Can the Eastern Caribbean Currency Union afford to grow old?

The demographic transition in the Eastern Caribbean Currency Union (ECCU) displays unusual characteristics.The transition now underway is rapid compared with international experience, and emigration is playing a particularly large role.  By 2060, ECCU pension funds’ expenditure will exceed contributions by over 6.2 percent of GDP, based on pension funds’ actuarial projections.

This paper describes several factors which could magnify the challenge of pension reform:

• for some ECCU countries,continued emigration at historical rates would considerably advance the projected date at which pension scheme assets are depleted
• there is a significant risk that assets will under-perform, given the large exposures to the highly-leveraged public sector and to a lesser extent the record with private sector investments
• portfolio diversification away from the public sector could be complicated by age-related pressure for greater central government health spending

• in Dominica, reforms have included: increasing the minimum pension age by 1 year every three years up until 65; increasing the employee and employer contribution rates by 1 percentage point each; increasing the contribution ceiling from EC$1,000 to EC$6,000 per month; and increasing the number of highest-earning years used in the calculation of the final insurable wage from 3 to 10 years
• in St. Lucia, reforms included: increasing the minimum pension age by 1 year every three years up until 65; increasing the minimum number of years required for a pension from 10 to 12 years; and reducing the maximum pension from 65 percent to 60 percent of the average insurable wage
• parametric reforms could include: gradually raising the retirement age from 60 years (62 for St. Vincent and the Grenadines) to 65 years; increasing contribution rates, which are low by regional standards, as well as contribution ceilings; reducing pension accrual rates; and increasing the number of years over which the insurable wage is determined
• however, parametric reforms could fail unless supported by public sector adjustment and portfolio diversification
• the concentration of pension scheme assets in the public sector reflects in part the regional emphasis on public investment as a catalyst for economic growth and development. The weak record of public investment in promoting growth, a strengthens the case for diversification from public to private sector assets, and for limiting investments in the domestic public sector to government bonds
• as pension schemes diversify away from public sector assets, the performance of private sector assets could become a greater issue. Pension schemes could take advantage of commercial banks’ comparative advantage in allocating resources by limiting domestic private sector investments to placing deposits through banks, and by no longer limiting its deposits to those of locally-owned commercial banks. Less emphasis could be given to mortgage lending and other direct private lending, particularly in competition with the private sector. This would also reduce administrative costs, which are high compared with other countries, at the same time that asset returns are increased