Pension Reform Law in Puerto Rico Delayed

The set of reforms were signed into law last month (see “Puerto Rico Governor Signs Pension Reform into Law”) and are seen as an important step in Puerto Rico retaining its investment-grade credit rating, which stands just a single notch above junk-bond status, according to a recent Reuters news report.

In response to a lawsuit, the court appointed a special commissioner to collect evidence, hold a hearing and submit a report on its findings by February 7, says the news report. The suit, filed by Puerto Rico’s Teachers Association, alleges that due process was not followed and that other measures could have been taken by the government to shore up the pension system.

The Teachers’ Pension Fund has a deficit of $10 billion and is slated to run out of cash by 2020 without the new reform law, according to the news report. The reforms will honor existing accumulated defined benefits but close down the system for all, switching future retirement benefits over to a defined contribution plan arrangement.

The reforms to the pension system include increasing employee contributions from 9% to 10%, raising the retirement age from 50 to 62 for new employees, and raising retirement age from 55 or 60 (depending on years of service) for existing employees. Government and employer contributions are slated to increase between 1% and 1.5% annually for the next several years, with a target of 20.52% by 2022.