Barbadian Workers Facing Increased Individual Retirement Savings Responsibility Amid Growing Closure of Occupational Pension Plans: 2023 FSR Report Reveals Decline in Pension Sector - Central Bank of Barbados & FSC

Barbadian workers will have to do more individual saving for retirement as an increasing number of employers are closing their occupational pension plans.

The 2023 Financial Stability Report (FSR) has revealed that “since 2019, 39 pension plans . . . have wound-up, primarily originating from within the financial, services, tourism, and sales/distributions sectors”.

Eight of these closures occurred over the past year and the report published by the Central Bank of Barbados and Financial Services Commission (FSC) said that “the global slowdown will likely impact these economic sectors and threaten the viability of occupational pension plans”.

A key indication that the occupational pension sector is shrinking is shared in the FSR statistic showing that relative to the economy the sector was at 22.1 per cent at year-end compared to 24.1 per cent in 2022.

Speaking at a roundtable discussion to launch the latest FSR, FSC chief executive officer Warrick Ward shared that “there have been more of the funds that are unwinding”.

“So basically, a lot of the entities they are closing their pension funds largely because they are finding the price of maintaining the pension plans a little bit too onerous,” he explained.

The FSR elaborated on the challenge, noting that in 2023 “pension coverage continued to decline as wind-ups outpaced new registrants over the past five years”.

“The sector is comprised of 245 occupational pension plans, of which 58 per cent are defined-contribution (DC), 32 per cent are defined-benefit (DB), and ten per cent are hybrid (DB plus DC combined) pension plans,” the report stated.

The report that DB pension plans have greater systemic implications for financial stability, adding that “even though the number of DC plans is greatest, DB plans constitute a higher proportion of the sector’s assets at 50.6 per cent”.

“DB plans are of greater concern for financial stability due to the inherent guaranteed element of expected benefits and promised annuity payments upon retirement,” the report outlined.

“Therefore, underfunding presents significant solvency implications for these types of funds.

Approximately 28.2 per cent of the total DB plans were underfunded on a solvency basis, 36 with an average funding ratio of 84.1 per cent. Similarly, 29.2 per cent of hybrid plans were underfunded with an average funding ratio of 66.3 per cent.

“Consequently, many employers have found themselves burdened by the challenges of administering and funding pension plans and there has been a gradual shift from DB structures towards DC pension plans,” it added.

This is the second consecutive year that regulators have flagged underfunded pension plans as an issue of major concern. The 2022 FSR said that “of the 248 registered occupational pension plans, approximately one-quarter were underfunded on both a going concern and solvency basis”.

At the end of 2022, there were 61 underfunded pension plans on the going concern basis, with a combined deficit of approximately $137.8 million. Another 65 pension plans were similarly underfunded on a solvency basis at December 2022, with a combined deficit of approximately $181.7 million.

Ward said that when pension plans were declared underfunded this was based on actuarial valuations, pointing out that such assessments were done every three years and the FSC “would work with the employer to make sure that there is always a plan to close that underfunding gap”.

“So that’s normally how it works. The employer for the defined benefit plans would then have to enter into some sort of arrangement to make that plan whole. So that’s how we go about dealing with underfunded plans,” Ward said.