Will your pension support you in retirement?

Pension image

According to FSC data, the private pension industry grew by 16% in 2019. More people are contributing to pensions- which is a positive development. However, are these pensions able to give the investors a positive return and support them in retirement? Could you be investing in a pension that is losing you money in the long run?

Anecdotal evidence suggests that most people do not know much about their pension investments. Each month you put away 5%, 10% or more of your income before tax and it automatically goes to a managed pension plan. How much do you get when you want to retire? What determines this figure? How much have you earned on the money you have invested so far? What is it invested in?

Why is it important to know about your pension?  With the shift to defined contributions plans, the value of the contributions (you and your employer have made) - will represent the total of the funds you have to live on during your retirement. Do you want to wait until 30 years from now to find out how much this will be worth?

Local regulations impose restrictions on the type and concentration of assets your pension fund manager can invest in. These restrictions can result in LOWER returns than if you were to invest in a non-pension product without these restrictions.

For example, local regulations place restrictions on the amount of US dollar assets a pension fund can buy act to reduce the principal of your investment in the long run. Fund managers are prohibited from investing more than 20%[1] of a portfolio in US dollar denominated assets. This means that 80% of your pension savings are denominated in Jamaican dollars. If you started contributing to a pension in 1982, the JMD/USD exchange rate was J$1.78 / US$1. If you wanted to retire 37 years later in December 2019, the JMD exchange rate was J$132.57/ US$1. 80% of your pension savings would have lost value at a rate of 12.4% per annum. 


There are also local restrictions on the size of the equity investment portfolio. Equities are a popular asset class among pension funds. Managers use this asset class to increase the growth rate for pensioners in the long run. In fact, one of the world’s largest pension funds, CALPERS, has roughly 50% of its portfolio invested in equities. In contrast, as at December 31, 2019, private Jamaican pension funds had 26% of their portfolios invested in equities[2] (N.B. this excludes equity investments contained in the share of “investment arrangements”).

This affects anyone who contributed to an individual or company pension plan or retirement scheme. Ask your provider to show you the returns you have earned and be sure to compare those return to devaluation and inflation.

Marian Ross is Vice President of Trading & Investment at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: [email protected]

[1] FSC Super Annuation Funds

[2] Source: FSC private pension statistics

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