The legislation to be enacted must be sufficiently comprehensive so as to protect the members' interests, without stifling initiative. The following areas are vital to the effective regulation of Pension/Superannuation Schemes and Approved Retirement Schemes:

(1)     The Creation of an Independent Regulatory Body

The administration of the pensions regulations should be undertaken by an independent body, to be directed by a board called `The Pensions Commission'. The major function of this entity is to supervise the operation of pension/superannuation funds and Approved Retirement Schemes, specifically with respect to legal, administrative and financial matters. In so doing, the Pensions Commission will have to interpret the relevant laws and regulations and provide general rules governing the trustees and managers of pension/superannuation funds and Approved Retirement Schemes.

It has been recommended that the Pensions Commission should be comprised of a Chairman and six to eight members, drawn from the public and private sectors, appointed by the Minister of Finance and Planning.

The Pensions Commission shall appoint a Superintendent of Pensions and employ a small, specialized working staff, which fully utilizes the information available to it from auditors, actuaries and other sources. In order to facilitate this, provisions will be included in the legislation making it the duty of the auditors/actuaries to report to the Pensions Commission on transactions adversely affecting the fund and/or members' rights.

The Pensions Commission and its staff should be sufficiently funded from the Central Budget and from the registration fees payable by the Pension/Superannuation Schemes and Approved Retirement Schemes, administrators and institutional investors. Alternative methods of funding would be an annual renewal fee either per capita on the membership of each fund/scheme, or per percentage of each fund/scheme, or based on a combination of both.

The Pensions Commission will be required to present annual reports to Parliament, and the National Pensions Act will provide for transparency and accountability with respect to all of the Commission's activities.

 

(2).    Licensing and Registration Requirements

• Approved Pension/Superannuation Funds and Approved Retirement Schemes under the Income Tax Act must be registered with the Pensions Commission. New Pensions Schemes will require registration as well as approval under the Income Tax Act (for tax exemption).
  
• All managers/administrators of Pension/Superannuation funds and Approved Retirement Schemes must be licensed.
  
• All trustees of Pension/Superannuation Funds and Approved Retirement Schemes must be registered by the Pensions Commission
  
• Licenses/Registration can be canceled/revoked for cause/refused.

(i)    Licensing of Institutional Investors

All institutional investors of Pension/Superannuation Funds and Approved Retirement Schemes must be licensed by the Pensions Commission, in accordance with the following criteria:

• the applicant's adherence to standards of sound business and financial practices in its operations;

• the ability of the applicant to meet the legislated fit and proper requirements with respect to its Board and Management personnel;

• the strength and quality of the applicant's management;

• the applicant's personnel must have acceptable qualifications and adequate experience for the management of Pension/Superannuation Funds and/or investment of the assets;

• the adequacy of the applicant's capital; and

• granting the license would be in the public interest.

(ii)    'Fit and Proper Persons' Requirements to be applied in the licensing of Trustees, Managers and Institutional Investors

In processing applications for licenses, the Pensions Commission will evaluate the Trustees, Managers, and prescribed key employees of the Institutional Investors, based on, inter alia, the 'Fit and Proper Persons' requirements outlined below:

• the person shall not have been convicted of an offence involving dishonesty, whether in Jamaica or elsewhere;

• the person is not an undischarged bankrupt;

• the person's employment record and business conduct and dealings do not give the Pensions Commission reasonable cause to believe that the person carried out any act involving dishonesty or impropriety;

• the person, in the opinion of the Pensions Commission, is of sound probity, is able to exercise competence, diligence and sound judgement in fulfilling his responsibilities in relation to the pension/superannuation fund, and whose relationship with the fund will not threaten the interests of the members; and for the purpose of this paragraph the Commission shall have regard to any evidence that he has:
  
  • engaged in any business practices appearing to the Commission to be deceitful or oppressive or otherwise improper, and which reflect discredit to his method of conducting business;
    
  • contravened any provision of any enactment designed for the protection of the public against financial loss due to dishonesty, incompetence or malpractice by persons concerned in the provision of financial services, or in the management of companies or due to bankruptcy;
    
  • the person is not mentally unsound; and
    
  • the person must have relevant knowledge and experience.

