The National Pensions (Amendment) Bill, 2020 ("Bill") has now been released. Its foremost purpose is to provide for the 'temporary suspension of pension contributions' and 'to enable specified members of a pension plan to withdraw a single lump sum amount from their account in the pension plan'.
During the daily COVID-19 press conference on April 20 2020, the Premier announced proposals to amend the National Pensions Law (2012 Revision) (the "principal Law") of which there were two key provisions:
- there would be a 6 month pension 'holiday' which would operate retroactively from April 1 2020; and,
- 'eligible' persons would be permitted to withdraw up to 100% of the value of their pensions which would be capped at CI$10,000. However, those persons with a pension value over CI$10,000 would be able to withdraw an additional 25% of their remaining pension pot.
The following briefing covers key aspects of the Bill which amends and repeals certain parts of the principle Law. It is important to note that the Bill is intended to be a temporary measure. Upon coming into force as the National Pensions (Amendment) Law, 2020, it will expire on November 30 2020 (unless extended by an Order of the Cabinet), the effect of which will be as though the principal Law had not been amended.
Temporary suspension of pension contributions by the introduction of the 'new' Part 1A
By virtue of section 5A, a 'pension holiday period' is introduced which commences retroactively from April 1 2020 ("commencement date").
In combination with section 5B, in practice this means that from the commencement date, pension contributions by both employees and employers are suspended until either November 30 2020 or any date extension subsequently ordered by Cabinet. This provision equally applies to self-employed persons who hold individual retirement accounts.
This is a default measure but upon careful reading of the wording of section 5B, the section essentially places a choice on both the employee and employer (individually) to suspend pension contributions - it is not a mandatory provision. Thus, there is no prohibition on an employee making voluntary contributions into a pension plan but the section provides that for the pension holiday period, the employer would not be obliged to contribute to the plan (and vice versa).
Notwithstanding, a note of caution should be exercised. The statutory amendments to the principal Law do not expressly prevail over any contractual arrangements between the employee and employer. There may be, for example, a term in the employee's contract of employment which contractually obliges an employer to 'match' pension contributions made by the employee. Consequently, if an employee were to continue making contributions to a pension plan during the pension holiday period, the new statutory provision would not necessarily protect the employer from a breach of contract claim.
It is clear by section 5C(2) that any arrears of pension contributions which accrued before April 1 2020 remain 'payable' and an employer will be liable to pay interest on those unpaid funds in accordance with section 50 throughout the pension holiday period.
Sections 25(1), (2), (3), (5) and (6) are not affected by the pension holiday and shall continue to apply. In essence, this means that should an employer recruit any 'new' employees during the pension holiday period, those employees will still be required to be members of a pension plan (with full contributions paid) subject to any exceptions set out under sub-section(2). Section 25 applies equally to self-employed individuals who set up a business during the pension holiday period.
Finally, in circumstances where a Caymanian has previously made a withdrawal from his/her pension either for the purposes of using that amount as a deposit for a residential dwelling or to pay-off an existing mortgage, the requirement to contribute an additional 1% into a pension scheme is also suspended for the duration of the pension holiday period in accordance with the introduction of sub-section (5) to section 52(D).
The emergency withdrawal by 'members' of pension funds by the introduction of the 'new' Part VIIB
Section 52I (2) recognises the distinction between defined contribution plans and defined benefit plans in which the value of the former will depend on factors such as the amount that is paid into the pension and the fund's investment performance; whereas the value of the latter is determined by more dynamic circumstances such as age at retirement, years of service, and level of salary during the final years of employment. This is important as the value of defined contribution plans is aligned to the financial markets and are now the most common type of pension schemes.
Notwithstanding, in either case, the provisions for emergency withdrawal of pension funds are essentially the same:
Where the balance in a members' defined contribution account or the commuted value of the members accrued benefits under a defined benefit –
- does not exceed CI$10,000, the member may withdraw up to 100% of the balance; or,
- if the balance exceeds CI$10,000, the member may withdraw CI$10,000 and up to 25% of the remaining balance.
For example, a member who has 'pension pot' of CI$100,000, may withdraw CI$10,000 + (25% x CI$90,000) = CI$32,500.
Any such withdrawals shall be taken as a single lump sum payment.
Eligibility for pension withdrawal under Part VIIB
Those eligible to apply for a withdrawal of pension in accordance with Part VIIB must:
- either be presently in the Cayman Islands; or,
- departed the jurisdiction between February 1st 2020 and November 30th 2020 (unless otherwise extended).
