Global Retirement Update

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1 Global Retirement Update November 2011 This Update summarizes recent legislative developments and trends related to retirement and financial management and highlights recently passed and pending legislation that may require employers to take action to comply with new rules or review existing plans. Action May Be Required Philippines Employers may wish to review their retirement plan design in light of the Bureau of Revenue s final regulations (Revenue Regulation No ), implementing the tax provisions for Personal Equity and Retirement Accounts (PERAs). As previously reported, these regulations were the last thing needed to roll out PERAs, a 401(k)-like retirement savings system. No major changes were made to the draft regulation circulated for consultation in October. The maximum total annual contribution will be PHP 100,000 for individuals and PHP 200,000 for couples. Overseas Filipino Workers (OFWs) may contribute PHP 200,000 annually. Contributions and account earnings will be tax free to individual participants, provided the funds are withdrawn at age 55 or older. Individuals will receive a tax credit of 5% of their PERA contributions. Employer contributions to a PERA will be tax free to the employee. Employers will be permitted to deduct only the amount that brings the total contribution to PHP 100,000 (e.g., if an employee contributes PHP 60,000 and the employer contributes PHP 60,000, the employer can deduct only PHP 40,000). Employers are not entitled to a 5% tax credit for their contributions. Employees retain the right to decide how employer contributions will be invested. PERAs are scheduled to be open for enrollment as of January 1, Recent Developments Americas The U.S. Social Security Administration (SSA) released the Social Security 2012 indexed figures on October 19, The SSA announced that there will be a 3.6% Cost of Living Adjustment (COLA) for This is the first COLA adjustment since Some other changes that take effect in January of each year are based Copyright 2011 Aon Hewitt 1

2 on the increase in average wages, as noted below: Wage Base: The 2012 Social Security wage base is USD 110,100 (the 2011 amount was USD 106,800); FICA/Medicare Tax Rate: The FICA tax rate remains at 7.65% 6.2% for Social Security and 1.45% for Medicare; Maximum Monthly Benefit: For an individual retiring at full retirement age in 2012, the maximum benefit is USD 2,513 (the 2011 amount was USD 2,366); and Annual Earnings Test Limit: For individuals under full retirement age, the annual earnings test limit is USD 14,640 (the 2011 amount was USD 14,160). For individuals attaining full retirement age in 2012, the annual earnings test limit for the months prior to attaining full retirement age is USD 38,880 (the 2011 amount was USD 37,680). There is no annual earnings test for individuals who have attained full retirement age. The U.S. Department of Labor s Employee Benefits Security Administration released a final rule relating to the provision of investment advice to participants and beneficiaries in individual account plans, such as 401(k) plans, and beneficiaries of individual retirement accounts (and certain similar plans). The final rule affects sponsors, fiduciaries, participants, and beneficiaries of participant-directed individual account plans, as well as providers of investment and investment advice related services to such plans. The final rule is effective on December 27, In the United States, the Pension Benefit Guaranty Corporation (PBGC) issued a proposed rule that would implement provisions of the Pension Protection Act of 2006 (PPA) that change the rules for determining benefits upon the termination of a statutory hybrid plan, such as a cash balance plan. For a plan terminated and trusteed by PBGC, the proposed rule would amend PBGC s current regulations for determining the allocation of assets and the amount of benefits payable under Title IV of the Employee Retirement Income Security Act (ERISA) to conform with the PPA changes. The proposed rule also would implement a PPA change for determining the present value of the accrued benefit under a statutory hybrid plan. Finally, the proposed rule would provide guidance on benefits payable under a statutory hybrid plan that terminates in a standard termination. The PBGC also announced that there will be no increase in the 2012 flat-rate premium for single- and multiemployer plans. For the 2012 plan year, the per-participant flat-rate premium for single-employer plans is USD and USD 9.00 for multiemployer plans (both unchanged from plan year 2011). The PBGC is required by law to adjust the premium rates for inflation each year based on changes in the national average wage index. The Canada Revenue Agency (CRA) has announced the maximum pensionable earnings for The maximum pensionable earnings under the Canada Pension Plan (CPP) are CAD 50,100, up from CAD 48,300 in Contribution rates remain unchanged for employees and employers at 4.95% and for the self-employed at 9.9%. The maximum employer and employee contribution is CAD 2,306.70, up from CAD 2, in 2011, and the maximum self-employed contribution is CAD 4,613.40, up from CAD 4, in The basic exemption amount remains unchanged at CAD 3,500. Amendments have been introduced to the Quebec (Canada) Pension Plan (QPP). The following amendments have been included in Bill 39, An Act to amend the Act respecting the Quebec Pension Plan and other legislative provisions: 1) the maximum retroactive retirement pension would be reduced from 60 to 12 months; Copyright 2011 Aon Hewitt 2

