Up to now, a member of a superannuation fund has been regarded in law as a person who has an interest in the fund. It is expected however that in Phase II of the reformation of our pension laws, the definition of “member” under the Pensions (Superannuation Funds and Retirement Schemes) Act (the “Pensions Act”) will be amended to include individuals whose pensions have been secured by the purchase of an annuity, i.e. annuitants. This proposed amendment raises a number of questions. First, it is important to consider that there are different types of annuity arrangements. 

In the most common type of arrangement in Jamaica, the retiree’s entire entitlement under a pension fund is used to purchase an annuity, after which he or she receives periodic payments directly from the annuity provider. In this instance, it is difficult to comprehend why this retiree, without any money remaining in the fund, should continue to be a member of the fund. In fact, it is accepted in many jurisdictions that the purchase of this type of annuity severs the relationship between the member and the fund, and with good reason. For example, members of the fund are entitled to representation on the Board of Trustees who have a fiduciary duty to act in the best interest of its members. If this annuitant remains a member of the fund, the trustees will continue to have a duty to him notwithstanding that he has no interest in the fund. This goes against the very purpose for which an annuity is usually purchased, that is, to reduce the obligations and risks of the fund. 

The retention in the fund of an annuitant, whose annuity was purchased in accordance with the arrangement described above, could potentially have serious implications for the members or the sponsor of the fund. For example, if, by some unfortunate event, the annuity provider is no longer able to pay the annuities to the annuitant, the trustees will have to assume that responsibility. Where will the trustees get this money? The only answer to this question is that it will be taken from the fund; the very fund in which the annuitant has a balance of zero. If the fund is a defined contribution fund, payments to the annuitant, in the absence of sufficient surplus, would result in the unreasonable reduction of the benefit entitlement of the active members of the fund. In a defined contribution fund the members of the fund bear the risk as their entitlement is solely based on their contributions, contributions made by their employer, and how well the fund performs. In a defined benefit fund, however, it is the employer who bears the risk of meeting the balance of the cost of providing pensions for the members of the fund. This would mean that in a defined benefit fund, payments to the affected annuitant would, in the absence of a surplus, increase the cost borne by the employer. 

Certainly, given these implications, the proposed amended definition of “member” in the Pensions Act is worth reconsideration. Perhaps it may be best to leave it to the trustees and sponsors of pension funds, to determine (based on the type of annuity arrangements they intend to implement) whether their annuitants will continue to have 

an interest in the fund and are properly to be regarded as members of the fund. In the event that an annuitant does not have an interest in the fund, I am of the view that it should also be left to trustees and the sponsor of the fund, having knowledge of the unique circumstances of their fund, to determine whether the definition of member in their constitutive documents can be as broad as is being proposed in the amendments to the Pensions Act. 

Until any amendments are made to the definition of “member” in the Pensions Act, trustees, when making annuity purchases, should ensure that, (a) the purchase of annuities is permissible under the constitutive documents of the fund, (b) they understand the type of annuity arrangement undertaken and (c) they understand the implications of the purchase of the annuities.