JAMAICA OVERHAULS PENSION SYSTEM

UNCLAS KINGSTON 000634

SIPDIS

SIPDIS

STATE FOR WHA/CAR (WBENT),WHA/EPSC (JSLATTERY)

STATE ALSO FOR HR/OE (CINTRON)

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR L LAMONICA

E.O. 12958: NA
TAGS: ECON EFIN JM
SUBJECT: JAMAICA OVERHAULS PENSION SYSTEM



1. Summary: The Senate has approved the contentious
Pensions (Superannuation Funds and Retirement Schemes) Act
to reform and regulate the pensions industry in Jamaica.
The Act was passed in 2004 and came into effect on March
1, 2005, but the regulations supporting the Act were sent
to a Senate Committee for review amid concerns that some
of the regulations were onerous. A number of stakeholders
in the pensions industry remain concerned about the high
costs associated with regulation and the amount of power
vested in the hands of the regulator, the Financial
Services Commission (FSC). The GOJ is also disturbed
about the lack of consensus on vesting and portability of
pension rights and has signaled its intention to pursue
these issues in a second phase of reforms. Despite these
concerns, this should bring order and security to
retirement savings, while providing a substantial pool of
funds for long-term investment. End summary.

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Background
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2. Nearly two years after its passage in the Lower House
of Parliament, on March 19 the Jamaican Senate finally
approved the controversial Pensions (Superannuation Funds
and Retirement Schemes) Act, 2004, paving the way for the
Financial Services Commission (FSC) to become the
regulator of pension funds and schemes in Jamaica. The
process to develop pensions legislation for the private
sector commenced almost ten years ago, but was largely
stymied by resistance from trade unions and some industry
players.


3. Prior to the passage of the act, pension legislation
was mainly found in the Income Tax Act of 1954, although
the Income Tax DepartQnt did not have the legal authority
to supervise the industry. The Act is therefore an
attempt by the GOJ to reform the pension system, ensuring
that a proper legislative and regulatory framework is
instituted to secure the interests of pensioners in the
over 1,500 registered pension schemes in Jamaica. This is
particularly important given the meltdown of the financial
sector in the 1990s which reflected, inter alia, the
imprudent management of the country's pension funds.


4. Under the new act, all approved pension funds and
schemes must be registered with the FSC. Likewise, all
managers and administrators of pension funds must be
licensed and all trustees must be registered. The
regulator will also have the power to monitor the
operations of the industry as well as demand the
disclosure of information to the agency and fund members.
Additionally, the legislation includes investment limits,
and allows self-employed persons and persons in non-
pensionable jobs to save for retirement.

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Dissent
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5. Trade unions are opposed to the issues of vesting and
portability, contending that persons should have the
option to reclaim their contribution refunds, should they
so desire. Currently, persons can opt for a refund of
their mandatory contributions in the event that they leave
their employment for another opportunity. It concerns the
GOJ, however, that - once obtained - these "refunds" are
generally used for consumption purposes, leaving many
retirees without sufficient resources for retirement.


6. Industry players, on the other hand, dislike the
supporting regulations to the Act due to: (1) the costs
associated with bringing the industry in line with the
requirements of the act and regulations; (2) the perceived
burden of compliance; and, (3) legal questions surrounding
offences and penalties, particularly the subjection of
trustees to criminal prosecution. It was these concerns
that prompted the Senate to send the act and regulations
to a select committee for review.


7. Patrick Lynch, Chairman of the Gordon "Butch" Stewart
group of companies pension scheme, one of the largest in
the country, has estimated that pensioners will lose some

USD 2.3 million of the approximately USD 2.3 billion under
management annually. Lynch has also reiterated his strong
objection to the FSC being given control over private
pension funds and retirement schemes, including the
authority to refuse the dissolution of a fund or scheme
even if the trustees agreed to do so.


8. William McConnell of the Lascelles DeMercado Group
(and prominent member of the Private Sector Organization
of Jamaica) argued that regulatory fees amount to a new
"tax" on retirees. Some detractors also argue that the
regulations impose costs that could wipe out a number of
the smaller pension schemes. However, Minister of Finance
Omar Davies and Executive Director of the FSC Brian Wynter
have countered by suggesting that the policy of levying
charges to cover the cost of regulation is universally
accepted. Davies said the GOJ'S sole interest in the
matter is the protection of the savings of contributors
and the treasury would not benefit from the passage of the
legislation.

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GOJ Concerns Left Unaddressed
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9. Despite trade union pressure, the GOJ wished to
include vesting and portability of pension rights as part
of the reformed pension landscape. These rights are
expected to ensure that persons are more prepared for
retirement and would prevent them from claiming any refund
of their contributions before retirement. While GOJ
officials and other industry players agreed that vesting
and portability rights were necessary, trade unions
insisted that persons should be allowed to claim for
refunds. With the deadlock stalling the reform process,
the GOJ eventually decided to postpone the issue, but
signaled its desire to pursue the issue in a second phase
of reforms. In fact, Davies has announced his intention
to establish a task force comprising representatives of
the various stakeholders as well as FSC officials to
consider this and other measures.

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Comment
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10. The approval of the Pensions Act will add an
important layer of regulation to the financial sector,
bringing the country's regulatory framework closer to
international standards. This is particularly important
given that the imprudent management of pension funds was
one of the underlying reasons for the mid-1990s financial
sector crisis. The improved regulations intend to provide
greater protection for retirement savings in a country
with a limited social safety net. The reform process is
therefore likely to bring some order to the way that
pension funds of approximately USD 2.3 billion are
invested. It also provides a significant pool of long-
term savings, given Jamaica's relatively young population,
for investment in long-term projects. Already, pension
funds are looking forward to the possibility of investing
in infrastructural projects like toll roads, which are
turning out to be relatively lucrative investments.
Nevertheless, real concerns remain, chief among them the
costs associated with meeting the regulations and the
impact of the new regulations on small funds.


11. Comment (cont'd): While the cost of regulation is
not a tax on the industry, it could hurt some funds,
especially in a low interest rate, high inflation
environment. Small funds could find it difficult to
comply with some of the regulations and might be forced to
dissolve. The issues of vesting and the portability of
pensions (to ensure that persons are more adequately
prepared for retirement) cannot be overstated, and one can
expect a second phase of reform by the GOJ to be imminent.
End comment.

JOHNSON