Presentation for Cayman Islands Life Underwriters Association Certain Aspects of the National Pensions Law March 2008

Presentation Outline National Pensions Law – history/summary/results National Pensions Law – Consultancy report Pension plan goals Individual goals Employee/Employer responsibilities How much is needed? Sources of retirement income How much is enough? Questions

National Pensions Law - history The Law establishes minimum standards for pension plans operating in the Cayman Islands – it onto itself is not a “pension plan” and provides no benefits National Pensions Law became effective July 1, 1998 for all Caymanians Effective January 1, 1999 for expatriate employees (except domestics employed to work in individual homes) Some plans “grandfathered” Top up plans permitted to operate Pension Participation is Mandatory Therefore, a Condition of Employment In the Cayman Islands

National Pensions Law - summary Minimum contribution of 10% of Years Maximum Pensionable Earnings - $60,000 annually Maximum employee contribution is 5%, minimum employer contribution is 5% Immediate “vesting” of contributions Earliest retirement age is 50 years Normal retirement age is 60 or by 61 st birthday “pension” in the form of an annuity, Retirement Savings Arrangement or Individual Retirement Account Compulsory spousal benefits at 100% - limited benefits for dependent children (different pre and post retirement) If no spouse opportunity to name beneficiary Opportunity for Additional Voluntary Contributions “generous” minimum defined benefit provisions

National Pensions Law - results Two Basic types of pension plans –Defined benefit – very few, usually an International Employer –Defined contribution – all the current multi-employer plans operating in the Cayman Islands Cayman National Pension Plan Chamber of Commerce Pension Plan Fidelity Pension Plan Silver Thatch Pension Plan British American Pension Plan British Caymanian Pension Plan Employer chooses type of pension plan Employees need to be consulted and choose the actual pension plan

NPL – Consultancy Report – The Findings Current minimum pension contribution rules will not produce adequate retirement income There remain issues with Compliance and Enforcement Investment Regulations are too restrictive and do not reflect Global Best Practices There is a general lack of public understanding of Retirement Savings and Planning and Financial Planning overall

Pension Plan Goals Ultimate Goal Replace salary Focus Value for money Factors to consider Employment expenses (and tax) Typical career path of members Earnings level Government programs Workload and aging of workers A human resource tool (?)

Individual Goals GoalsDifferent for each individual Focus Personal and family needs Factors to consider Retirement age Expense reductions New expenses after retirement Government programs Pension plan Other retirement income/savings Post retirement employment

Pension Plan/Individual Goals Pension plan goals and individual goals are not the same To have a good pension from a pension plan, need long service and/or adequate contributions

Pension Plan Goals Historical perspective Prior to 1998 Few pension plans / paternalistic view Benefits usually low with late retirement Recognition of shorter life expectancy Reliance on family and government benefits Since 1998 Recognition of longer life expectancy Less reliance on immediate family New and more pension plans Realization of meager government benefits, if at all Inflation protection

Pension Plan Goals Future issues Demographics More retirees, possibly fewer contributors (DB “problem”) Later entry into workforce Phased retirement Late retirement incentives Recruitment and retention Benefit versus contribution balance

Pension Plan Goals Other issues Expenses that may increase Health care Leisure activities Expenses could vary greatly by age Expenses that could disappear or diminish Retirement savings Insurance coverage Expenses associated with children Debt repayment (i.e. mortgage) Work related (meals, transportation, clothing, etc.)

Pension Plan / Individual Goals Other issues / Factors too consider Is it possible to save too much? Depends on individual circumstances Need to balance current and future needs Is the return on investment worth it? Other sources of income Replace all or a portion of net salary Prioritize pension plan features Form of lifetime pension / survivor benefits Indexing Retirement rules / ages Consider salary level, work pattern and typical career of plan members

Employee’s responsibilities Take an interest in what pension plan your employer has Ensure your employer is providing you with a plan Ensure payroll deductions are being taken, if applicable Ensure contributions are going to the plan administrator Save any payroll slips and compare pension deduction amounts to pension plan statements – insure you receive a statement Notify the pension plan administrator of changes in personal information such as address, phone numbers, marital status, beneficiaries, etc. Plan to attend your pension plan’s annual general meetings and information sessions Be aware of your employer’s responsibilities, your responsibilities and discuss these with co-workers

Employer’s responsibilities Be aware of the provisions of the Law and that they are a condition of employment in the Cayman Islands Be aware of the employment circumstances of people in your employ – be wary of employees not wanting to pay and of employees where others actually hold their work permits Provide a pension plan or make contributions to a pension plan for every person employed by the employer in the Islands. Ensure that the employee and employer pension contributions are paid into the appropriate pension fund by the 15 th of the month following the month for which the contributions are attributable. Advise the pension plan administrator of changes in employment status of employees and provide administrative information required, such as contact details, employee information, etc. Provide any information requested by the National Pensions Office and comply with their orders and directives

How much is needed? United States AON Consulting / Georgia State replacement ratio study (2001 edition) –69% to 78% of gross salary for salaries in $30,000 to $90,000 range –Higher %’s for higher salaries Historical range 60% to 85% Canada CIA 1995 study –70% to 80% of gross salary –75% to 100% of net salary Recent analysis suggests as low as 50% of gross salary for middle to high income earners General consensus – 70%

How much is needed? 2001 Retirement Confidence Survey (USA) 25% of respondents thought 50% to 59% was sufficient 14% of respondents thought 60% to 69% was sufficient 21% of respondents thought 70% to 79% was sufficient Overall 60% thought 50% to 80% was sufficient 8% had no idea, 16% thought 80% Three phases after retirement High cost active phase – up to age 75 Slower paced less active phase – age 75 to 80 Declining health phase – over age 85 Income needs decline by as much as 25% after age 75 (health care most significant risk)

How much is needed? Cayman Islands –Consultancy Report March 2007 based on CI’s 2005 Annual Economic Report and CI’s 2004 Compendium of Statistics Someone currently earning $30,000 would require 70% to 75% at retirement for minimum benefit adequacy For someone earning $60,000 replacement ratio for minimum benefit adequacy would drop to 55% to 65% –Ratios achieved by current National Pensions Law (at age 60) range from 24% (salary $60,000 age 25) to 50% for “full career” employees (salary $20,000 age 18) – DC component only –If Consultancy Report’s recommendations for benefit adequacy are adopted ratios improve to 45% to 63% at age 60 (NRD) and 68% to 94% at age 65 (NRD) – DC only

Sources of retirement income – Cayman Islands Benefits compulsory under National Pensions Law (substitute PSPP Benefits) – employer sponsored pension plan Investment income from personal/retirement savings and principal (rental income) Post retirement employment Benefits from Family and Children services Additional sources of income as a result of recommendations and action forthcoming from National Assessment of Living Conditions, if any Highly likely first two bullets only (perhaps 3)

Sources of retirement income – Other parts of world Some form of state paid / tax supported Social Security Some form of government run basic pension scheme Optional employer sponsored pension plan (contributory on e’ee’s part or not) Some form of voluntary personal savings / investments encouraged through tax relief Voluntary savings / investment outside of tax system – Principal Post retirement employment

How much is enough? Annuity factors from Sagicor – cost per $1,000 monthly income - April ’07) Age Sex/Form of payment Female Life only GTD 10 year $151,939 $153,158 $142,863$131,723 Male Life only GTD 10 year $141,585 $144,146 $131,144$118,451

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