Palau’s pension fund on brink of collapse if shortfalls continue
Koror (Marianas Business Journal )l- The reserve fund status of Palau’s Civil Service Pension Fund is on the brink of collapse by 2030 unless reforms are instituted, according to the economic reviews of the Asian Development Bank and the Graduate School USA.
The independent review by the Graduate School USA stated that the accrued net pension liability of the pension plan currently is close to $260 million with only an asset of about $26 million and would require $7 million in support to keep it afloat.
Meanwhile, according to the ADB economic outlook report at the end of July 2019, the pension plan’s liabilities continue to “pose a fiscal risk” to the Palau government.
The ADB added that based on an audit report, as early as fiscal 2022, payout might be depleted and that an absence of reform will further burden the government as it might be forced to subsidize it to prevent its collapse.
Based on Palau’s Office of the Public Auditor, the pension plan covers retirees from national and state governments. It has 6,160 members with 1,630 retirees receiving benefits.
Elliot Udui, acting administrator of the pension plan, told the Journal the agency has not missed any payment yet, and because it has received stopgap measures to improve its fiscal position, annual drawdown from its assets or trust fund has decreased — but it is still lobbying the government for subsidy.
He said continued shortfall will affect future members and Udui said the pension plan will need at least $3 million a year to gain a sustainable footing.
Beneficiaries receive benefits ranging from $50 to a maximum $2,500 a month; the payout depends on the beneficiary’s salary and total years of service, he said.
Attempts of subsidy in the past have failed. Instead, the government has put in measures such as getting $25 from the $100 fee collected from tourists visiting Palau as part of the marine sanctuary legislation. Another stopgap was a law creating a 4% remittance tax collected from foreign workers on transfers to be earmarked for the fund.
According to the OPA, in fiscal 2018, the stopgaps were able to infuse at least $1.2 million into the pension fund. Member contributions were at $7 million, with investment income at $1.2 million. Despite additions, the pension fund is still experiencing a shortfall.
The economic review of the Graduate School USA noted that it is less desirable to implement a “use broad tax policy” that will only benefit civil servants.
It said the “more appropriate” source of funding for the plan would be an increase in contributions or adjustment to benefits.
The pension fund has tried to implement remedies since then; one is that the mandatory retirement after 30 years of public service has been removed.
The plan has also proposed raising contributions from employers and employees from the current 6% to 10% each in 2017 but was shot down by President Tommy E. Remengesau Jr., who instead commissioned an actuarial study to come up with recommendations for more comprehensive reform.
ADB noted that the fund is proposing reforms from an increase in the normal retirement age by one year every five years until the retirement age reaches 65 years; it has also recommended, among others, that contribution scheme to be opened to private-sector employers and employees.
Although Remengesau has not proposed a subsidy to the pension plan when he submitted the fiscal 2020 financial package of Palau to Congress in July, the House of Delegates has introduced an amendment to the budget bill earmarking a sum of $2.7 million to save the plan.
It proposes that funding be sourced from general funds.