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Pension plans reclassified according to risk profile

THE FINANCIAL Services Commission (FSC) indicates that it has concluded a reclassification exercise for Jamaican private pension plans, with changes based on specific plan benefit type and in line with Organization for Economic Cooperation and Development (OECD) and international standards.

The OECD guides policymaking in member countries with what it describes as evidence-based standards. The application of the updated standard was used in the FSC’s revamp of local pension plans and concluded in 2022.

Pension plan arrangements in Jamaica are either defined benefit (DB) plans or defined contribution plans.

Meanwhile, there are three specific types of defined benefit (DB) plans: traditional defined benefit (TDB), hybrid defined benefit (HDB) and mixed defined benefit (MDB). Each has varying risk exposures which are monitored accordingly.

In the traditional defined benefit plan, the FSC indicates benefits are linked through a formula to the members’ wages or salaries, length of employment, or other factors.

In the hybrid plan, benefits depend on a rate of return credited to contributions, where this rate of return is either specified in the plan rules, independently of the actual return on any supporting assets (e.g., fixed, index to a market benchmark, tied to salary or profit growth, etc.), or is calculated with reference to the actual return of any supporting assets and minimum return guarantee specified in the plan rules, as outlined by the FSC.

The hybrid plan also refers to defined contribution plans which guarantee pension payments from the fund.

The mixed defined benefit plan features two separate defined benefit and defined contribution components, but which are treated as part of the same plan.

The FSC reports that as at the latest quarter reviewed, there were 255 active defined contribution (DC) plans with 100,930 members at the end of Q3 2022. These had total asset values which saw a 0.81 per cent reduction moving from $219.27 billion to $217.49 billion at September 31, 2022.

The asset values for defined benefit plans decreased for the quarter, moving from $478.10 billion to $465.63 billion. DB plans, however, continue to account for more than 50 per cent of total private pension assets.

Traditional defined benefit plans, meanwhile, reported assets of $391.53 billion, the largest among all defined benefit plans in the pension industry.

Of the three categories of DB plans, most DB plans (84) were traditional defined benefit schemes. However, hybrid or HDB plans had the largest number of members (20,685).

Hybrid defined benefit plan assets, meanwhile, had the largest quarterly reduction (3.08 per cent) among all three types of DB plans in the last quarter assessed.

Solvency data was provided to the FSC for 353 active plans as of September 30, 2022, and 96 per cent or 339 were deemed as solvent, as at September 2022.

At the end of the quarter, the regulator indicates, 211 pension plans representing over 50 per cent of total active plans, reported solvency levels between 100 per cent and 120 per cent.

A total of 76 plans reported solvency levels between 120 per cent and 150 per cent and 52 plans reported solvency levels of over 150 per cent. Of the 52 plans that reported solvency levels of over 150 per cent, 35 or 67.3 per cent were TDB plans.

The number of insolvent plans remained unchanged at 14, which consisted of nine DC plans and the remaining five: three traditional, one hybrid and one mixed defined benefit plan.

The FSC commented: “Given the true nature of defined contribution plans, where benefits are dependent on contributions plus investment gains, DC plans should not be insolvent in theory. However, insolvent DC plans primarily occur due to poor governance, particularly related to over-crediting members’ accounts.”

The FSC indicates that it has been in constant dialogue with their trustees and administrators discussing strategies aimed at improving their solvency position.

It was observed: “While the FSC continues to actively monitor these pension plans, the trustees and sponsors are reminded of their fiduciary duty to monitor their plans’ financial health, to reduce the occurrence of insolvency and fulfil the ultimate objective of their pension plans: to provide sufficient pension benefits for participants.”

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