This document discusses pension reform in Jamaica and lessons that can be learned from the Employee Retirement Income Security Act (ERISA) in the United States. It provides background on Jamaica's macroeconomic landscape and aging population trends. It describes Jamaica's current pension system and incentives provided under ERISA to encourage pension coverage, savings, and protection of benefits. The document proposes several short, medium, and long-term solutions Jamaica could adopt, including improving financial literacy, expanding pension products, and reforming tax and regulatory policies to promote private pension savings. The overall goal is to help Jamaicans better prepare for financial security in retirement.

1. Towards a brighter financial future
Pension Reform in Jamaica, Lessons
from ERISA
Melanie KamilahWilliams | Hubert H. Humphrey Fellow – Jamaica, FSC

2. GlobalTrends – Aging Population (65 years and
older)
Country 2015 2030 2045 2050
Brazil 7.8 13.0 18.7 21.2
Bulgaria 18.9 22.7 28.2 30.0
China 9.4 15.7 21.8 22.5
Colombia 6.5 11.0 15.3 16.6
Jamaica 8.1 12.6 17.0 18.2
Mexico 7.2 11.8 18.8 20.2
Nepal 4.3 5.8 9.1 10.6
Pakistan 4.3 5.7 8.3 9.6
Romania 15.4 18.8 26.3 27.8
South Korea 12.7 22.6 30.9 32.7
USA 14.0 18.6 19.4 19.8

3. Save for retirement -Time changes everything

4. Retirement Savings Equation

5. Jamaica’s Macro-Economic Landscape
 Upper Middle Income Country of 2.712 million people
 Annual population growth since 1991 – 0.36% (now 17.4
births per 1000)
 GDP of US$14.76 Billion (based on US dollar value in 2012) –
World Bank
 Negative growth in GDP from 2008 – 2012 (Global recession)
 GDP driven by services (tourism and finance), remittances,
manufacturing

6. Jamaica’s Macro-Economic Landscape
 GDP driven by services, remittances, manufacturing
 Projected GDP Growth of 0.3% in 2013 - 1.3% by 2016
 Unemployment Rate:
9.4% - 2007,
1.4 % - 2009
13.7% - 2012
 Informal Economy is sizeable

7. Macro-Economic Factors affecting pensions
 Population growth is slowing
 Longevity increasing
 Relatively young working age population – 1.3
million between 15 – 44 years;
 Older working population - 480,240 persons
between 45 – 64 years

8. Macro-Economic Factors affecting pensions
 Women are more educated than men, fewer
children
 Brain Drain
 Poverty Rate 9.9% in 2007 to 17.5% in 2012 (based
on US$1.25)
 Second highest rate of poverty is among elderly
16.8%

9. Jamaica’s SocietalValues
 Family-oriented (remittances)
 Community (Church is safety net)
 Saving
 Education and hard work
 Prize home-ownership
 Leave an inheritance

10. Profile of Person who saves for retirement
 Works for an employer who offers a superannuation fund
 Higher education (Tertiary)
 White-collared or pink-collared employee
 Long-term attachment to labour force
 Long tenure in current job (in excess of 5 years)
 Has sought a job with an employer offering a pension
 Union-represented
 Home owner

11. Features of a successful private pension system
Adequate
benefits
Sustainability Coverage Cost effective

12. Pillars of a successful pension system
 First – mandatory public pension (PAYG, social
pension)
 Second – mandatory public DC plan (fully funded)
 Third – occupational pension schemes or individual
retirement accounts
 Private savings for retirement income

13. Features of Jamaica’s pension system
 Mandatory Public Pension Plan PAYG – National
Insurance Scheme
 Civil Servants receive non-contributory DB pension
from Consolidated Fund
 Private Pension Plans
 Private savings

14. Types of Private Pension Plans in Jamaica
 Employer-sponsored pension plans (superannuation
funds - SFs)
Defined benefit plans
Defined contribution plans
Employer required to make annual contributions
Employees may have to contribute

15. Types of Private Pension Plans in Jamaica
 Retirement schemes –
Individual retirement accounts
 Employee or self-employed persons eligible
Civil servants, SFs members currently ineligible
DC plans
 No employer contributions are required

16. Types of Private Pension Plans
 Specified Pension Plans (public industry pension plans)
Not regulated by FSC
created by statute
 No tax-preferential treatment
 Top-Hat Pension Plans

17. FundamentalThemes of Private Pension Plans in
Jamaica
 PreferentialTaxTreatment for SFS and ARS – EET model is
used
 Employee/Employer contributions are exempt from income-
tax
 Earnings are exempt
 Benefits are taxed on payment
 Trust arrangement

18. Private Pensions Regulation
 Pensions (Superannuation Funds and Retirement Schemes)
Act and Regulations
 Tax issues – IncomeTax Act
 Regulators – Financial Services Commission,TAJ

19. Solutions for increasing pension coverage
Improved GDP
Pensionable
Employment
Financial
Literacy
Targeted
Regulation
Diversified
Pension
Products
Incentives for
Employers

20. ERISA, IRC – Main Goals
 Balance the interests of Employers and Employees
 Business approach to pensions
 Pensions protection is a national investment in social
cohesion – EBSA, DOL
 Safety net for defined benefit plans – PGBC (Pension
Guarantee BenefitCorporation)