However, by virtue of section 52I(3), the ability to withdraw does not apply to a member who:
- has claimed benefits under normal or early pension entitlement; or
- is a public servant as defined by section 2 of the Public Authorities Law (2020 Revision) with pension contributions under this Law which were paid by a statutory authority or a government company as defined by section 2 of the Public Authorities Law (2020 Revision), is not entitled to apply and shall not apply to withdraw an amount from the member's account in a pension plan in accordance with this Part.
Thus, in respect of section 52I(3)(a), those members who are currently drawing on their pension will not be able seek a lump sum pension withdrawal. Furthermore, the prohibition on public servants in (b) not only applies to withdrawals from their public service pension fund but also extends to any private sector pension they may have from previous employment. This is likely to be a 'public policy' decision owing to the fact that public servants are not yet facing redundancy or any reduction in pay and therefore, there is no legitimate need to access any of their pension funds.
There are strict penalties for any member referred to in sub-section (3) applying for a withdrawal of pension under Part VIIB. Any such application is deemed to be a criminal offence which carries a fine of CI$10,000 and/or a term of imprisonment of one year.
The application process
Any eligible member of a pension scheme seeking to make a
withdrawal in accordance with Part VIIB is
required to submit an application to his/her relevant pension administrator by way of a prescribed form. As far as we are aware, the application form has yet to be approved by the Director of the Department of Labour and Pensions ("Director").
At the same time, it will be necessary to submit original government-issued photo identification or otherwise notarised (or certified) copies. The Director may require other documents upon request.
Sections 52I(8) & (9) thereafter provide a timetable in which the administrator is required to render a decision on the application. In summary, the timetable is as follows:
- Within 7 days of receiving the application, the administrator is required to notify the applicant of receipt;
- Within 14 days of notifying the applicant of receipt, the administrator shall notify the applicant of the decision to either approve or refuse the application;
- If the application is 'approved', within 45 days from receipt of the application, the Administrator shall notify the applicant that either a cheque for the amount applied for has been prepared or a payment has been made by direct deposit to a financial institution as directed by the applicant. The applicant may choose either of the two forms of payment.
An application may, however, be refused by the administrator on two grounds:
- where the administrator is not satisfied that the applicant qualifies to make a withdrawal under Part VIIB; or,
- if any other requirement(s) under Part VIIB have not been met by the applicant.
Where an application has been refused, the administrator shall notify the applicant accordingly within 14 days of having notified the applicant of receipt of the application and provide reasons in writing. However, an applicant has the right to refer the administrator's decision (in effect, an appeal) to the Director for reconsideration. In the event that the Director overturns the administrator's decision, this will bind the administrator unreservedly.
The government clearly expects a pension administrator to adhere strictly to its obligations and the timetable set out in the legislation. Penalties are severe and non-compliance is an offence for which liability on summary conviction bears a fine of CI$10,000 and/or a term of imprisonment of one year.
Additional Voluntary Contributions
Section 47 has also been amended which now permits members, on becoming unemployed, to withdraw any additional voluntary contributions ("AVCs") which have been paid into a pension plan.
As there is a general right for eligible members to withdraw from their pensions under section 52I(2), the section 47 amendment should be read as a separate and additional measure restricted to benefit those persons who are unemployed.
The legislation is 'silent' however, in respect of the applicable time period as to when the member became unemployed. Does the section 47 amendment only apply to those who become unemployed from the date of the amended section, or, does it apply to a person who may have been unemployed for many years? The position is not clear but given the text of the Memorandum of Objects and Reasons which preface the legislation, we are of the view that provided a member is unemployed at the date of application, the amendment to section 47 permits the withdrawal of AVCs:
"Clause 3 seeks to amend section 47 of the principal Law to allow a member to access the member's additional voluntary contributions, upon providing the administrator with evidence of the member's unemployment."
There are no prescribed constraints on the amount of AVCs that may be withdrawn in these circumstances although the pension administrator will need to be satisfied of the member's unemployment. The application process is self-contained in section 11 and shall be made to the pension administrator in the manner designated by the Director.
This is a dramatic piece of legislation in an attempt to boost the local economy and assist those primarily, who have been dismissed from their employment in the current COVID-19 crisis. However, the wide-ranging effect is to also permit those in the private sector - who remain employed on full-salaries - to access their pensions for a lump sum withdrawal.
Critically, those individuals who are considering a withdrawal should, in the first instance, contact their respective pension administrators to ascertain current pension values. The recent extraordinary falls in the stock market will undoubtedly affect the majority of pension values significantly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.