A call for a PPP in retaining pension funds

| 20/04/2020 | 25 Comments

MLA Ezzard Miller writes: 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.

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 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.

Aside from that, however, I have some very serious concerns with the proposed plan for pension drawdown by individual pensioners.

For this to have reasonable impact on the ability of persons to sustain themselves for several months it 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, totaling $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 pensioner 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 and, in my book, it spells disaster for most persons when they become pensioners.

I have long been an advocate for investing a much larger portion of the pension funds collected in the local financial institutions on long term fixed deposits to fund necessary national growth, for example, in home ownership and the expansion of the local economy, including entrepreneurial growth and development. 

Nevertheless, I have never supported the type of access by individual pensioners that would enable withdrawal of money from their pension plans.

The way pension plans work is that institutional investment in long-term fixed deposits provide long-term cheaper money for these institutions to lend to Caymanians under strict conditions.  Pensions, in the meantime, retain the funds in their individual plans.

The proposal, therefore, to provide persons substantial cash payments by drawing that cash from their pension funds without imposing realistic conditions, especially with no guaranteed timeline for when this lockdown will end, is a recipe for disaster.

We should have learned some hard lessons from the experience of allowing persons to draw down their pension plans to pay mortgages in the last several years. The latest report indicates that some of those same persons continue to experience difficulties in keeping their mortgage payments current.

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 the pension funds in a more controlled environment.

If we go with the 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.

It is very important that the 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 in desperate need to retain or replace income from non-existing jobs.

It is indeed a desperate situation, but it is possible to devise a solution that retains 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 initiating replacing their salary with a 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 a utilization of their pension funds. The big benefit, however, would be to protect pensions from being reduced to a 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, 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 will 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 the 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 Pensions 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.

This coronavirus and its worldwide economic consequences have placed in question the economic focus of successive governments on incentivizing inward investment to drive development and progress. At the same time, this economic model has ignored the development of local entrepreneurs to grow the domestic economy by incentivizing local ownership.

This focus on inward 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 by the development to circulate and grow the local economy.

The management of the containment of the coronavirus is difficult, but, as challenging as it is, it will be easy compared to the complexities of managing the economic damage and the economic recovery over the next couple of years.

The Cayman Islands’ success has been built on public-private partnerships, and now more than ever we need that collaboration to devise a solution that is practical, affordable and sustainable.

And those criteria should never be ignored at the cost of Caymanians placing their future well-being at risk by undercutting pensions designed to see them through their golden years.

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Comments (25)

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  1. Anonymous says:

    Providing the opportunity for the working population to access their pension is just that – an opportunity. Nowhere have I read that you have to do so; if you do not wish to do so.

    I believe that this choice puts the power back in to the hands of the working population. The monies I have contributed toward my pension is my money and if I so please to take the opportunity offered by the Premier, that is my prerogative.

    Anyone who same to have a difference of opinion about the need to offer the pension draw down or the pension holiday, simply do not need money to literally survive these unprecedented times we are facing in Cayman.

    MLAs, I am certain you do not have landlords breathing down your throat about paying rent, or have to count your money more than once when you are in the line at the grocery store, gas station, pharmacy etc just to make sure you have in hand the amount needed to pay that particular bill. If you say you do, then I think you are talking rubbish.

    Apart from allowing the working population to access their pensions funds, if we so desire, in order to continue to have the financial means to offer up continued public assistance to the many that are in need of it right now, all of you MLAS could offer up a pay cut to do just that and would not feel a dent your income.

    So do not think for one moment that the common phrase, “WE ARE IN IT TOGETHER”, applies here because we are NOT ALL IN IT TOGETHER!!!!

  2. Anonymous says:

    Got Gold?

  3. Anonymous says:

    One would think that as being a massive ‘market’ in the financial industry perhaps they should have not played our pensions on the Stocķ Market. Who the hell does that? Our pensions are gone.

  4. Anonymous says:

    Why aren’t we using those “permits for whomever can pay” budget surpluses to fund the economy?

  5. Anonymous says:

    Unfortunately the people will have to understand they may lose as much as 10-35% of their contributions at this time, as the financial markets are really off their highs when a lot of their pension contributions were invested.

    There is not much good I can say about the Private Pension Laws. I just hope those that have a significant fund accumulated, will make the best out of the funds withdrawn.