21. ERISA – Protection ofWorkers
 Pensions is deferred compensation
 How do we ensure a wider cross-section of employees
are covered?
 Qualification Rules for employee pension plans
 Participation Rules - not just Highly Compensated
Employees can be covered
 Eligibility Rules – 1000 hours in a year

22. ERISA & IRC – incentives to employers
 Built in safe harbours or “shock absorbers” for
Employers
 Preferential tax treatment (EET)
 Limits on Employer’s fiduciary responsibility for
investment
 Bottom line: Employers must want to offer pension
plans to employees

23. ERISA and IRC – incentives to Employees
 Non-forfeitability of benefits (Vesting) – ERISA § 3 (19)
 Vesting on Normal RetirementAge
Defined Benefit plan:
 Cliff vesting at least 5 years, or
 Graduated vesting - Year 3 – 20%, by year 7 - 100%
 ERISA § 203 (a) (2) (A)

24. ERISA and IRC – incentives to Employees
An individual retirement account plan (DC):
 Cliff vesting at least 3 years; or
 Graduated vesting - Year 2 – 20%, byYear 6 - 100%
vested
 Vesting rules do not apply IRA plan - IRC § 408
 ERISA § 203 (a) (B)

25. ERISA and IRC – incentives to Employees to save
 Participation rules (Eligibility)
 ERISA § 202 (a) (1) (A), IRC § 410 (a)
 General rule – 21 years or completes 1 year of service,
whichever later
 Cannot exclude persons who have attained a certain age [IRC
§ 410 (a) (2)]

26. ERISA and IRC – offering incentives to Employees to
save for pensions
 Benefit accumulation rules – to minimize back-
loading benefits
 Financial Hardship withdrawals
 Employer contributions to an IRA for employees [IRC
§ 408 (c)]
 Tax penalties for withdrawals – distribution is taxed as
part of gross income [IRC § 408 (c), § 72]

27. ERISA and IRC – offering incentives to employees to
save for pensions
 Diversified retirement savings arrangements (target funds,
employer stock, etc)
 Roll-over (transfer) of accumulated benefits to IRA (401 (k)
plan) -
 Permitting after-tax dollars to be used for pension savings
(ROTH IRA)
 Now principal protected My RA accounts
 Bottom line: Employees will save, if given good choices

28. ERISA’s protection of accrued pension benefits
 Vesting schedules
 No ‘bad-boy’ clauses – preventing forfeiture due to misconduct
 Preventing “claw-backs”, undermining accrued benefits through
plan amendments
 Minimizing “back-loading” of benefits – benefit accrual rules
 Funding & Solvency for DB plans
 Tax penalties when plans do not meet qualification requirements

29. Diversified Pension Products – Employers’ choice
Employee stock
purchase plan
Profit Sharing
plan
SIMPLE Plan Target Plans

30. Diversified Pension Products – Employers’ choice
Money
Purchase
DB plan SEP Plan IRA plan

31. Practical Solutions to encourage private
pension savings – short term solutions
 Understand employee’s behavior (Behavioral Economics)
 Motivate them through retirement product design
 Encourage employers to establish SFs (e.g. reduced
statutory filings)
 Financial Literacy
 Control investment management costs - fee caps
 Portability of benefits

32. Short term solutions
 Mandate retirement counselling advice to plan for
retirement
 Investment Manager, HR as conduit
 Happens at least at the following stages:
beginning of career – 21 - 22
mid-career - 40 - 45
Nearing end of career – 55 - 65

33. Medium term solutions
 Revised tax qualification rules (eligibility)
 Vesting schedules
 Use a ROTH IRA type model (TEE) to promote
additional pension savings
 Investment menu
 Default investment option in DC plans

34. Long term solutions
 Economic development - job creation and
pension savings
 Encourage SMEs and entrepreneurial spirit
 Pension reform - societal value adjustment
self-reliance
tax compliance
increasing birth rate

35. Long term solutions
 Flexible investment options
 Encourage people to save through DC funds by:
Relationship between contributions and benefits
No obligation to subsidize others (no DB)
Fiduciary duty of investment manager
You keep the investment return

36. Practical Solutions to encourage private pension
savings – Long term solutions
 Funding and Solvency rules for DB plans
 Accept DB plans will become extinct
 PBGC model to provide safety net for remaining DB
plans

37. Practical Solutions to encourage private pension
savings – Long term solutions
 Creation of new retirement products
 Investor protection through conduct of business
regulations
 Emphasis accountability of the individual – you must
be your own fiduciary

38. Long term solutions
 Encourage contributions to DC plans and retirement
schemes
Participation Rules – not just HCE
Mobile phone platform to make pension
contributions (India and Kenya)
 Limited Financial HardshipWithdrawals

39. Above all else, get saving for retirement

40. ThankYou!

41. Appendix
 Investment Company Institute
 World Bank – www.worldbank.org
 Inter-American Development Bank
www.iadb.org
 ERISA and Employee Benefit Law –
The Essentials (ABA); DavidA. Pratt
and Sharon Reece, 2009
 Statistical Institute of Jamaica
 http://statinja.gov.jm
 Laws of Jamaica
 http://moj.gov.jm/laws