Martha Myron

Lump-sum pension option coming at last

  • Lump sum option: a proposed change in the law will give private-sector employees the option to withdraw 25 per cent of their occupational pension fund balance as a lump sum when they retire

Part one of two: evaluating the Bermuda National Pension Scheme (Occupational Pensions) Act Amendment 2019 tabled in the House of Assembly on Friday, September 13, 2019, but not yet enacted as law.

Well, dear readers, the review of these amendments has been an illuminating, sometimes tedious task — as it always is when wading through House Bills full of legalese ponderances. Why, oh why can’t laws be written in plain, ordinary language? Enough whining!

There are 44 proposed amendments (and some additions) to the original National Pension Scheme (Occupational Pensions) Act 1998 and its regulations, National Pension Scheme (General) Regulations 1999.

The 1998 Act covers:

• Establishment, registration, administration, and membership of pension plans

• Funding and contributions

• Vesting and retirement

• Locking-in of contributions and benefits

• Benefits

• Winding up

• Sales, transfers and new plans

• The Pension Commission, its orders and advice

• Hearings and appeals

• General extras and schedules

The 1999 Regulations should be of particular interest for many private-sector employees in Bermuda, as their defined contribution plan has the potential to become their largest retirement asset.

Part V covers pension fund investments and is linked to Part VI — actuarial and fund management with regulations relevant to portfolio investments. In today’s (or any time) volatile global markets, diversification of investable resources is absolutely critical for management of the minimisation of concentrations of risk.

The Bermuda National Pension Scheme (Occupational Pensions) Act 1998, the first of its kind in Bermuda for the private working populace as a defined contribution plan (DC) became operative in January 2000.

Specifically, a DC plan is defined as a percentage monetary contribution from the employee and generally, matched by his/her employer plus a discretionary voluntary percentage of extra savings from the employee, if the individual so chooses.

DCs are not based upon number of years of service, total average salary composite for last three years, and similar structures; that is a defined benefit plan not popular in global employment due to the massive future employer-funded (or unfunded) liability. The defined contribution pension funding as a matched benefit is real money, driven and owned by the employee.

The Bermuda pension law was and is mandatory for all approved local private – business and self-employed employers, in spite of vehement objections at inception that I noted both as a worker and consultant.

Employees have to meet minimum employed vesting requirements, among other regulations, while the legislation itself did not allow any withdrawal sums whatsoever until first age of a retirement plan.

A younger member could anticipate waiting 35 to 40 years and then as a retiree have two choices: an annuity or a drawdown account, but no lump sum available. The plus side is that the contributions are fully invested, appreciating over the long term into a future significant asset.

The Act and Regulations together was and is a wonderful, comprehensive production designed for increased stability for our people in retirement. Remember, it was operative into law preceding slightly before another time of great capital market volatility during the 2000 tech market and a year later, the terrible, unforgettable tragedy of September 11.

Initially, the new mandatory pension introduction in 2000 to the Bermuda private working environment was all over the spectrum:

• Positive for thousands who had no future individual contributory pension prospects, knowing full well even then that the Bermuda government old-age pension would not fulfil retirement needs

• Positive to realise that here was a choice to save your money and benefits while having controlled choices as to how your savings would be invested for the future

• It was negative for some employers who radically objected to another government-imposed benefit

• Bewildering, abrupt lesson in modern portfolio theory (high returns equal high risk) for working individuals who had no prior opportunity to invest in capital markets. Human nature being what we are, who could resist aggressive funds returning 15 per cent and higher — that unfortunately collapsed after the tech boom went bust. Not a great start, but most eventually recovered value.

Since inception, the scheme has a few amendments, most notably, the Financial Hardship Regulations 2010 for individuals made redundant during the great recession in Bermuda who desperately needed cash to meet mortgage facility payments, rental arrears and unplanned for health emergencies.

And now to the best news for this day, the highly anticipated (by me) major amendment change of 2019.

Hallelujah! The Amendment 2019 Section 24 9 (b)(1) states that “privately employed individuals attaining retirement age and termination of employment will be allowed to access a lump sum, up to 25 per cent of their defined contribution plan account balance, or a local retirement product”.

Finally! The regulations have provided some parity between public service employees who have always (since the same time frame of 2000, at least) had the choice of receiving 25 per cent of their total superannuation pension benefit in a lump sum and private-sector employees, who had no cash option.

Dear readers, this is terrific: for after years of reading my comments, rants, and articles comparing the retirement inequity between the public and private sector, the Government has acted in the employees’ best interests.

See my articles: “Why don’t private-sector pensions have the same lump-sum options as public-sector pensions?” (April 5, 2014) and three earlier articles written in December 2011. “Two gentlemen retire. John Contribore and George Benefine, a comparison between a Bermuda public civil servant and a private sector employee’s retirement benefits. They are not equal – at all!” (https://tinyurl.com/y4gu4svk)

The Bermuda National Pension Scheme Act 1998 became operative on January 1, 2000 under the PLP government, a life-changing event for the private sector Bermuda islander employees.

Almost 20 years on, in spite of all challenges, this universal pension act is a good thing.

And in that time frame, we have become comfortable with investments, capital markets, stocks, bonds, and other securities, including cryptocurrency.

Remember, your pension may become your greatest retirement asset.

I’d love to hear from private-sector employees who started in 2000 at introduction of the brand new pension plan. How have you done? Are you building a decent retirement fund? Have you changed your investment perspectives?

Part 2: next week, we discuss other amendments tabled, as well as items that I had hoped to see improved, but were not included.

Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette. Contact: martha.myron@gmail.com