal sanctions for compliance failures.
 Reverse Residential Mortgages


Essentially this is voluntary dissaving by converting owners’ equity in
a home into a lump sum and/or income stream for providing income
during retirement while enjoying accommodation for life and
without having to repay the encashed equity.
Needs careful regulation, possible counselling and close monitoring.
Implementation Issues
13
 Terminal benefits (pensions and gratuities) are costly and are
currently costing the GOG about 5.8% of its revenue. Our
proposals when fully settled should cost no more than 4.0% of
revenue
 Recommended proposals with pension for all will ultimately
eliminate expensive gratuities.
 For cost purposes the recommendations on Tier three
arrangements do not make provisions for retroactivity. When
accepted it will be a new arrangement that will apply mainly
to new entrants .
 Certain persons under existing programmes may be able to
convert their benefits under existing arrangements to the
much improved benefits of the proposed arrangement but it
would not be on a one to one basis.
Time Allocation of Income to the Four Tier
Programme
14
18 to 30 years
31 to 45 years
46 To 65 years
Compulsory
Savings
10%
10%
10%
Employer
contribution
10%
10%
10%
Voluntary Savings
25%
25%
25%
TOTAL
45%
45%
45%
Social Security
10%
10%
10%
Supplementary
Pension
10%
10%
10%
Housing
10%
15%
7.5%
Higher Education
10%
5%
12.5%
Taxes
5%
5%
5%
Sources
Uses
Why Are Governments So Concerned About
Pension Reform?
15
 Alleviate or minimize poverty among population and




particularly among senior citizen who are becoming the
largest group in the society
Substantial source of savings for long term economic
development.
Broadens and deepens the financial and capital markets
If pension arrangements are not properly managed it
could lead to considerable distress for senior citizens
(CLICO and BAICO).
Minimizes the need for government assistance to the
elderly and makes more government funds available for
other essential social and economic physical and
institutional infrastructural programmes.
Conclusions
16
 The need for a well structured social assistance and cost
effective contributory retirement programmes are
imperatives given the emerging patterns and structures
of our demography, society, economy and the heavy
demands on government for virtually everything, while
there is an aversion to paying taxes.
 Participation must be compulsory for all commencing
from first employment right through to retirement.
 Regional management arrangements are superior to
national efforts.
 THANK YOU.