Rezworth Burchenson, Guest WriterThe Pensions Act was passed in 2004 bringing into effect important reforms in the country's pension industry.
Phase One of the reform has been completed, while Phase Two, which is pending, is specifically aimed at protecting the interests of approved pension-fund and retirement-scheme members.
It is expected to address the important yet controversial issues of vesting, locking in, portability, and indexation.
VESTING
When a pension-fund member becomes vested, it means that he/she is entitled to the employer's contribution in addition to his/her own - both compulsory and voluntary.
These contributions will not be a cash benefit but the additional employer's portion will facilitate a much higher pension at normal retirement age.
It is proposed that members would be vested no later than five years of membership in a fund, allowing faster access to the employer's contribution.
PORTABILITY
Portability will allow members and deferred members to transfer their accumulated benefits - contributions and interest - to a retirement scheme or another pension fund.
For example, if a member terminates employment and becomes self-employed, he can port his contributions and interest and, if vested, the employer's contribution to a retirement scheme.
Where that member is changing jobs, those contributions from employer and employee can be ported to the pension plan of the new employer.
It is now common practice for pension-plan members who terminate employment to request a refund of their contributions without making adequate provision to ensure that these monies are saved towards providing an income at retirement.
In Jamaica, where the propensity to spend is quite high, these refunds derail attempts to ensure that members of pension plans are adequately prepared for retirement. In that regard, Phase Two has included the provision of locking in.
LOCKING iN
This means that persons who contribute to a pension plan will not have access to the money contributed - excluding the voluntary contribution - when they terminate employment after five years of membership. These contributions would be locked in until retirement date.
Although the locked-in clause means that pension-fund members will not have access to their benefits until retirement, it does allow members who leave their jobs to move their contributions to the pension fund of their new employer or to a retirement scheme. This provision would only be applicable after the amendment to the act becomes effective.
This means that contributions made before that date would be refunded on termination, at the member's request.
INDEXATION
Finally, indexation, another highlight of the Phase Two reform, allows trustees to index the pension benefits of members to the movement in the Consumer Price Index, providing a hedge against inflation.
However, these increases will be subject to the approval of the trustees and only if the stated pension fund can so afford those increases.
It is expected that as a result of the passage of Phase Two of the act, Jamaica will have a much more modern pension-fund industry, vital to the development of pension funds and the trust that Jamaicans have in pension schemes.
More importantly, the reform of the pensions industry should have far-reaching implications, positively impacting the deepening of the capital markets, raising Jamaica's domestic-savings rate, and increasing the pool of capital available for investments and development.
Rezworth Burchenson is managing director of Prime Asset Management Limited, a pension-fund management company. Email: rburchen son@primepensions.com.