(iii)    Registration of Pension/Superannuation Funds

The Trustees of a Pension/Superannuation Fund will have to apply to the Pensions Commission for registration of that fund. In processing the application, the Pensions Commission will evaluate the fund based on the criteria outlined in part (iv) below.

If ALL the requirements are met, and the Trustees have been registered and Managers of the fund have been licensed under the National Pensions Act, the Pension/Superannuation Fund will be registered to operate in Jamaica. For New Schemes after the Effective Date, application to the Income Tax Department for tax exemption must be preceded by registration.

(iv)    Conditions for Registration of Occupational Pension Schemes

The Pensions Commission shall not register a pension/superannuation scheme unless the scheme
satisfies all the conditions set out below. The conditions are that:

1. The pension/superannuation scheme shall be established in Jamaica in connection with some trade or undertaking carried on solely or partly in Jamaica.
   
2. The pension/superannuation fund is bona fide established under irrevocable trust.
   
3. The principal purpose of the scheme must be the provision of a pension (or an annuity) on retirement at a specified age or ages or upon earlier retirement as provided for in special circumstances.
   
4. The benefits and conditions of the scheme should include:
   
   • The specified normal retirement age shall not be less than age 60 years, with provisions
   • for earlier/later retirement in special circumstances. Early retirement should be allowed no earlier than 10 years before the normal retirement age except on ill-health grounds.
   • A specified Normal Retirement Age under 60 may apply for special occupational
     groups.
     
   • The maximum rate of pension accrual is 2% of final pay per year of service.
     
   • The maximum pension must not exceed the limits Statutorily prescribed from time to time. It has been recommended that the maximum annual pension must not exceed the limit on retirement of 75% of salary (as defined in the Income Tax Act) at retirement after a minimum 37 1/2 years of service with the employer/employers, or proportionately less for shorter service.
     
   • Pension increases may be granted above this level after the date of retirement, but not exceeding annual changes in the CPI.
     
   • Lump-sum benefits may be provided on death, but must not exceed the higher of 2 years' salary and the member's contributions accumulated with interest and/or appreciation in investment units in respect of the contributions.
     
   • Lump-sum benefits on termination of employment:
     
     • vested member - member's voluntary contributions accumulated with interest and/or appreciation in investment units allocated in respect of the contribution.
       
     • non-vested member - refund of the member's own contributions (voluntary and compulsory) accumulated with interest and/or appreciation in investment units allocated in respect of the contribution.
       
   • Lump-sums at retirement not exceeding the commuted value of a 1/4 of the accrued pension should be allowed. The maximum lump-sum should not exceed 12.5 times one-quarter of the pension before the commutation.
     
   • Small pensions may be commuted in full. (It is suggested that $300 per month be used as the designated figure for small pensions.)
     
   • The transferability of pension rights to another pension/superannuation scheme and from another pension/superannuation scheme should be provided.
     
   • Enhancements of pensions on disability/ill-health retirement may be provided.
     
5. The sponsoring employer must be a contributor to the pension/superannuation scheme.
   
6. In no circumstances, may a cash amount representing the employer's contribution, be paid to the employee on termination of service before retirement. When a vested employee's service is terminated before he/she retires, the member must have his pension rights preserved in the scheme or transferred to another registered scheme or Approved Retirement Scheme.
   
7. An employee who has more than 5 years' membership in a scheme, on termination of service, may ONLY be repaid his voluntary contributions accumulated with interest and/or appreciation in investment units allocated in respect of the contribution. If an employee has more than 5 years' membership in the scheme then the accrued benefit entitlement (less the voluntary contributions - if encashed) must be preserved in the scheme and paid as a benefit on retirement or, alternatively, the value of the preserved benefits can be transferred to another registered scheme the employee is joining, or a registered Approved Retirement Scheme. This preservation requirement will only apply to years of membership, and contributions, after the effective date. Refunds of employees' contributions accumulated with interest and/or appreciation in investment units allocated in respect of the contributions may on termination of service be made regardless of years of service, in respect of service and contributions up to the effective date.
   
8. The ordinary annual contributions made by the employer to the scheme must not exceed 10% of remuneration. Deficiency payments are allowable but must be substantiated by an actuary.
   
9. Where members' contributions are required these must be deducted from earnings and be paid over to the Trustees/ Administrator within one week of the deduction date.
   
