By MLA Ezzard Miller
A CALL FOR PUBLIC-PRIVATE PARTNERSHIP
IN RETAINING PENSION FUNDS
22 April 2020
Congratulations to Government
Before I discuss how pension funds can be retained while funding employees in these desperate times, I take a moment to once again congratulate the Premier and his Government for consulting and following the advice of the medical fraternity on the handling of the Coronavirus pandemic.
The shelter-in-place and other social distancing arrangements, including the “soft curfew” and “hard curfew” restrictions on personal movements, appear to be working given the results of limited testing.
Procurement of testing kits
I also wish to “big up” those persons involved in the procurement of the testing kits. The story as related in the Compass was intriguing and demonstrated the value of personal relationships coming together for the common good.
I do wonder, nevertheless, why the opportunity was not taken to purchase two additional testing machines which could have provided the ability for at least a tripling of the testing that could be performed on a weekly basis.
At the current estimated rate of testing, 500 in two-week periods, it is going to take many months to complete the number of tests that need to be done before we can start to open up the domestic economy.
Concerns with the proposed pension drawdown plan
Aside from that, however, I have some very serious concerns with the proposed plan for pension drawdown by individual pension beneficiaries.
For this to have reasonable impact on the ability of persons to sustain themselves for several months, the drawdown would have to be a substantial amount; for example, it would require, at a minimum, a drawdown of six months’ salary, at an average of $2,000 monthly, totalling $12,000, for the average person. However, for that average person that would represent five years of contributions.
In order to make pensions whole again, the average pension beneficiary would have to double his or her contribution each month for the next five years. At a salary of $2,000 per month, given the high cost of living in Cayman, the average person could not afford these additional contributions.
Combine this with the proposed moratorium on paying pension contributions, in my book, it will spell disaster for most persons when they become pensioners.
I have long been an advocate for investing on long-term fixed deposits in local financial institutions a much larger portion of the pension funds collected. The earnings could fund necessary national growth, for example home ownership and the expansion of the local economy, especially in local entrepreneurial growth.
I have never supported the type of access by individual pensioners that would enable withdrawal of money from their pension plans.
Administration of pension plans
Well administered pension plans usually involve institutional investment in long-term fixed deposits. In this way, pension funds afford availability of long-term cheaper money for these institutions to lend to Caymanians under strictly managed conditions. Pension beneficiaries, in the meantime, retain the funds in their individual plans.
The proposal to provide persons substantial cash payments by withdrawing cash from their pension funds without imposing realistic and sustainable conditions, especially with no guaranteed timeline for when this lockdown will end, is a recipe for disaster.
We should have learned some hard lessons in the last several years from the experience of allowing persons to drawdown their pension plans to pay mortgages. The latest report indicates that some of those same persons continue to experience difficulties in keeping their mortgage payments current.
Warning on impact of rushing amendments to pension law
I suggest that before we rush into amending the pension law to facilitate this drawdown—which I agree may look attractive at this time as a quick way to get some income replacement—we carefully look for ways of utilizing pension funds as a part of a more well thought out, planned, and controlled strategy.
If we go with the proposed direct income-replacement model, allowing a six-month salary/cash withdrawal from individual pension plans, it will be almost impossible to manage the spending by individuals. Further, the drawdown funds are unlikely to last six months—that is just human nature—and we will ultimately all pay the price in the long-run.
It is therefore very important that Government clearly identifies the problem/need it is trying to fix before a solution is determined. Is this an employment problem/need or an income replacement/need?
This is essentially an employment problem, in that non-essential employees are desperately in need of retaining or replacing income from jobs that are currently non-existent/functional.
It is indeed a desperate situation, but it is possible to devise a solution that retains both employment and income by equipping employers with the necessary financial wherewithal to continue to pay their employees.
This better solution would result in employees retaining their employment, rather than the government merely replacing their salary with a one-time drawdown on their pension plans or by a subsidy from the government’s Needs Assessment Unit (NAU).
This plan would still enable employees to benefit from utilization of their pension funds. The big benefit, however, would be protection of pensions from reduction to the point where employees will ultimately have to resort to the NAU for supplemental income in current conditions or during their pensionable years.
This plan could be developed with the aid of financial experts in Cayman, where we are reputed to have some of the best in the world.
As an example of how this would work, let’s say some $50 million, more as determined, could be sourced and distributed amongst the local commercial banks on a fifteen-year fixed deposit. (Most pensioners work for forty or more years, pre-retirement). The plan would be governed by two strict conditions.
The first condition is that employees’ pension funds would serve as collateral, for which the banks would offer an interest of half a percent on the pension funds it receives and would fully insure the funds against loss.
The second condition would be that the lump sum distributed to the banks would fund loans to business owners to pay salaries of their employees, including a salary for the owners/managers, at one percent on a five-year loan. A moratorium would be imposed on principle and interest for the first year.
This would allow pensioners, including employers/owners, to retain their pension money while benefiting from investing in themselves.
Government, in turn, would amend the Pension Law to sweeten the deal by incentivizing the commercial banks to offer loans at their regular commercial rates over the next ten years to Caymanian businesses, to grow and to fund entrepreneurial growth.
Under such a scenario I could support a one-year moratorium on pension contributions.
Time for creatively adapting to new economic climate and demands
A key benefit of this plan would be to incentivise local entrepreneurship at time when it is more than ever needed, replacing or at least bridging away from the strategy of focusing on international inward investment.
The defects of this traditional economic strategy, espoused by successive local governments, of incentivising inward international investment to drive development and progress, have been laid bare by the ravages of the Coronavirus.
Unfortunately, we are now reaping the tares of this strategy: i) we have ignored the incentivising of local entrepreneurs to grow the domestic economy, and ii), inward international investment has allowed foreign investors to repatriate profits from investments.
Labour earnings, as well, are largely repatriated as work permit holders leave very little of the money generated to circulate and grow the local economy.
Importance of careful management of current economic needs and recovery
In light of all of these factors, management of the containment of the Coronavirus, as challenging as it is, will be easy compared to the complexities of managing the economic damage and recovery over the next couple of years.
But there is hope. The Cayman Islands’ success has been built on public-private partnerships, and now, more than ever, we need to leverage that collaborative spirit that has shown itself ever accessible in times of greatest national need.
Now more than ever, we need to come together for the common good, from which all of us stand to benefit, in devising solutions that are practical, affordable and sustainable.
Importantly, such essential criteria should never be ignored at the cost sacrificing the future wellbeing of Caymanians by undercutting pensions designed to see them through their golden years.