It all adds up: update on national pensions
This is an update, 18 years later, of the original Moneywise article published in January 2002.
It has now been 20 years since the ground-breaking, game-changing Bermuda National Pension Scheme (Occupational Pensions) Act 1998, a contributory benefit plan, was legislated into law.
Imagine. Where did that time go?
Individuals entering the workforce in the last couple of years may have no idea just how significant this pension legislation was, or what it truly represented. It was a mandated, wonderful opportunity for our Bermuda private sector workforce to contribute, control, and invest a percentage of their own earnings, along with an employer-match, in their new retirement account.
Up to 2000, our island private sector workforce had no established universal contributory pension scheme. Yes, Government’s social insurance Contributory Pension Fund existed, but even then it was well realised this pension structure would be nowhere near enough even for a bare-bones retirement (actuarially predicted to run out in estimated 2047 to 2049. See Actuarial Report of 2014, page 32).
By the way, where is the 2017 report? According to Government “December 7, 2018. The actuary is currently working on the 2017 actuary report for the CPF and it is anticipated that this report will be completed in the second quarter of 2019 at the latest”. Have I missed it?
Further, in 1981, the Bermuda Government had already implemented a superannuation plan (now in existence almost 40 years) to provide pensions for retired employees of the Civil Service of Government of Bermuda and the employees of various quasi autonomous non-governmental organisations.
Anecdotally, this defined benefit plan was, and is, greatly envied by the private business sector working population because the retirement benefit is calculated on number of years of, and final earnings, while a defined contributory pension plan is solely based upon what the employee/employer contributes and the total investment return.
Nevertheless, 20 years ago the new Bermuda National Pension Scheme represented a mandatory across-the-board pension scheme for private working sector Bermuda Islander individuals.
When this Pension Act was enacted in 2000, pension contribution percentages were introduced gradually, starting with a 1 per cent contribution (total 2 per cent) from both employee/employer a year up to the final deduction/match of 5 per cent (total 10 per cent) each.
At first, a 1 per cent double-sided contribution seemed superfluous, an almost why bother situation.
Challenging, too, for even these small initial contributions was the timing factor of the pension plans’ entry into the global stock market in early 2000, right at the beginning of one of the worst bear markets in the last two decades. Employees who had little prior exposure to capital market investment volatility were appalled as their contributions slid in market value, particularly, if they had chosen an aggressive portfolio allocation.
That was then.
Investment markets recovered from that recession and the one to follow in 2008, moving upward to the highest valuations ever, for some sectors as reported recently. Hopefully, we have all learnt that investment volatility is almost a normal occurrence, and that many other factors: longevity, diversification, portfolio manager expertise, other savings, improving career skills, etc, overall can contribute to positive retirement accumulations.
Readers: the following section of probability of future pension amounts are based on assumptions and estimates.
Moneywise does not know the balance of your individual pension accounts, nor what you earn, nor what your investment allocations are. Your pension results could be very different than the numbers Moneywise is using.
Note that Moneywise always uses very low rates of return as a base assumption. If your pension account, over time, is returning a higher total rate of return, excellent.
If you are not sure where or how your pension plan is doing, write to me for help at firstname.lastname@example.org
Pension growth probability illustration
Consider if you were 22 years old and earning $50,000 in 2000, with small incremental raises each year. You started your pension in the classic minimum laddered deduction scheme (1 to 5 per cent, actually 2 per cent up to 10 per cent) with your employer-match you will have put away an estimated $110,000 today.
In another 23 years to normal retirement age of 65, you will have contributed an additional $138,000, all at the 10 per cent of gross salary rate. This assumes that you do not elect to drop your contribution rate to 3 per cent/3 per cent based upon the Temporary Amendment passed in late December 2019.
That’s not small potatoes in anyone’s pantry. By the way, that’s with no compounding or capital market appreciation added in.
Moneywise used a bare minimum 2 per cent average rate of return for the estimated 20-year accumulation. Once you hit the 10 per cent (5 per cent and 5 per cent), take a look at where your estimated retirement pension will be in 43 years, compounded at both 2 per cent and 3.45 per cent average annual rate of return.
Note: this is the rate of return based upon the 2014 Actuarial Review Report of the Bermuda Government Contributory Pension (social insurance).
The illustration (Fig 1) assumes you are not job-hopping, cashing every two years, or changing your asset allocation, frequently.
Note also, that the fees for managing and administering the BNPS are not readily obtainable so, they have not been deducted from the estimated results.
Remember the rule of 72. Divide the interest rate 2 per cent to 3.45 per cent into 72, equals the number of years it takes to double your money.
Overall, the Bermuda National Pension Scheme is a good thing. Yes, a sacrifice now, but you are saving for future security.
• Actuarial Review of the Contributory Pension Fund of Bermuda as of August 1, 2014 Morneau Sheppel May 10, 2016
• Tough Outlook for Pensions, Duncan Hall, January 29, 2019, The Royal Gazette. Link here https://tinyurl.com/u47qnz2
• Bermuda National Pension Scheme (Occupational Pensions) Act 1998. Download from http://www.bermudalaws.bm/SitePages/Home.aspx
• 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, Bermuda. All proceeds earned from this column go to The Reading Clinic. Contact: email@example.com
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