The folly of a pension holiday

It was anticipated that the pension holiday, which came into effect at the end of April, would ease the financial burden of increased fees (particularly the enormous hikes in work permit and other immigration fees) and costs by providing more cash in the employees’ pay packet, while simultaneously putting less of a financial strain on the employer. Business Editor Lindsey Turnbull examines why this idea was doomed to failure on many counts. 
 
The pension holiday was signified by a change in the law that gave Caymanians the option to stop making pension payments for one year and non-Caymanians the option to take a break for two years. In its basic format the premise sounded promising – an extra 5 per cent of salary in the employee’s pocket each month and an extra 5 per cent that the employer did not now need to contribute. A win win situation for all, or so it may have been perceived.
 
Cayman’s human resources professionals were charged with the education of their company’s staff with regard to the pension holiday as well as the administration of the procedure, should the staff member take up the offer.
 
At the end of May the Cayman Islands Society of Human Resources Practitioners undertook a survey of their members in order to appreciate whether employees properly understood the implications of a reduced pension at retirement, should they choose to elect for the pension holiday. The survey also aimed to find out the main flaws in the plan, as they related to its administration and the consequences of its implementation.

Education, education, education
Out of 53 respondents, over 80 per cent said that they had explained the pension holiday in detail to their staff, via one-on-one meetings with staff, group discussions, input by the Chamber of Commerce and other communications.
 
Some companies went to great lengths to ensure that their staff was fully informed. One respondent stated that they sent emails to all staff including explanations of the changes in the Law, as well as a FAQ received from their pension plan provider, as well as organising an information session for staff. They created their own FAQ and instigated one-to-ones with HR members to discuss the issue further.
 
One HR professional commented that although they as a company would not be participating, they were still obliged to offer the pension holiday to staff:
 
“We created an overview and published company-wide to advise and allow employees to make the decision they wished to regarding the uptake. As an organisation we are not participating as we do not feel it’s in the best interest of our employees and equally are not in a position financially where we need to have more cash flow.
 
However despite our stance we have offered to employees to participate. We were advised it should be offered but we could decline the application which I believe is a farce. Therefore while we are not rolling out organisationally and requesting employees to participate, we have informed and counseled those who opted to participate and approved the suspension point blank. To deny some and not others would be arbitrary and unfair.”
 
One organisation got around this issue by continuing to pay their employer’s contribution. They commented:
 
“Several employees did express their desire to opt out of contributing to their pension, but because the employer has expressed the desire not to participate they will continue to receive their 5 per cent contribution in their accounts.”
 
One respondent said they would only be observing the pension holiday in the coming month (June).
 
Even with the apparent extension education of their staff, there was still a high percentage (39.6 per cent) of respondents who still did not believe that employees fully appreciated how taking a pension holiday could affect their future retirement.
 
One respondent said: “It was implemented far too quickly with little information and guidance from pension providers.”

Not in the staff’s best interests

Around half those polled in the survey (53.8 per cent) said that their companies would be participating in the pension holiday, with the remaining 46.2 per cent saying that they would not.
 
That said, 67.3 per cent of respondents said that staff would be participating in the pension holiday, with the remaining 32.7 per cent stating that their staff would not be taking up the offer. In the main the percentage of employees actually taking up the offer varied but tended on the low side. One respondent said out of 34 employees only three (all Caymanian) took up the offer, while another said 21 per cent of its workforce had opted to take a break from pension payments. Another had approximately 30 staff elect to participate, mostly young Caymanians.
 
Another said that out of 400 employees, eight (all Caymanian) signed up for the holiday. They commented: “It would therefore seem that the holiday was not well thought out as our business supports paying pension and advised that it was in the best interests of our employees to keep contributing as it was ultimately an added benefit to them. Therefore the concept that it was to assist employers due to the rise in work permit fees has not really been the outcome.”
 
Another respondent said that only one employee had taken the pension holiday. “Fortunately the employees realised that this is not a good idea. Government needs to encourage a savings culture,” they commented.
 
An important point was raised by a respondent when it comes to the cost of implementing the holiday:
 
“Unfortunately because the holiday was not mandatory the cost of administration and legislation might far outweigh the potential savings to employers participating in the holiday. The majority of employees even at the administration level are not participating. Most expatriate employees are not participating due to the fact that they receive their monies two years after leaving the Island. Expatriate employees view their contributions more as a savings while Caymanians will not see their money until aged 60 or 65.”
 
One respondent fears problems ahead when the holiday period is over: “the law is too weak,” they commented.
 
“It has no teeth. There should be firm indications of what should/should not be done verses make it voluntary between two parties. This law will be detrimental to those employees who have to re-enter their pension contributions after the one/two year allowance. We will find persons unable to budget and therefore the country will find itself needing to introduce a tier system to the pension commencement in order to manage.”
 
One respondent succinctly made their feelings clear in the survey: “It avoids the real problem of correcting criminal employers; it’s a weak attempt to “save” money; it demonstrates a lack of HR understanding and ability and it is a waste of time.”

Financial folly
If the above was not evidence enough of the folly of taking a pension holiday, an actuarial report undertaking by Ecker assesses the impact of a two year contribution holiday on account balances. Using investment returns modeled across 1,000 economic scenarios for each year, the models assumed the current annual salary of $50,000 with a 4 per cent annual increase through a career with 10 per cent annual contributions (but no additional voluntary contributions) and a retirement age was assumed of 65.

The results were as follows:

At current age 25 with 40 years until retirement the most likely scenario is a projected balance at retirement that is $193,000 less than if there was no contribution and a 90 per cent probability that the shortfall is between $80,000 and $697,000 depending on future investment results.
 
At age 35 with 30 years until retirement the most likely scenario is a projected balance at retirement that is $102,000 less than if there was no contribution and a 90 per cent probability that the shortfall is between $41,000 and $218,000 depending on future investment results.
 
At age 45 with 30 years until retirement the most likely scenario is a projected balance at retirement that is $38,000 less than if there was no contribution and a 90 per cent probability that the shortfall is between $23,000 and $85,000 depending on future investment results.
 
To those young Caymanians who decided to opt out: look at these figures and decide if you can really afford a pension holiday.

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How many of the young Caymanians choosing to opt out of paying their pensions for the next year will be able to afford to lay here and enjoy their retirement?

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