Jamaica’s government-led pension reform initiative

Jamaica’s pension industry continues to see a number of changes, directed by the government. World Finance spoke to the CEO of one leading Jamaican pensions provider to find out more

Interview with: Vernon James, Managing Director and CEO, NCB Insurance Company
July 7, 2016

Jamaica has been attempting to develop its pension industry for a number of years. Much success has been made so far, principally with the passing of a series of legislative acts in the mid-2000s. It is anticipated the reform of the Jamaican pension system will continue to progress and develop, with efforts focused on the reform of public pensions and the implementation of certain provisions.

Despite such progress however, there remain significant strides to be taken in the near future, specifically when it comes to funded schemes for public employees. World Finance spoke to Vernon James, the Managing Director and CEO of NCB Insurance Company, about these changes and how his firm is adapting to them.

NCB Insurance offers a wide range of products and services that are geared to meeting the insurance, long-term investment, and pension needs of the island’s population. In speaking about how his firm is dealing with the changing nature of Jamaica’s pension industry, James also pointed out the number of challenges within the market that lay ahead, and how reforms have impacted his own operations of his own firm. Alongside a structural change to how NCB operates, James noted his firm in particular is also increasing investment in technology to smoothen the running of its business in light of recent legislative changes to the pensions sector.

How is the pension market in Jamaica evolving today?
The need for the reform of the Jamaican pensions system has been argued for since as far back as the 1970s. However, the evolution escalated during the last two decades, following the financial meltdown of the 1990s. It may be argued the major reform came in 2005 with the issuance of the Pensions (Superannuation Funds And Retirement Schemes) Act from 2004, and the passage of supporting regulations in 2006.

Phase I of the pension reform process – as the first stage has come to be known – focused primarily on general operational issues, including registration and approval of superannuation funds, retirement schemes, trustees and responsible officers, licensing of administrators and investment managers, and governance. Phase I has, in my view, achieved some major objectives. These include increased access for self-employed persons and persons in non-pensionable posts via approved retirement schemes, improved governance and formal supervision of pension arrangements, and increased transparency.

Technology is leveraged to keep the trustees and pension fund members informed on all aspects of their respective funds

Several critical goals are, however, yet to be accomplished. These include the adequacy of pensions at retirement, dependency of the aged on the state and families, and the transition of public sector arrangements from pay as you go or partial funding to full funding. The hope is some of these issues will be addressed in the long-awaited Phase II of the reform process. It is anticipated this stage will focus on adequacy matters such as portability, vesting, funding and solvency as well as addressing other critical issues such as trustees’ ability to adequately diversify the investment portfolios of pension funds, while remaining cognisant of attendant risks.

In regard to Phase II reforms, the Financial Services Commission – the regulatory authority for the pensions industry – has already prepared recommendations and solicited feedback from various industry players. Drafting Instructions have already been submitted to the Chief Parliamentary Council (CPC), the body responsible for the creation of the laws of the land.

Some major anticipated changes include allowing multiple retirement arrangements, the ability to transfer benefits between Jamaica and ‘recognised jurisdictions’, the ability of members to unlock contributions for specific reasons: conditions under which surplus in an ongoing plan may be distributed; triggers for partial wind-up of a plan; vesting; civil penalties and indemnification for trustees, and several amendments to investment regulations.

What factors have instigated this ongoing transformation?
Prior to the passage of the Pension Act and Regulations, no legislation existed to effectively provide for regulation of existing pension arrangements. Minimal provisions in the Income Tax Act failed to address pivotal issues such as requirements for: trust deeds; management of pension funds; benefit payments; complaints; solvency and compliance, and instead focusing primarily on the tax exempt status of pension schemes.

Following the financial sector meltdown of the 1990s, the government took a decision to institute extensive pension system reform. To this end, in 1994 the Ministry of Finance and Planning (MoFP) established a Pension Reform Committee with representation from across the pensions industry, which proposed to Parliament in January 1999 a set of reforms in the Green Paper entitled Reform of the Pension System in Jamaica.

Following public consultation, the MoFP submitted a revised outline of the proposals to the Cabinet in June 2000. This enhanced proposal formed the basis on which appropriate pension legislation would be developed. The key features of the reform of the pension system included the enhancement of the basic Social Security System, the National Insurance Scheme (NIS) and the encouragement of effectively regulated Occupational Pension Schemes and Approved Retirement Schemes, for private and public sector workers, to supplement the basic NIS benefits.

The major objectives included are: to ensure proper pension arrangements for employees; reduce dependency of the aged on the state and families; heighten social awareness about the need for retirement preparation; increase access to pension arrangements; ensure effective governance and supervision of pension arrangements to ensure accountability; transparency and solvency of plans; to introduce minimum benefit standards for – among other things – portability and vesting, and convert some of the partially and/or non-funded public sector pay-as-you-go schemes to fully funded, contributory schemes.

What challenges does the market still face?
The enhancement of the NIS and the creation of funded schemes for public employees remains one of the main challenges ahead. To address this we will require amendments to existing legislation. Public sector pension reform is, however, progressing and commenced with the Green Paper, Options for Reform of the Public Sector Pension System, which allowed for private and public sector feedback.

Recommendations from these consultations culminated in the preparation of a final policy document, the White Paper The Reform of the Public Sector Pension System, which was tabled in Parliament in December 2013. The White Paper outlines the plans for public sector pension reform which was implemented in April 2016. Another problem going forward is that Phase II, as outlined above, is yet to commence.

This continues to delay several of the mission-critical objectives to support a well-functioning, efficient national retirement system. It is understood, however, that Drafting Instructions have already been submitted to the CPC. Further change to pension legislation is, therefore, imminent.

How has NCBIC changed alongside the market’s evolution?
To ensure we are in a position to support increased governance and regulatory requirements for pension funds, NCBIC has changed its organisational structure to focus on specific functional areas and activities related to our pension business. We have also improved our technological capabilities to allow for efficient and timely regulatory reporting for pension funds under our purview.

Our enhanced monitoring and tracking procedures have ensured improved and ongoing compliance with the Pensions Act and supporting regulations. Systems are also in place to monitor and track investment limits.

Technology is leveraged to keep the trustees and pension fund members informed on all aspects of their respective funds, including access to member balances and administration and investment management reports. Customer satisfaction is a key component of our business strategy and, as such, regular meetings are held with trustees where they are provided with critical information regarding the investments, administration, regulatory and accounting matters. In addition, these meetings are used as an avenue for the trustees to openly discuss their concerns and to make recommendations as they relate to our service delivery.

What core role does technology play in these changes?
Given the new requirements of the Pensions Act, governance and, by extension, regulatory reporting has become increasingly important. As a result, pension fund managers and administrators have had to improve their reporting capabilities in line with these requirements. In this context, NCB Insurance Company has utilised technology to assist with the reporting requirements surrounding regulatory compliance pertaining to investment management and administration of the pension funds under its management.

We have other plans to further incorporate technology into our business. We plan to leverage technology to provide critical fund information, via online access, to members and trustees alongside improvements to the portfolio management process. We also plan to provide technology-focused training for our key employees in order to ensure proficiency, as well as improve trustee education by continuing to host our pension seminar and expand our ongoing trustee training programmes.