2.3 Scenarios

We’ve described the mathematics of pension funds in an earlier paper (you can read or download it from the AFM Perspectives website). We won’t repeat ourselves here. In that paper, we pointed out that the AFM-EPF faces severe capital challenges and that each year which passes without either increasing the amount of cash entering the fund or decreasing the amount leaving it will make any future cuts worse. We see no reason to change that view today and Mr. Lowman’s figures and discussion only serve to confirm it. He provides three scenarios:

Assuming we get a 6% employer contribution increase:

Cuts today would be 13%
Cuts in three years would be 18%

If we don’t get the 6% employer contribution increase:

Cuts in three years would be 28%

Most people would probably prefer the 13% cut scenario. Perhaps ironically, that won’t happen because it takes at least a year to get MPRA status from Treasury for a pension fund and that’s a requirement for any benefit cut. Under the multiple assumptions that:

  1. Mr. Lowman’s figures are correct.
  2. We obtain 6%/year employer contribution increases for five years.
  3. We get MPRA status in one year.

The smallest cut possible in Mr. Lowman’s view would probably be around 14.67%. And if we delay three years and don’t get the contribution increases, Mr. Lowman believes we will have a 28% benefit cut.