Puerto Rico has passed pension reforms that include making payments to the depleted defined benefit system from general revenues, and creating a defined contribution plan for active workers and new hires.
The reforms were passed Aug. 10 by the commonwealth's Legislative Assembly and signed Wednesday by Gov. Ricardo Rossello.
The changes are subject to approval by Puerto Rico's Financial Oversight and Management Board, also known as PROMESA for the Puerto Rico Oversight, Management and Economic Stability Act under which it was created. The oversight board has its own plan for pension reform that calls for progressively reducing pension benefits by a total of 10% for most participants and enrolling all active members and new hires in defined contribution accounts.
The legislation signed by Mr. Rossello calls for the new defined contribution plan to be administered by a third-party provider. It also prevents the government from accessing the assets in the retirement plan.
Funding the pension system through a pay-as-you-go system "clearly demonstrates this administration's commitment to comply with the fiscal plan and continue rescuing Puerto Rico from the worst fiscal crisis in its modern history," Mr. Rossello said in a statement. "Puerto Rico is taking a historic positive step towards stabilizing and saving the public pension system."
At an Aug. 4 meeting, PROMESA board member Andrew Biggs said pension changes will be implemented through a combination of legislation and the PROMESA board's plan of adjustment, "which we are actively working on."
"These changes dealt principally with a systemwide overhaul to accomplish three things. First, fund existing pension obligations on a 'pay go' basis, which means the government will pay benefits to retirees directly as they come due, rather than attempting to pre-fund future benefits via a retirement system's investment fund," Mr. Biggs said.
"Second, enroll both active employees and newly hired workers in a true defined contribution retirement system, in which each employee has an individual account that segregates their contributions from their existing accounts (if any) and protects their contributions to pay for their own future benefits," Mr. Biggs continued.
"Third, ensure that all newly hired employees are enrolled in Social Security. While most Puerto Rico government employees pay into Social Security and will receive benefit from it, most teachers, police officers and judges are not enrolled in Social Security. Enrolling newly hired employees, and potentially current employees as old as age 40, would provide those employees with a more solid source of income in retirement," Mr. Biggs added.