3 2) earnings subsequent to the end of the contributory period could be excluded from the calculation of the additional pension in the case of beneficiaries working and paying contributions under the Canada Pension Plan; 3) an individual would be able to qualify for a retirement pension at age 60 without having ceased working; 4) an additional amount for disability after retirement would be established, and an individual must have paid contributions for at least four of the last six years preceding a disability to be entitled to a disability pension starting at age 60; 5) the definition of child of the contributor would be amended with respect to the payment of an orphan s pension or a disabled contributor s child s pension; 6) the years of contribution to the Plan after payment of a retirement pension has begun could be taken into account in determining entitlement to death benefits; and 7) entitlement to death benefits and an orphan s pension would be increased. Employees in Chile may have to contribute more to their pension plan. The Ministry of Labor announced that it would commission a study to determine how to improve private pension fund benefits for retirees. Given recent market fluctuations and longer life expectancy, many retirees do not receive a minimum private pension that is sufficient to cover basic living expenses. The government is expected to examine whether it is feasible to increase contributions (currently 10% of pay up to 66 tax units per month) and/or expand the minimum contribution period. Asia The Australian government released draft bills under which superannuation contributions would increase from 9% to 12% and the age limit on contributions (age 70) would be abolished. Employers would be required to continue to contribute to an employee s superannuation account as long as he or she continued to work. The draft legislation also would abolish the 15% tax paid on superannuation contributions by individuals earning less than AUD 37,000, affecting an estimated 30% of workers. If passed, the changes would be effective July 1, In Japan, the Employee Pension Insurance Plan (EPIP) contribution ceiling may increase for high-income earners. The Welfare Ministry proposes to raise the monthly contribution ceiling from JPY 620,000 to JPY 1,210,000 for employees earning JPY million or more. The new ceiling would equal the statutory contribution ceiling for health insurance. The Ministry is expected to submit a draft bill to the Diet in A Family Court in Seoul (South Korea) recently ruled that a retirement annuity should be included in the property settlement of a divorce. Previously, the courts ruled that a retirement annuity could not be included in the property settlement since an accurate calculation of the amount was not possible. Rules for opting for annuity insurance in lieu of contributions to the Labor Protection Fund (LPF) in Taiwan have been relaxed. Previously, employers with 200 or more employees had the option of offering annuity insurance in lieu of contributing to the LPF, provided that the employer obtained the consent of the union or more than one-half of the employees if no union was present. Under the new rules, only approval at the labor management meeting is necessary. India s Insurance Regulatory and Development Authority (IRDA) has issued a final set of guidelines for pension products. Products must offer a defined benefit, either as a minimum return on all premiums paid during the term of the contract and disclosed at the time of purchase of the contract, or a guaranteed maturity benefit paid at the time of vesting, surrender, or death, also disclosed at time of purchase. Policyholders will have to use their balance, to the extent permitted under Income Tax Law, to purchase a life-time annuity or a single premium deferred pension plan. For employer-provided group pension products where the plan maintains a Copyright 2011 Aon Hewitt 3

4 superannuation fund rather than individual accounts, the defined benefit is applicable to the entire superannuation fund. Benefits accrued upon termination, retirement, or death are payable according to the employer s plan rules. Pension products may have insurance coverage for the duration of the policy. The sum of any rider premiums cannot exceed 15% of the premium paid for the pension policy, must be separately accounted for, and cannot be included in the calculation of the defined benefit. The guidelines are effective December 1, Products that do not meet the guidelines must be withdrawn from the market as of January 1, Malaysia s 2012 national budget includes new provisions on the tax treatment of contributions to private retirement schemes. Contributions to private retirement schemes or deferred annuities would be deductible up to MYR 3,000. The current MYR 6,000 deduction would then apply only to life insurance premiums or contributions to other authorized pension plans. Withdrawals from a private retirement scheme before the statutory retirement age or the maturity period would be subject to individual income tax rates. The current employer 19% deduction on voluntary contributions to the Employee Provident Fund would be extended to private retirement schemes. Europe In the United Kingdom, the Pensions Act 2011 received Royal Assent on November 3, The Act s main provisions, which in most cases will need to be brought into force by regulations, cover the following: The increase in State Pension Age (SPA), and other minor changes to state pensions Following amendment during its passage through Parliament, the Act provides that the SPA will increase to age 66 by October 2020, for both men and women; Automatic enrollment The earnings threshold (above which jobholders need to be autoenrolled) is increased, set initially at GBP 7,475 (the income tax personal allowance for 2011/12). The Act also provides for alternative self-certification arrangements for money purchase schemes to be set out in regulations; Indexation and revaluation, allowing for the switch from Retail Price Index (RPI) to the Consumer Price Index (CPI) Amendments allow schemes whose rules already index pensions in payment in line with RPI to continue to do so without needing to compare against CPI as well; Payment of surplus to the employer and the requirements of Section 251 of the Pensions Act 2004 The deadline for trustees to act is extended by five years from April 6, 2011 to April 6, Section 251 also is amended to make clear that it does not apply to, for example, schemes in windup or to administration payments made to an employer; Copyright 2011 Aon Hewitt 4

