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Fidelity Pension Plan and The Recently Amended National Pensions Law

Frequently Asked Questions:

Q. What differentiates the Fidelity Pension Plan from the other multi-employer pension plans in Cayman?

Most multi-employer pension plans in Cayman offer different options with different asset allocation mixes. These other plans either allow you to choose your asset allocation (i.e. how much you invest in equities, bonds, cash) or they determine how your assets should be invested between equities, bonds and cash based largely on your age and income. We just offer one plan whose asset allocation is determined by the Investment Committee of the Fidelity Pension Plan. Currently, the Fidelity Pension Plan has only 12% of its assets invested in U.S. equities, but the maximum 30% permitted by the National Pension Regulations in non-U.S. equities. The reason for this is that by most valuation measures, U.S. equities are more expensive than any other time during the past 100 years apart from 1929 and the late 1990’s. Neither were good times to load up on U.S. equities. In contrast, valuations of non-U.S. equities are currently quite attractive which bodes well for their future returns.

Q. Wouldn’t I be better off just putting my money in the bank than contributing to the Fidelity Pension Plan or one of the other multi-employer plans?

This is not permitted under the National Pensions Law, but even if it were, you would not have been better off. Over the past five (5) years, the Fidelity Pension Plan has generated a net compound annual return for its Members of 3.3% per annum and since inception more than 12 ½ years ago, it has generated a net compound annual return of 3.5% per annum.

Q. Cayman pension plans are so expensive. I would be better off if I was contributing to a pension plan overseas. They would have given me a much higher return than 3% a year.

This is not permitted under the National Pensions Law if you live here. If you lived in the US, you would likely contribute to a 401K plan which usually gives you a choice of how you invest your pension savings. The experience of most people who contribute to a 401K pension plan in the U.S. has been that they switch into “hot” funds at just the wrong time and returns of most investors has been a lot lower than the market return as a result. In the UK and Europe, it is unlikely that you would have earned much more than 3% a year over either time span, and possibly considerably less (in a weaker currency). A large part of most pension plans is invested in bonds and cash which have yielded zero or close to zero for many years. In fact, trillions of euros of European bonds have had negative yields for some time, and this is before pension plans incur their inevitable administration and management expenses. Relatively low returns of pension plans globally have been a result of historically ultra-low interest rates in the developed world and the effects of the Global Financial Crisis. Cayman pension plans are not immune to what has happened around the world. As far as the expenses of defined contribution pension plans in other countries are concerned, it is a common misperception that these generally are much cheaper than Cayman plans.

Q. How can I compare how my plan is performing versus other multi-employer pension plans in Cayman, and how much my plan costs to manage and administer compared to other plans?

It is currently very difficult to compare the performance and cost of pension plans in Cayman. We have made a number of suggestions to the regulator as to how this might be achieved. The Fidelity Pension Plan is currently upgrading its web site and will lead on this quest towards transparency and comparability by providing historic data for the Plan, the most recent audited financial statements, and the most recent investment advisor’s report so that not only Plan Members, but anyone, can access the information that they need in order to make an informed choice of pension provider.

Q. If I am a Caymanian and a non-current homeowner, how much of my pension can I withdraw to use for this purpose?

You may borrow up to a maximum amount of CI$35,000 from your pension plan (provided you have the amount in your account) as a down-payment to purchase an existing home, construct a home, or purchase land to construct a home. If you currently own land you cannot borrow the funds to purchase other land. The funds must be paid back to the pension account at a rate of an additional 1% per month; so the amount paid to pension from your salary each month is 6%. The employer is not required to match the additional 1% so the employer still pays 5% each month for a total of 11% of your salary each month paid to pension until the loan is repaid or you reach retirement age. If the home is sold before the loan is repaid you will need to repay the loan or ten per cent (10%) of the total market value; whichever amount is greater, back to your pension account.

Q. The rules on the “draw-down” of pension savings when I become entitled to withdraw money from my pension plan have changed. Why are the withdrawal levels lower in the early years when I may need more funds? There is no way that I will be able to retire on the maximum permitted draw-down amount. What happens if there is money left in my pension plan when I die?

The amended National Pensions Law permits you to withdraw annually from your pension plan the greater of CI$12,480 or a prescribed % of your balance depending on your age. This percentage increases as you get older for two reasons. One is that it is a percentage of what is likely in most years to be a diminishing balance as you withdraw funds. The other is that inflation means that a dollar 10 or 20 years hence will not buy as much as a dollar today. As far as the concern that you won’t be able to retire on the money in your pension plan, it is highly unlikely that anyone would be able to retire entirely on their pension plan if they contribute 10% of their salary each year up to the required limit. You need to make additional savings arrangements in order to fully fund your retirement. If there is a balance left in your pension plan when you die, that balance is transferred to your named beneficiary.

Q. There are changes in the rules that affect me if I leave the Cayman Islands. Why can’t I take out my pension balance if I leave Cayman in a few years? What are my options for accessing or transferring my pension balance if I leave Cayman?

The rules for transferring your pension balance if you leave Cayman were changed to minimise the risk of people who subsequently return here becoming a burden of the state. Cayman’s economic and taxation model is unable to support a large social welfare state so these “gaps” in the previous legislation needed to be filled. The other issue is that, as already mentioned, it is highly unlikely that anyone would be able to retire entirely on their pension plan, so if you wanted to make a lump sum withdrawal from your pension plan on leaving Cayman, how were you planning on plugging what is likely to be an already wide deficit in your retirement savings? Beginning 1 January 2018, you will only be able to transfer your pension to an overseas locked-in retirement account after two (2) years of no contributions if the amount is over CI$5,000. You must have no contributions after December 2017 to receive a cash refund. If you do not have a locked-in retirement account in your country or the country you are currently residing, then the funds will remain invested in the Fidelity Pension Plan until you reach retirement age. Those with amounts under CI$5,000 will still be able to receive a refund after three (3) months of no contributions. A reminder: if you return to the Cayman Islands to work or reside during the period of eligibility of no contributions then you no longer are eligible for a pension refund or transfer.

Q. What paperwork do I need to complete and what ancillary documentation do I need to provide as proof of leaving if I leave Cayman?

We request you make an appointment to come to the office to complete the refund paperwork prior to leaving the Cayman Islands. You will need to bring your passport, airline ticket or itinerary, and a separation letter from your current employer with you. We will go over the process and provide you with a checklist of the items you will need to provide us with closer to your refund eligibility date. The only items you will need closer to your eligibility date are a Proof of Residence and wire instructions from your bank.

Q. When can I start accessing the funds in my pension plan?

Under the amended National Pensions Law, you do not need to be retired to start drawing down your pension. If you are 47 years old or younger this year, your normal age of pension entitlement will be 65. If you are 48 years old as of 1 January 2017, you can retain age 60 as your normal age of pension entitlement.

Q. How much am I required to contribute to a Cayman pension plan under the amended National Pensions Law?

All employees between 18 and 65 must contribute 10% of their salary up to CI$87,000 of annual earnings to a Cayman pension plan, with the exception of Caymanians under 23 who are pursuing full-time education and non-Caymanian and non-Permanent Resident “household domestics”, e.g. maid or gardener.