$276M of pension fund surplus

Guardian Life of the Caribbean (GLOC)employees are salivating over the news that the company’s pension fund has exceeded investment expectations, registering a surplus of about $276M. The company is a subsidiary of Guardian Holdings Limited (GHL). In letters to employees, headlined, “Guardian Life of the Caribbean Pension Fund Plan : Proposals for increasing your participation in exceptional investment performance,” it was noted that the fund had accumulated assets far greater than its liabilities.

These “surplus” assets are continuing to increase, said the letter, which was signed by Douglas Camacho, Guardian Life President. The company described as a “problem” the excessive surplus. In 1998, the Plan’s assets were three times the plan’s liabilities and the surplus was around $125 million, employees were told. By the end of 2003, assets had increased to over four times liabilities, with a surplus around $276 million. The law, the company said, imposes limits on what can be done with such a surplus. “The two common options are to reduce contributions or to increase benefits,” said the letter noting that neither of these is very helpful.  

The employees have never contributed to the Plan since its inception in 1981. In 1999, the company stopped contributing on the advice of the actuary to try and reduce the growth of the surplus, it was pointed out. Despite the fact that no contributions have been made for the past four years, the surplus, the company said, has continued to grow. On using the surplus to increase benefits, the company said there are limits to this. “The Pension Plan benefits are already on par with the best in the financial services industry. The law imposes a maximum of 2/3rds of your highest salary. Even if we were to double the pension plan benefits, that would still leave a surplus of well over $100 million,” it was explained. “These excess funds are wasted. They benefit neither Plan members nor the Company.” For example, it was noted that the law does not allow the Plan to pay medical costs for pensioners.

The company also explained what happens if the plan is wound up. The trustees, said the company, have to use all the assets of the Plan to purchase annuities, up to the maximum pension limit for each Plan member. “Any excess assets after that will be paid back to the company. For persons who are not yet pensioners, this annuity will start at the Plan’s normal retirement age, which for most persons is age 62. So, once everybody has received an annuity of 2/3rds of their salary, plus whatever increases the Board of Inland Revenue will allow, the residual assets are paid over to the Company. On why the Plan should not be terminated right now, the company said there are several problems with this option. Firstly, it provides a very large benefit to persons who have spent a short time in the plan, it was noted. In addition, persons with long service may receive little or no benefit from the surplus.

“This is unfair since we believe more surplus should be allocated to persons who have spent longer in the Plan. “Secondly, if all Plan members take the maximum benefit, the surplus repayable to the company, if any, becomes very small. We are of the view that the excess assets in the Pension Plan should be shared between the Plan members and the Company. To deal with this, the company has invited all pension plan members to transfer to an identical, new pension plan, “so there is no loss of existing or future pension benefits.” The company said it will guarantee that pensions from this plan will be increased at the rate of 3.5 percent per year.

In addition, all existing pensioners who transfer will have their pensions increased to a minimum of $1,000 per month. This can only be done though if enough members (employees, deferred pensioners and pensioners) agree to transfer  to the new pension plan. Once that happens, the company said it will then wind up or terminate the existing Pension Plan. Annuities will be purchased for any persons who are still in the Pension Plan, it was noted, and the residual surplus would then be paid over to the Company in accordance  with trust law. Out of this, the company said it will then pay incentive payments to persons who did transfer. “These could be taken as cash or as increased pensions in the new pension plan,” said the company. The company stressed that it will not proceed with this proposal unless a significant number of Plan members are in agreement. “At the end of the day, if everybody transfers, Guardian would receive less than half of the current surplus,” the company said.