10. The contributions made by an employee in a scheme year must not exceed 10% of the employee's remuneration in that year. For the self-employed, the contributions must not exceed 20% of earnings in the year.
    
11. The contributions to the fund by the employer and the employee shall be mutually recognized by both parties as a condition of employment. That is, membership in the scheme must be compulsory for the employee.
    
12. Pensions cannot be paid to employees who retire on a voluntary basis earlier than 10 years prior to the specified normal retirement age of the scheme, but no earlier than age 50.
    
13. Suitable winding-up provisions must be enshrined in the Trust Deed and/or Rules.
    
14. Prescribed minimum solvency requirements must be met. For example:
    
    • For a Defined Benefit Plan:
      
      A minimum 90% of accrued benefits at the valuation date computed on projected salaries must be covered by the assets. Accrued benefits to be valued on an actuarial basis acceptable to the Pensions Commission.
      
    • For a Defined Contribution Plan:
      
      A minimum 100% of the member's accumulated contributions plus the employer's accumulated contributions on his behalf, must be covered by the assets.
      
15. Pension rights cannot be assigned.
    
16. A member may allocate a portion of his/her pension in favour of a spouse or dependent.
    
17. Registration will be in the public interest.
    

(3).    Information Requirements

So as to ensure full, timely disclosure and accountability, provisions should be made for the submission to the regulatory authority and to the respective members of the schemes, of the following reports by each Pension/Superannuation Fund:

Information to the Pensions Commission

• Annual audited accounts and reports on the membership within nine (9) months after the end of the financial year. These should include full details of the assets.
  
• Actuarial valuations and Reports on solvency at least once in each three year period, within one year after the due date.
  
• Proof of custody of the assets should be satisfactory.
  
• Any other information as may be reasonably required from time to time by the regulatory authority.
  
• Information to Members of Occupational Pension Schemes

1. When an employee retires he will rely on his pension/superannuation scheme to provide financial support for the rest of his life. In view of the importance of pension benefits, it is essential that members of pension/superannuation schemes are kept informed of the benefit entitlement on a regular basis. The appreciation for, and knowledge of, the promised level of benefits would be increased with more disclosure. Trustees of pension/superannuation schemes should ensure that each active member receive as a minimum, within 6 months of the end of the scheme year, the following information:
   
   1. Information to be provided to a member of a defined benefit scheme:       
      
      1. Name
         
      2. Date joined scheme
         
      3. Date pensionable service commenced
         
      4. Normal retirement date
         
      5. Pensionable earnings for scheme year
         
      6. Member's compulsory contributions for scheme year
         
      7. Member's voluntary contributions for scheme year
         
      8. Member's total compulsory contributions accumulated with interest and/or appreciation in investment units allocated in respect of the contributions, to the
         end of the scheme year
         
      9. Member's total voluntary contributions accumulated with interest and/or appreciation in investment units allocated in respect of the contributions, to the
         end of the scheme year
         
      10. Accrued pension (based on pensionable salary and service as defined in the scheme rules) at the end of the scheme year.
          
   2. Information to be provided to a member of a defined contribution scheme:
      
      1.   Name
         
      2. Date joined scheme
         
      3. Normal retirement date
         
      4. Compulsory contributions paid by member during scheme year
         
      5. Member's voluntary contributions for scheme year
         
      6. Member's total compulsory contributions accumulated with interest and/or appreciation in investment units allocated in respect of the contributions, to the end of the scheme year
         
      7. Member's total voluntary contributions accumulated with interest and/or appreciation in investment units allocated in respect of the contributions, to the end of the scheme year
         
      8. Employer's total contribution made on member's behalf accumulated with interest and/or appreciation in investment units allocated in respect of the contributions
         
      9. Total bonus (if any) credited to member accumulated with interest and/or appreciation in investment units allocated in respect of the contributions, to end of scheme year
         
2. The following information should also be made available for inspection on request
   
   1.  A copy of the annual audited accounts of the scheme;
      
   2. A schedule of the investments of the scheme giving a breakdown by market value into broad categories such as ordinary shares, property, fixed interest investments, deposits, mortgages, etc.;
      
   3. A copy of the report on the latest triennial actuarial valuation of the scheme;
      
   4. A copy of the Trust Deed and plan rules; and
      
   5. Any changes to the Trust Deed and Plan Rules must be communicated to the members.
      
      
3. Recourse to the Pensions Commission:
   
   Members of a pension/superannuation plan shall have recourse to the Pensions Commission in the event that they consider that their best interests are not being served or are being jeopardized in any way, for example in the event of the non-production of minimum information on time, inaccurate information, etc. Details of this right shall be included in the legislation.
   