5 Definition of money purchase benefits The Act will change the definition of money purchase benefits. For example, in the Pension Schemes Act 1993, a benefit other than a pension in payment is defined as money purchase if its rate or amount is calculated solely by reference to assets which "must necessarily suffice for the purposes of its provision to or in respect of the member." A benefit which is a pension in payment is defined as Money Purchase if it is secured by an annuity contract or insurance policy made with an insurer, and before coming into payment, it met the Money Purchase definition. The Government intends to consult on regulations making consequential and transitional changes. (Refer to the October 2011 Update for additional information.); and Pension Protection Fund (PPF) and Guaranteed Minimum Pension (GMP) equalization Following earlier consultations, the PPF has confirmed its approach to calculating PPF compensation and FAS assistance to take account of GMP equalization. The PPF will undertake a six-month pilot project with selected schemes. This has no direct effect on schemes that are not entering the PPF (for which the GMP equalization method remains unclear). Also, the U.K. government plans to reduce Pension Protection Fund (PPF) administration and general levy rates by at least 25% and 12%, respectively. The general rate is charged on a per-member basis and is tapered according to the number of members in a scheme. Rates have not changed since 2008/2009. In the Netherlands, the unions, employers associations, and the parliament have approved the pension agreement. Under the agreement, the pension age will increase from age 65 to age 66 in 2020 and to age 67 in Thereafter, future increases will be a function of life expectancy. Employers and employees will be able to negotiate the transfer of their defined benefit pension plan risk to plan members. They can agree to a guaranteed nominal pension or a flexible pension depending on asset returns and longevity. The government must determine whether the transfer of accrued rights to the new system is possible. The latest agreement includes several additions to previous versions, notably: Abolition of life and employee savings schemes as of January 1, The scheme will remain active for employees with a balance of at least EUR 3,000 as of December 31, 2011; Introduction of a vitality scheme. Effective January 1, 2013, employees will be able to deposit a maximum EUR 20,000 in the vitality scheme (maximum annual deposit of EUR 5,000); and Introduction of a work bonus for employees over age 61. Effective January 1, 2013, employees who continue to work after age 61 will receive an employment bonus in the form of a tax rebate of up to EUR 2,350 per year. In France, the minimum legal retirement age may increase to age 62 in 2017 rather than Prime Minister Fillon announced the accelerated increase in a November 2011 speech on balancing public finances. The change is expected to reinforce pension reforms passed in 2010 and reduce the accumulated deficits of old age pension plans by EUR 4.4 billion between 2012 and Italy s Stability Law of 2012 includes a provision to raise the retirement age to age 67 by The Stability Law was approved by parliament on November 12, 2011 and published in the Official Gazette on November 14, It was passed to help the country through the current economic crisis. The Law also includes provisions to reduce the debt of local authorities, liberalize public services, promote the employment of women and apprentices, and Copyright 2011 Aon Hewitt 5

