Each month, thousands of Jamaicans contribute five per cent, 10 per cent and as much as 20 per cent of their monthly salary to a pension fund or individual retirement account. In some cases, this is matched by your employer. The most important message for these contributors is that — your pension investments will NOT support you in retirement. These funds will NOT be sufficient to replace your income 20 years from now. Why?

1. Inflation: While inflation has been in the single-digit range since 2011, Jamaica’s 20-30-year average inflation rate is much higher. It is important to look at longer-term horizons that mirror our working life, since this is the length of time over which we make pension contributions and prepare for retirement. Jamaica’s average 30 year over year inflation rate is roughly 11.5 per cent. This means that your Jamaican dollar investments must at least earn 11.5 per cent to simply retain their purchasing power. That is the first benchmark to which you must hold your pension manager accountable.

2. Devaluation: Let us look at devaluation over the same 30-year period. If you started contributing to a pension in December 1992, the JMD/USD exchange rate was J$22.20/US$1. In December 2023, the exchange rate was J$154.95/US$1. That is a 6.7 per cent per annum move. This should be another hurdle rate that your pension fund manager must be exceeding in addition to inflation.

3.Pension restrictions:

a. 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.

b. 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 10 per cent of a portfolio in US dollar denominated assets. This means that 90 per cent of your pension savings are denominated in Jamaican dollars.

c. 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 per cent of its portfolio invested in equities. In contrast, as at March 31, 2023, private Jamaican pension funds had 21.15 per cent of their portfolios invested in equities2 (NB this excludes equity investments contained in the share of “investment arrangements”).

4. Track record of returns: What are the historical returns delivered by the investment manager? Have you intentionally selected the pooled funds with the best returns? Or have they automatically put you in a default allocation. How much money have you contributed and how has it grown? How often do you check this information? Do the tax savings outweigh the returns, impact of inflation and devaluation? Actively planning for your retirement requires you to ask and get answers for these questions on a regular basis.

Marian Ross-Ammar is vice-president, trading & investment at Sterling Asset Management. Sterling provides financial advice and instruments in US 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: info@sterlingasset.net.jm