(4).    Investment Limits

The investment of funds by the Trustees/managers/institutional investors, should be subject to limits according to the generic type of the instrument, limits per issuer, and limits per category and risk level.

The following are some of the limitations to be enforced by the Pensions Commission:

1. At least 80% of the market value of the assets relating to the Jamaican liabilities of the fund must be invested in Jamaica.
   
2. A pension/superannuation fund shall not own more than 30% of the voting shares of any corporation.
   
3. No more than 10% of the market value of the pension/superannuation fund may be invested in a single investment.
   
4. No more than 10% of the market value of the pension/superannuation fund may be invested directly in any company and/or in any of its affiliated entities/subsidiaries.
   
5. For transactions not carried out in stock exchanges, no more than 5% of the market value of the pension/superannuation fund may be invested in the affairs of its institutional investor and its related entities, provided all such transactions are carried out at market rates and are declared to the Pensions Commissioner.
   
6. Investment in real estate required for the occupancy or expansion of the business of the institutional investor is prohibited.
   
7. No more than 5% of the market value of a Pension/Superannuation Fund may be invested in the business of the sponsoring employer.
   
8. Omnibus Clause
   

(5)    Ownership of Assets

As an important safeguard, it must also be explicitly stated that the assets acquired for the pension/superannuation fund must be registered, issued or transferred on behalf of the respective pension/superannuation fund. In addition, the trustees/the institutional investors must at all times be able to prove that they have or have access to the relevant securities and titles.

(6).    Trust Deed and Rules

Existing Plans

Any application for the registration of a Pension/Superannuation Fund already in existence, must be accompanied by a letter from the Income Tax Department approving the scheme, and a copy of the Trust Deed and Plan Rules, which must include, inter alia, satisfactory clauses providing for:

• The appointment and removal of Trustees, inclusive of member-nominated Trustees;
  
• Quorum to include at least one employee-nominated Trustee;
  
• The contributions required by employers and by employees;
  
• The method of determining the benefits payable to members or to their beneficiaries, in the named contingencies, e.g. retirement, death, termination, etc.;
  
• Preservation of pensions, and facility to accept assets transferred from another Pension/Superannuation Fund;
  
• The eligible categories of beneficiaries under the scheme;
  
• The investment powers of the Trustees;
  
• The winding-up of the plan; and
  
• Indemnity for Trustees while acting in good faith and in reliance on professional advice.
  

New Plans

Any application for the registration of a new pension/superannuation fund must be accompanied by a draft copy of the Trust Deed and Plan Rules, which must include satisfactory clauses providing for the above factors.

(7).    Retirement Age

1. Normal Retirement Age
   
   The law must require every registered plan to have a specified normal retirement age in the Trust Deed and Rules. The minimum normal retirement age which would generally be allowed is 60. However, individual pension/superannuation plans may specify a different retirement age for the members as may be desirable in accordance with the nature of occupation involved.
   
2. Early Retirement
   
   Early retirement should be allowed no earlier than 10 years before the normal retirement age except on ill-health grounds.
   
   
3. Ill-Health Retirement
   
   Ill-health retirement should be allowed.
   
4. Late Retirement
   
   Late retirement should be allowed up to five years after the Normal Retirement Age.
   

(8).    Beneficiary Designation

In the event of death before retirement on pension it is considered desirable that the rights of contributors and beneficiaries be protected so that they accrue to the fullest extent to dependents or the named beneficiaries. Members should be allowed to nominate and to change the nominations of the beneficiaries, who are normally spouses, dependent children and other dependents.

(9).    Plan Winding-Up

In all cases of plan winding-up the specific approval of the Regulatory Authority should be a condition precedent to the winding-up. The Trustees should submit winding-up proposals to the Pensions Commission for approval prior to distribution of the assets/settlement of the members' rights.

