At the Rotary Club of Saipan meeting held at the Hyatt yesterday where he was guest speaker, Retirement Fund Administrator Richard Villagomez said the lack of new members to the defined contribution plan and increasing liabilities combine to push the contribution rate to 60.9 percent.
He reported that the actual contribution rate in Palau stays at 6 percent but its recommended rate is 26.8 percent.
Although there are no available figures as to the actual contribution rate for the Marshalls and Federated States of Micronesia Social Security Administration, their recommended rates are 7 percent and 6 percent respectively.
GovGuam Retirement Fund’s actual contribution rate is 21.5 percent while its recommended contribution rate is 24.8 percent.
“We can tell that they really don’t have problems meeting their contribution amount,” said Villagomez.
But in the CNMI, he said the actual contribution rate is half of the recommended rate.
He explained that the Fund contribution rate was based on covered payroll — those members in the defined benefit plan. With the existence of the defined contribution plan, the membership to DB plan will continue to shrink as people retire or move on. For Villagomez, 60.9 percent of the government payroll is a significant amount.
If one were to calculate it based on the recently approved fiscal year 2012 budget, Villagomez said 60.9 percent translates to $48 million of the $102 million total budget of the CNMI.
He told Rotarians, “There is a significant gap between what the system requires and what is actually contributed.”
The Fund administrator cited commitment as the biggest factor for any pension fund.
“Without commitment, even if your pension fund is at a 100 percent level, eventually it will get to zero if there is no commitment by the people who created it and who should be supporting it,” he said.
From 1988 to 1997, the Fund had put in $140.87 to the portfolio.
Villagomez said from 1998 to 2001, no contribution had been made to the portfolio and what had been received by the pension agency had been paid out as pension benefits.
If it were not getting enough contributions from the central government, the Fund withdraws money from its investments.
Withdrawals
This has been the case since 2005 when it began withdrawing money to fund its shortfalls.
The Fund withdrew $4.5 million in 2005; $17.97 million, 2006; $33.51, 2007; 43.02 million, 2008; $40.75 million, 2010; and $52.22 million, 2011.
The 18 to 34 percent increase in withdrawals from the market in 2006 to 2007 could be attributed to the passage of the P.L. 15-15 that suspended all contributions to the Fund which resulted in significant shortfall in funding, Villagomez said.
For Villagomez, “We weren’t generating enough returns to cover the withdrawals. We are just withdrawing too fast.”
Since inception, the Fund has withdrawn $230.49 million from its portfolio.
He also reported that the Fund reached a peak end market value of $483 million in 2007 and went down from that point.
As of Oct. 25, the Fund had $264,497,211 left.
As for Fund’s investment performance since 1989, Villagomez reported that the Fund annual returns to the portfolio is 8.16 percent versus the benchmark’s 8.65 percent. “Compared to the benchmark, we have more or less matched the benchmark,” he said refuting allegations that the Fund mishandled the portfolio.
“This shows that is not the case,” he said.
For Villagomez, if the Fund had not withdrawn from the market, its assets would have been about $518 million at the end of the fiscal year 2011.
“It’s a vicious cycle where the less money you have in the portfolio, the more contributions to give back for those lost returns,” he said.
He added, “If we have $518 million, we could rely more on our returns that we are generating to fund for payouts.”
The current employer contribution rate of 60.8686 percent would have been much lower, much more manageable if no withdrawals were made, he said.
Solutions
Citing an earlier report made by their investment consultant Wilshire Associates managing principal Maggie Ralbovsky, Villagomez said for the Fund to remain solvent, the only choice is restructuring of benefits.
However, there are legal and constitutional issues to cutting benefits.
Effect on the economy
Villagomez provided Rotarians with an estimate of $63 million in benefits paid out last year.
Of this amount, $53 million stays in the CNMI. This is equal to 5.5 percent of the commonwealth’s total gross domestic product of $962 million as of 2009.
CDARS
In the meantime, the Fund is trying to transition to an all-cash portfolio through Certificate of Deposit Account Registry Service.
Villagomez said they have not completed the transition yet and there’s significant paperwork to accomplish as the Fund moves $264 million to CDARS.
Asked if all their liquidated assets were in CDARS, he said, “Not entirely in CDARS. We are finalizing the paperwork.”
He said, “The money is in mutual funds. Some is still in cash. We are working towards CDARS.”
But the Fund will have to reverse this strategy as soon as they have selected a new investment consultant.
For now, the Fund’s requested proposal has yet to be closed and it has so far received about four proposals, Villagomez said.
The Fund has been operating without a consultant since Sept. 12.