    This maybe an opportunity to improve on what they have accumulated, and I know that at retirement and annuity is nothing to brag about.

    It would have been better in the long term, for the Government to provide a fund, financed over a long term to assist the needy as this is a humanitarian crisis.

  6. Anonymous says:

    It’s not just those who need it that will take it. Everyone will take it as it’s the only chance to get any of your money before you retire……and what happens then?

  7. Anonymous says:

    Suggesting the most vulnerable and likely least financially astute is madness and the government must know this. The recovery in markets will be swift and these poor people will have sold at the bottom. The government could issue low interest loans with the borrower’s pension as collateral against the loan.

  8. Anonymous says:

    giving money to your employer to keep the business afloat lends itself to so many areas of abuse I don’t even know where to begin. Banks aren’t equipped to open up accounts these days let alone lend money in a time of crisis

  9. Anonymous says:

    most pensions have huge amounts invested in cash – breaking a CD isn’t going to move the dial one bit and will free up the necessary cash without without selling equity positions or bonds

  10. Anonymous says:

    I’ll sum this up in a number of points across the board as not everyone will read everything I have to say on this subject if I download in one entry – If you have less than $10k in pension you’re probably never going to get PR or are very new to the island. I’d have liked to have seen this 100% withdrawal only eligible to those that are leaving the island with a plane ticket.

  11. Anonymous says:

    Interesting proposal.
    The challenge the legislature will have is the seeming simplicity of ‘pension holiday’ and ‘pension draw-down’. But I do wish them luck in crafting a more long-term-viable solution than ‘take your money now and hope for the best tomorrow’.

    My one disagreement would be that we can’t raise the (future) pension rate. Whatever they do should come with a permanent 2-10% rise in the base (shared) pension rate for everyone to start in 6-12 months.

  12. Anonymous says:

    Finally we get our money out of those losing funds! Have they ever made money?

  13. Anonymous says:

    “it could take months to open the domestic economy” ….no big deal…

  14. The Grim Creeper says:

    “Work permit holders leave very little of the money generated by the development to circulate and grow the economy” What planet does Ezzard live on. Who rents most of the apartments, who buys large numbers of cars from local dealers, who supports the local restaurants and private schools, who buys all their food from local supermarkets. The local economy would collapse without all the money expats spend on the island. If the Premier succeeds in destroying it by other means and the expats are forced to leave, nothing will be left except the civil Service and a Govt that can’t pay them.

  15. Anonymous says:

    Well said Ezzard!

    • Anonymous says:

      He needs to stop talking so much sense. He keeps making most of our other politicians look like idiots.

  16. Anonymous says:

    Great recommendation. Raid your pension fund while it has lost 1/3 of it’s value.

    This is what great investors do: CRYSTALLIZE YOUR LOSSES and spend the proceeds on EXPENSES.

    Absolutely F*ing Brilliant!

  17. Anonymous says:

    Giving access to pension for those employees who lost their jobs and stuck in the island will have relief fund coz its the employees right to access their pension

    • Anonymous says:

      Yes lets leave the pensions in the account until the stock market crashes and theres nothing left to take out!

      • Anonymous says:

        Hello…..it already crashed. There might not be anything left to take out.

      • Anonymous says:

        This is exactly how I view it. It’s so easy for Ezzard to say leave your pension alone when he’s taking in a nice monthly paycheck along with paid benefits and I can’t begin to imagine the liquid cash he may have. I bet if he was told to take a pay cut and donate that salary to those less fortunate now, he’d sing a different song. I plan to take mine. Tomorrow is not promised and pension is in no way guaranteed money whether u withdraw now or years from now. Take it while u can get it.

        • Anonymous says:

          OOH, I hope you don’t live to an old age with no money left, as that would be much worse imo.

    • Anonymous says:

      yes, it will, but be sure that lots of employees who have not lost their jobs will access it as well and when it’s time to retire, there won’t be enough there for them. Most people don’t spend their money wisely, especially those who are still employed and will rape their pension, which is why they find themselves in financial distress.
      While there’s never a guarantee, that one will even live long enough to draw from you pension. I bet being old and not having enough money to live is a lot worse than being younger and having a rough ride for a few months.

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