Surpluses arising after providing for all liabilities in the event of winding-up should be apportioned in the following order of priorities:

1. Current pensioners and beneficiaries.
   
2. Active members, deferred pensioners, and their beneficiaries.
   
3. The sponsoring employer/employers.
   

(10).    Offences and Penalties

In order to discourage non-compliance and offences against the legislation, a schedule of penalties shall be included in the regulations. The Pensions Commission shall have the authority to take, inter alia, the following actions in the event of non-compliance:

• cancel the registration of Trustees;
  
• require the sponsoring company to have new Trustees appointed, within the provisions of the Trust Deed;
  
• appoint a temporary manager to manage the fund's assets;
  
• fines to be applied to the Sponsoring Company and/or the Administrator and/or the Trustee(s) for breaches under the Act in their capacity, as deemed appropriate by Court Order; and
  
• imprisonment of the Director(s) of the Sponsoring Company and/or the Director(s) of the Administrator, and/or the Trustee(s) for breaches under the Act in their capacity, as deemed appropriate by Court Order.
  

(11).    Conditions for Registration of Approved Retirement Schemes

The Income Tax Act currently allows for Approved Retirement Schemes which are operated to provide pensions for self-employed persons, and employees who are not contributors to an approved superannuation fund. These schemes are however, unattractive and impracticable, as under the Income Tax Act, self-employed persons are subject to a ceiling on salary contribution towards pensions, of $6,000 per year. This level of contribution provides benefits which are insufficient to meaningfully supplement the benefits payable under the N.I.S.

It is therefore suggested that the first and most important step in enabling self-employed persons and those in non-pensionable employment to effectively provide for their retirement, is to raise this ceiling. A cap of 20% of the chargeable income of the contributor is suggested. The chargeable income would be subject to a maximum to be stated in the Act, example, $4,999,200 per annum ($416,600 per month/$96,140 per week). The limit will be reviewable.

The Approved Retirement Schemes will be governed by the same legislation as the occupational pension plans and as such, will have the same provisions for the following areas:

• Licensing and registration requirements;
• Information Requirements;
• Investment Limits;
• Ownership of Assets;
• Retirement Age;
• Beneficiary Designation;
• Plan Winding-up; and
• Offences and Penalties.

    The only exceptions will be with regards to the fact that:

• Approved Retirement Schemes may be administered by any registered Institutional Investor acting as a trustee, operating under a master trust deed with many individual members; and
  
• Immediate compulsory vesting should be legislated for self-employed persons and persons in non-pensionable employment who are members of Approved Retirement Schemes.

The following provisions will also be made:

• the total of all contributions paid in each calendar year to the individual plan and to any other registered retirement plan may not exceed the maximum ordinary contributions allowable under a registered occupational plan. This makes the treatment of individual plans consistent with that for occupational plans.
  
• the member must contribute regularly (at least annually) to the Approved Retirement Scheme.
  
• the maximum lump sum on retirement or death for Approved Retirement Schemes should also be consistent with the provisions for occupational plans.
  
• provisions should be made for the transfer of pension rights from an existing approved occupational plan into an Approved Retirement Scheme, upon the termination of the member from employment that is covered by a registered plan.
  

(12).    The Development of Provisions for Parental Pensions.

There is currently an expressed need for creating a vehicle to facilitate the provision of pensions by persons for their parent(s) who has/have no or inadequate pension entitlement. It is therefore necessary to widen the pensions system to allow tax-free savings by adults towards parental pensions.

In order to facilitate this, the following provisions will have to be made:

• The maximum annual contribution to such a scheme by any individual would be 5% of his/her salary. (Thus an employee may contribute a total of 15% of salary to his/her own pension and a parental pension, and a self-employed person and a person in non-pensionable employment may contribute a total of 25% to his/her own pension and a parental pension.)
  
• Similar to the Approved Retirement Schemes, the Parental Pension Plan must be administered by any registered fiduciary institution acting as a trustee, operating under a master trust deed with many individual members.
  
• The level of Parental Pensions must be such that when added to any other pension(s), the total is within the limit for self-employed persons.
  