6 increase taxes on fuel. The process by which the retirement age will increase is expected to be published by the end of the year. The minimum interest rate for second-pillar pensions in Switzerland will be 1.5% in The government reduced the rate from 2%, following the recommendation of the occupational pension commission (BVG-Kommission). The Irish government plans to make changes to defined benefit plans. The Minister of Social Protection outlined the framework for the government s plans in late October A reformed funding standard would be introduced, requiring plans to have a risk reserve to protect them from future volatility. The change would be phased in over 11 years. The previous funding standard would be reinstated, and plans would have 3 years to meet this target. The revaluation rules for preserved benefits would change to ensure equity between active and deferred members. Also, the rules for benefit payments in the event the plan is in deficit would change to create a more equitable distribution of assets between active members, pensioners, and members who are deferring retirement. The Danish government will not ask parliament to limit contributions to lifelong annuity pensions. In October 2011, the government introduced plans to limit contributions to DKK 100,000. Following opposition from unions and the pension and insurance associations, the government decided to withdraw the limit on lifelong pensions (livsvarige livrenter). Instead, it plans to impose an annual DKK 50,000 ceiling on annuity pension plans (ratepensioner). Payroll contributions for retirement are scheduled to increase marginally in Finland, effective January 1, Employee contributions to the Employee Pension Plan (TyEL) will increase from 4.70% to 5.15%; the average employer contribution will increase from 17.10% to 17.35%. Contributions are based on employment income. In related news, the government announced that social security (KELA) pensions will increase by 3.8% and TyEL pensions by 3.6% in Pension increases are indexed to inflation and wages. Effective January 1, 2012, employers In Belgium with internally funded pension plans must include their plan information in the second-pillar pension plan database (DB2P). The requirement applies regardless of the number of employees covered by the plan. Currently, pension vehicles and insurance companies are required to include plan information in the database. The European Insurance and Occupational Pensions Authority (EIOPA) has published a consultation on its draft advice to the European Commission on the review of Directive 2003/41/EC the Institutional for Occupational Retirement Provision (IORP) Directive. The 517-page document is a response to EIOPA s first consultation, which was carried out in the summer, and a second consultation on the scope of the IORP directive. The document sets out EIOPA s response to a call for advice by the Commission on the scope of the IORP directive; it does not contain recommendations on any changes. Among the matters covered is the extent to which the legislative framework for IORPs should be similar to that for other financial institutions and products, in particular the Solvency II framework for insurance. The deadline for responses to the consultation is January 2, In the Czech Republic, the Chamber of Deputies overrode the Senate s veto of the government s pension reforms, as expected. Under the reforms, a voluntary second-pillar pension will be established. However, the government is considering delaying the implementation of the new pillar until 2013 or 2014 as a result of the Copyright 2011 Aon Hewitt 6

7 worsening European Union economy. Also, effective January 1, 2012, two separate ceilings will apply to social security and health care contributions. Currently, all contributions are based on six times the average annual wage. The ceiling for social security contributions will be based on four times the average annual wage. Employee contributions to the second-pillar pension will increase in Romania from 3.0% to 3.5% of gross pay, as of March The contribution rate was originally scheduled to increase to 3.5% in 2011; however, the government froze increases in 2009 as a result of the rising deficit in the public pension system. The retirement age may increase in Bulgaria. Currently, the retirement age is age 63 for males and age 60 for females. The Finance Minister indicated that the government will consider a gradual increase to age 65 for males and age 63 for females. The retirement age could begin to increase as early as next year. Employees in Russia may have the option to defer retirement. Among the pension reform proposals the government is considering is the option to allow employees to defer retirement for one to two years in exchange for a higher pension. The government does not expect to have a draft pension reform bill ready before the end of Middle East Debate continues over the retirement age for women in Israel. The Welfare, Labor, and Health Committee of the Likud has approved a draft law freezing the retirement age for women at age 62. The draft law would reverse previous legislation that has been gradually increasing the retirement age to age 64. The Finance Ministry opposes this draft law, arguing that the retirement age for women should gradually be increased to the retirement age for men age 67. Employers in the UAE may be required to contribute to a pension plan for expatriates. The pension plan would replace the current end-of-service gratuity, which is equal to 21 days pay for each of the first five years of service and 30 days pay for each year of service thereafter. Employers would be required to contribute 8% of pay to the pension program. Employees also would be expected to contribute; however, a projected contribution rate has not yet been published. * * * * For more information on the topic and countries in this newsletter, please refer to the Aon Hewitt Country Profiles eguide. You can learn more about the Country Profiles eguide here. Copyright 2011 Aon Hewitt 7

8 About Aon Hewitt Aon Hewitt is the global leader in human resource consulting and outsourcing solutions. The company partners with organizations to solve their most complex benefits, talent, and related financial challenges, and improve business performance. Aon Hewitt designs, implements, communicates, and administers a wide range of human capital, retirement, investment management, health care, compensation, and talent management strategies. With more than 29,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients and their employees. Copyright 2011 Aon Hewitt Inc. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt's preliminary analysis of publicly available information. The content of this document is made available on an as is basis, without warranty of any kind. Aon Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt reserves all rights to the content of this document. Copyright 2011 Aon Hewitt 8