A well-managed pension is central to income security in old age, and pension funds are key financial institutions in many countries, contributing funds to the economy and enabling people to save sufficiently for their retirement needs. But pension provision is in crisis globally, which puts at risk financial sustainability, care and dignity in old age.
The ongoing shift from defined benefit pension schemes, which guarantee a retirement income, to defined contribution ones, in which retirement income depends on financial market returns, is a key aspect of the pension crisis, making pension funds more precarious. More of people's pension money is at risk if the value of a fund’s assets decline, and if lower long-term interest rates result in a fund’s liabilities increasing. A further risk is that people may live longer than expected, leaving pension funds more stretched. And it is essential that the fund is well-managed in terms of aspects such as portfolio diversification, appropriate risk and return, management and governance.
In this context, pensions in five countries in the Caribbean are now on a far better financial footing thanks to research by Brunel's Prof Philip Davis on pension regulation and reform, including health and stability indicators that flag up risks and enable pension fund managers to react, either for individual funds or for the overall sector.
From 2015 to 2017, Prof Davis was commissioned by the International Monetary Fund (the IMF) through its Caribbean Technical Assistance Centre, known as CARTAC, to contribute to better and more consistent data collection, and thereby enable calculation of such financial health and stability indicators for pension policy in the Bahamas, Barbados, Guyana, Jamaica and Suriname.
Besides his own long-run research expertise in the pension field, the background for this work was separate to research, also at the IMF, to assess macroprudential indicators and the development of financial soundness indicators for 36 countries. His research showed that concentration and distribution measures (CDMs) can help predict system-wide vulnerabilities.
Until recently, only a small fraction of the population in the Caribbean countries was saving for retirement, and a lack of consumer knowledge and tools for oversight by supervisors meant that the pension systems in the Caribbean were fragile. But if pension fund supervisors were to collect data appropriately and thereby create health and stability indicators for individual pension funds (also using the CDM approach for the sector as a whole), Prof Davis explained in presentations given in the Caribbean, then the supervisors could be better informed as to when to intervene.
"The work I did gave the authorities a better set-up of data from the pension funds," explained Prof Davis. "This would then enable them to calculate various financial indicators that would give them evidence as to whether the pension fund was acting appropriately or not. And that could be true at an individual fund level or at the whole-sector level.
As a result of Davis's work, countries have implemented improvements to supervision at both the operational and strategic level, increasing retirement income security for vulnerable people in old age. The countries fully accepted the recommendations and adopted the framework for improved pension regulation, as proposed by Prof Davis.
Helped by this and other reforms, the countries' pension sectors have experienced consistent growth, also boosting the countries' economies. And there has been a rise in people being registered for pension plans, increasing the number of prospective retirees who will be financially independent and cared for in old age.
For example, in Barbados, the number of pension plans registered under their Occupational Pensions Benefit Act rose from 145 pension plans in 2014 to 268 in 2017, so that there are now 96% fully registered active pension plans in that country - meaning that they're properly supervised. And in Jamaica, the pension fund assets rose from being 22.4% of gross domestic product (GDP) in 2012 to 28.2% in 2017.
Prof Davis’s research thus serves as an outstanding example of how effective pension reforms can have a fundamental impact on both regulators and at-risk people in several countries. His contribution has not only had real policy impact, but also benefited some of the most vulnerable people in the Caribbean. The changes in pension data management and supervision have improved retirement income security for both current and prospective pension plan members, safeguarding their wellbeing in old age.
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Project last modified 12/05/2022