Retirement Planning with a Barbados Perspective
Introduction
Getting older, forces you to think about how to retire and maintain your standard of living. The changes proposed for the state pension, sparked my desire to understand their impact.
My first article of this series reviewed how the NISSS and Old Age Pension works. The second highlighted and discussed the challenges facing the NISSS and why the need for change. This article builds on the analysis of the previous two articles.
Objectives for NIS state pension
From the ministerial statement on the Revitalization of the National Insurance Scheme, July 28, 2023. The objectives outlined by The Honorable Minister Colin Jordan, M.P., are:
- To ensure the stability of the scheme.
- To maintain the size of the NIS’s projected reserves at a level equal to or greater than two to three times the value of annual benefit expenditure.
Proposed changes to our state pension
Summary points form the Ministerial Statement on the Revitalization of the National Insurance Scheme on July 28, 2023:
- Current pensionable age is 67:
- In 2028 will increase to 67.5 years.
- In 2034 will increase to 68 years.
- Early retirement age will increase from age 60 years to:
- 61 in 2025
- 62 in 2028
- 63 in 2031
- For persons who do not turn 60 years or older on January 1st, 2024, eligibility to receive Old Age Pension, the number of weeks of contribution will increased from 500 weeks, to:
- The number of weeks contribution will increase by 30 weeks per year, until 2030.
- From 2031, will require 750 weeks contributions..
- A new funding policy to be laid in parliament.
- A funding policy and a Compulsory Adjustment Mechanism will be incorporated into the National Insurance and Security Act.
- Pension benefit, using best five-year wages average, will change to best 10-year wages average.
- Increase in flexibility for self-employed to contribute to the NIS.
The NISSS published a summary document called, Embracing Changes: Towards a New NIS. The following is a summary of the key points.
- Early Reduction and Late adjustment factors:
- For every year of early pension, benefits will reduce from 6% to 9% per year up to national pensionable age
- For every year of deferral of pension up to age 70 years benefits will increase from 6% to 9%.
- Annual pension benefit adjustment:
- In 2023 pension benefit increase by 3%.
- For subsequent years, “up to 1.5% annual increases thereafter, except when 3-year average price inflation is higher than 3%. In this case the Actuary will advise on the appropriate amount.”
- Old Age Pension Formula:
- “There will be changes to the pension formula for future Old Age Contributory Pension (OACP) awards that gradually result in smaller average new pensions over 5 years that are seven percent smaller.”
A new name
“On 1st December 2023, the NIS transitioned to a statutory corporation and was renamed the National Insurance and Social Security Service (NISSS).”.
Changes to our state pension effective from January 2024
- “The National Insurance and Social Security Service (NISSS) advises that it will be administering the payment of pensions, previously paid by the Treasury Department to retired public sector workers with effect from January 2024.” .
- The maximum insurable earnings:
- Monthly paid workers insurable earnings increase from $5,120 to $5,200.
- Weekly paid workers insurable earnings increase from $1,182 to $1,201.
- Benefits
- Minimum Old Age Contributory pension has increased to $254 per week.
- Grants
- Funeral grant: $2,220
- Maternity grant: $1,280
Gap between state pensionable age and the termination of private employee contracts
The pensionable age in Barbados moved in 2018 from 65 to 67 years and will move to 67.5 in 2028 and to 68 in 2031. Government workers have the advantage of The Pensions Act, Cap. 25 of Barbados that governs the pensions of public officers. It includes provisions for the grant of pensions, retirement conditions, and other related matters. The private sector however, has no standardized legislation for retirement age, with most employment contracts terminating at age 65.
Options to consider to bridge an income gap between termination of employment contract at age 65 and eligibility for Old Age Contributory pension at age 67, 67.5 or 68
- Early pension, will incur a 9% penalty per year until pensionable age is reached.
- Negotiate with your employer to extend or offer a new contract past age 65.
- Seek alternative employment or become self employed.
- Contribute to a private or employer pension plan to help bridge the gap.
- Live off of saving.
Reduction in new pension benefits
Changes to the Old Age Contributory Pension (OACP) formula will reduce new pension benefits by approximately 7%. What has been proposed is to increase the average annual insurable earnings from the best 5 years to the best 10 years.
This change can reduce the average annual insurable earnings used in calculating your state pension, which can negatively impact the value of your pension.
At the time of writing this article, this proposal has not been implemented.
Increase in the value of individual NISSS contributions
The NISSS has consistently raise the ceiling on maximum insurable earnings without altering the contribution rate. This can result in individuals seeing more of their salary or wages allocated to NISSS contributions. Contribution value is calculated by taking the individual’s insurable earnings and multiplying it by the contribution rate.
The missing self-employed
The self-employed, are not doing themselves or the wider society any flavours by not contributing to the NISSS. There are benefits from the NISSS that should be considered:
- Sickness benefit
- Maternity benefit
- Invalidity pension or grant
- Old Age Contributory pension or grant
- Funeral grant
- Survivors’ pension or grant
Of note, self-employed are not eligible for non-contributory old age pension.
This said, it is unrealistic to ask a self employed person to contribute 17.1% of their insurable earning to the NISSS.
Within the NISSS category of self-employed, “contributions and levies are payable on insurable earnings up to a maximum of $4,880 per month or $1,126 per week and a minimum of $21 a week or $91 a month for persons between ages 16 and pensionable age”. Discussions are evolving around flexible contributions for self employed persons.
Conclusion
Sustainability
In the next 10 years, the viability of the NISSS state pension is in question. The premise that the NISSS state pension will always be there, is no longer a certainty.
Risk
The NISSS faces diversification risk and credit risk with 69% of its investments in the Barbados government. There are no sureties in place to ensure that future governments do not renege on their obligations. to the NISSS.
With expenses exceeding revenue earned, the NISSS continues to face long-term sustainability risk.
Independence
The NISSS board should have greater operational independent from the government in how it invests and offers services to its contributors.
Population
A population in declined, requires society to plan and develop generational strategies. This requires long-term planning and commitment, that will not bear fruit in the short term.
Private Pension
Employer and personal pension plans, and private sector investment funds will be critical for future retirement planning.
With the right incentives, private pensions could reduce the overreliance of many Barbadians on the NISSS as their primary source for pension income.
