In addition to the legislative reform that was made with the passing of the National Pensions (Amendment) Law 2016, changes will also be made to the pensions withdrawal schedule and allowances for the Retirement Savings Arrangements (RSA).
Retirement Savings Arrangements (RSA) are individual retirement accounts that serve as a vehicle for members of approved pension plans to transfer their account balances into the RSA instead of purchasing an annuity or being paid out of the pension plan.
Under this new policy, which will come into effect on 9 January 2017, there will be a minimum and maximum annual withdrawal amount that a pensioner can make based upon the pensioner’s age and pension account balance. The current withdrawal maximum of CI$12,000 per annum has been in place since 1998 when the private sector pensions regime was first introduced and does not take into account the pensioner’s age nor does it offer any flexibility for withdrawal amounts depending upon account balances.
The new schedule has a minimum annual withdrawal amount of CI$12,480 for all pensioners, an increase of $480 from the current maximum withdrawal amount. For RSA accounts that have smaller balances, the figure of $12,480 will also be the maximum withdrawal amount in order to help ensure that pension plan members have a basic pension amount that lasts for their entire retirement and that they do not use all of their pensions funds before their anticipated death (calculated based on the current life expectancy rate in the Cayman Islands).
The new pensions withdrawal schedule makes provision for the CI$12,480 annual withdrawal amount to be adjusted for inflation going forward as well, something that the current RSA schedule does not do. In addition, under the new schedule, pensioners who have larger amounts in their account, will be able to withdraw an increasing amount on a yearly basis above the proposed CI$12,480 threshold as well as have the option to withdraw a lump sum amount any time after the age of 90.
“In addition to making some long overdue changes to the National Pensions Law, this Government was intent on finding a way to provide a sensible and feasible solution to the issues surrounding the current annual pay-out schedule,” said Hon Tara Rivers, Minister with responsibility for private sector pensions.
Minister Rivers continued, “For those persons who have accumulated significant balances in their pensions account, this new schedule will now afford them the opportunity to make greater withdrawals to increase their quality of life as retirees; and for those who may not have accumulated sufficient funds to withdraw above the stated maximum annual threshold, the schedule now accounts for the need to adjust that figure upwards as necessary to adjust for inflation. This new pay-out schedule should provide some well needed relief for many of our retirees, helping them to live more independent in their golden years.”
The Ministry of Education, Employment and Gender Affairs along with the Department of Labour and Pensions contracted the services of consultants Morneau Shepell in September 2016 to complete an actuarial review of the current schedule and provide recommendations for new drawdown provisions for RSAs.
Established in 1966, Morneau Shepell is the largest company in Canada offering human resources consulting and outsourcing services, and they are also the largest administrator of retirement and benefits plans in Canada serving approximately 20,000 clients, ranging from small businesses to some of the largest corporations and associations in North America and around the globe. The firm is familiar with the pensions regime of the Cayman Islands as they have previously worked with the Cayman Islands Government to provide consultancy services on the pensions legislative regime.
“We asked the consultants to develop an appropriate schedule of drawdown factors for the RSAs that would provide an adequate level of income in retirement that is consistent with a sustainable spending and consumption rate in the Cayman Islands for retirees; consider the longevity risk and the probability of retirees outliving their income; factor in consistency with the poverty line, now and in the future; and ensure competitiveness with insurance annuity purchase rates,” said Amy Wolliston, Superintendent of Pensions/Deputy Director ( Pensions) of the Department of Labour and Pensions.
The result is a schedule that took into account the demographic profile of future retirees; maturity of the RSA framework; the investment portfolio and available assets that would impact future returns on pension funds; current and projected account balances; the impact of inflation on future cost of living; Cayman’s mortality experience; the spending and consumption rates of retirees; and best practice from other jurisdictions where such factors are in use.
Ms. Wolliston explained that the current RSA drawdown provisions are classified by account balance at retirement age and are managed as follows:
- Amounts under $5,000 are paid in full as a lump sum;
- Amounts between $5,000 and $12,000 are paid out over 1 year;
- Amounts between $12,000 and $24,000 are paid out in portions of $12,000 each year until funds are exhausted;
- Thereafter, as the account balance increases by $12,000 the amounts paid out commence with $12,000 in year one and escalates by 2% each year until funds are exhausted;
- For amounts over $204,000 only interest is paid.
Under the new schedule, and based on the recommendations from Morneau Shepell, the new drawdown factors for Retirement Savings Accounts will be managed by taking into consideration, the pension plan member’s age and account value. The new schedule then determines the minimum and maximum amount, based on a percentage, which can be withdrawn on an annual basis.
For more information about the National Pensions (Amendment) Law 2016 or the new RSA schedule, contact the Department of Labour and Pensions on 949-8960, or email [email protected].