(13).    Preservation of Deferred Entitlement/Portability of Pension Rights

Although many employees have been a part of a pension plan at one point or another, several of them upon retiring do not have sufficient resources to sustain them through to the end of their lives. This is because persons on changing jobs tend to opt for contribution refunds, rather than deferred pensions. Therefore, funds which should be accumulating as saving for retirement, are frequently used for consumption purposes during the employee's working lifetime. This then forces persons to work longer than they would normally have to, or to depend on the state or their families for their livelihood.

It is therefore necessary to enact statutory provisions to ensure that pension rights are automatically transferred or preserved on changes of employment after the attainment of a stipulated minimum period of employment. More specifically, a number of options shall be made available to the contributor, as follows:

1. Upon the termination of the service of an employee in circumstances in which he is not entitled to a pension and in which the period of service as a member of the fund is less than five (5) years, the contributions paid by the employee may be refunded to him together with any interest earned thereon and/or appreciation in investment units allocated in respect of the contributions;
   
2. On termination of service on completion of more than 5 years' membership, the member may only get a refund of his voluntary contributions accumulated with interest and/or appreciation in investment units allocated in respect of the contributions. The remaining pension rights must be preserved in the plan, or be transferred to another occupational plan or approved retirement scheme he is joining, in accordance with his wishes; and
   
3. (Notwithstanding (i) the employee may be offered the option to leave his accumulated contribution in the Fund and be eligible for a deferred pension starting at the normal or early retirement age.
   

Revaluation of Deferred Entitlement

If a deferred pension is to be given, the revaluation of deferred entitlement is essential. Revaluation is the process by which the deferred pension, defined at the time of withdrawal from service of the member, is adjusted during the period between withdrawal and eventual retirement, with the aim of preserving some of the real value of the pension to the member.

The deferred entitlement will be revalued by means of an offer of a fixed pension subject to "value for money" conditions. Herein, the fixed benefit payable at retirement will be subject to a minimum guarantee that it will not be less than the pension that could have been bought based on the actuarial transfer value of the deferred pension at the time of withdrawal, increased by interest/appreciation as earned by the scheme until retirement. This would essentially ensure that the member continues to share in the investment performance of the scheme.

Transitional Arrangements re: Preservation of Deferred Entitlement/Portability of Pension Rights

Existing schemes on the commencement date of the National Pensions Act will be grandfathered in the following respects:

1. entitlement to lump sums falling under Section 3(c) of the Income Tax (Termination of Employment Payments) Order, 1971, will continue tax free; and
   
2. employees' contributions accumulated with interest/appreciation for all service prior to the commencement date may be returned on death/termination before retirement.

The mandatory vesting provisions apply for contributions made by employers and employees after the effective date of the law

(14).    Indexation of Pensions

Under present legislation, a pensioner's annual pension at retirement and thereafter is limited to two-thirds (2/3rd) of the member's salary at retirement. This restricts the amount by which a person's pension can be increased after retirement, and in the long run results in erosion of the real value of the benefit received. In an inflationary environment, maintaining the purchasing power of the pensioner's benefit to some degree should be given due consideration. However, given the extra cost of providing a pension that is linked to inflation and the difficulties involved in finding suitable investments to cover the indexed liability, it is not felt to be appropriate to make indexation compulsory.

The indexation of pensions shall therefore be subject to affordability by the fund and/or the employer. When indexation is applied the following shall be applicable:

• after a minimum of 37 1/2 years employment with the plan sponsor, the total pension payable shall not exceed 75% of the member's highest salary earned by him during any twelve (12) consecutive months of membership of the plan. Post-retirement increases will be allowed even if this ceiling is breached, as long as such increases are granted to the incumbent pensioners in the plan as a class and any individual variations are based on a formula recommended by the actuary.
  
• the cost of increases shall be met out of the accrued surplus in the fund or out of special contributions by the employer, subject to approval by the Regulatory Authority and the Commissioner of Income Tax.
  
• the increased pension should not exceed the maximum pension mentioned above, increased by reference to the Consumer Price index (CPI) for the period between the date of retirement and the date of granting the increase.
  
• the increases should be recommended or have the written approval of an actuary.
  

(15).    Initial Time for Compliance

When the law becomes effective time has to be given for matters such as:

• Compliance with provisions; and
  
• Processing of applications for licensing and registration.

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