Another look at the Tourism Workers Pension Scheme
THE TOURISM Workers Pension Scheme should make a significant difference to the workers in the industry who, up to now, have generally not been in a position to make formal arrangements for life after retirement. The scheme will operate in a way similar to other defined contribution or money purchase, schemes with some features of its own.
As a money-purchase scheme, the benefits to be paid to the workers in retirement or to their beneficiaries if they die before retirement will be determined by the value of their individual retirement accounts made up primarily of their contributions, the contributions of their employers for those working in the service of others, and the accumulated interest on those contributions.
For those earning above the income tax threshold, the scheme will provide tax benefits in that such contributions are not subject to tax. Beyond that, the investment income earned by the contributions in the fund will not be subject to tax. Additionally, at retirement, workers who opt to take a lump sum, equivalent to 25 per cent of the pension benefit, will not be taxed on the lump sum if current practices hold.
The funds are to be managed by professional investment managers selected by the trustees and licensed by the Financial Services Commission, and the income of the scheme is to be credited to the individual account of each member. The pooling of the contributions will allow the managers to invest in at least one diversified portfolio, but it is quite possible that they could choose to set up several investment funds. This will enhance the management of risk and allow members to benefit from investment instruments they would not likely be able to invest in with their own limited resources or due to their limited knowledge of investments and possibly limited time to manage their own funds.
For those employed by others, the contribution of the employer will be a significant boost to the workers’ account and, thus, their retirement income. The self-employed, not having that benefit, will find it necessary to contribute the maximum allowed by law to boost their benefit.
In addition to the mandatory contributions, workers will be able to make voluntary contributions which, when combined with the mandatory contributions, should not exceed the limits set by the Income Tax Act in respect of ordinary annual contributions to an approved pension plan – 20 per cent of pensionable income – thereby enhancing the ability of the worker to get a better pension. Workers will be able to vary or discontinue their voluntary contributions if the need arises.
The system of accountability to be set up should make members find comfort. The trustees will have overall responsibility for the administration of the scheme and the management of the funds. There are to be penalties for employers who do not remit contributions to the investment manager on time the assets and investments of the scheme will be held in the name of the custodian trustee; and the trustees will be required to make a statement of account available to each member four months after the end of each financial year showing the value of each individual account, including bonuses and any surpluses allocated.
Portability is a big plus. Workers will be able to have the full value of their individual accounts transferred to an approved pension plan locally or a similar plan abroad in the event that they change employment. Similarly, workers who were members of other approved pension plans will, likewise, be able to transfer their accumulated contributions and interest to the Tourism Workers Pension Scheme.
The purchase of an annuity for the benefit of the worker at retirement will ensure that the worker will receive a predictable stream of income in retirement without the risk of outliving the pension. Scheme members should make it their duty to know the options available to ensure that the most suitable annuity is purchased, and the provision to augment retirement savings that are inadequate to purchase the prescribed minimum annual pension is a positive one.
One downside of pooled investment funds is that they are not customised to the needs of the people who buy into them. This can be eased if several funds are set up and members are able to indicate how they would like their contributions to be distributed among the investment funds.
There is the risk that the pension will not be sufficient to sustain the retiree. Workers should thus establish additional sources of post-retirement income. Unit trusts represent one option. Stocks as well. Priority should be placed on investments that generate returns that are not subject to tax. The self-employed, not having the benefit of employer contributions, should pay careful attention to securing additional sources of retirement income.
Unlike defined benefit plans, which pay benefits determined by a formula based on length of service and salary and on which the employer takes the investment risk, the retirement benefits from defined contribution schemes are based on the value of the worker’s account at retirement, and as the investment risk is borne by the pension scheme member, there is the real risk that the member could receive a relatively small pension.
The Tourism Workers Pension Scheme is not a call for workers in the industry to ignore independent planning for retirement. It is a call to embrace the programme, to contribute as much as the worker can afford up to the statutory maximum, and to seriously embrace additional tax-favoured means of saving for life after work.