Global Retirement Update

Transcription

1 Global Retirement Update November 2012 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 India The Ministry of Labor and Employment issued a notification clarifying when expatriate employees can withdraw provident fund contributions. Since 2010, expatriate employees ( international workers ) have been permitted to withdraw their accumulated provident fund balance upon retirement at age 58, except under specified circumstances. Expatriates from countries with a social security totalization agreement with India can withdraw funds according to the terms of the agreement. However, most of the agreements do not address the withdrawal of the provident fund balance. Under the latest notification, expatriates from countries covered by a social security totalization agreement may withdraw their fund balance when their employment with a company covered by the Employees Provident Fund Act ends. The amount will be payable through their bank account or via their employer. Recent Developments Africa The Durban (South Africa) Labor Court recently ruled that employment contracts should include a provision on the normal retirement age. The case involved the dismissal of an employee at age 64; the employee was not a member of the employer s provident/pension fund. The court ruled that the termination of employment on the basis of age was unfair, and employers cannot unilaterally impose a retirement age. If the employment contact does not address the retirement age and an employee is not a member of the employer s provident/pension fund, the employer must be able to show that other employees in a similar position have all retired at the same age. Copyright 2012 Aon Hewitt 1

2 Americas The U.S. Social Security Administration released the 2013 indexed figures. There will be a 1.7% cost-of-living adjustment (COLA) for Some other changes that take effect in January of each year are based on the increase in average wages, as noted below. Wage Base: The 2013 social security wage base is USD 113,700 (the 2012 amount was USD 110,100); FICA/Medicare Tax Rate: The FICA tax rate remains at 7.65%: 6.2% for social security, and 1.45% for Medicare combined; Maximum Monthly Benefit: For someone retiring at full retirement age in 2013, the maximum benefit is USD 2,533 (the 2012 amount was USD 2,513); and Annual Earnings Test Limit: For individuals under full retirement age, the annual earnings test limit is USD 15,120 (the 2012 amount was USD 14,640). For individuals attaining full retirement age in 2013, the annual earnings test limit for the months prior to attaining full retirement age is USD 40,080 (the 2012 amount was USD 38,880). There is no annual earnings test for individuals who have attained full retirement age. The U.S. Internal Revenue Service (IRS) announced the 2013 official indexed figures for retirement and other employee benefit plans. Many of the pension plan limitations will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged. Following are the official limits of most interest to large and medium employers, as well as the official 2013 key employee pay thresholds for top-heavy plans. Section 402(g) annual dollar limit for pretax contributions to Section 401(k), 403(b), and 457 plans: USD 17,500 (the 2012 limit was USD 17,000); Section 414(v) annual dollar limit on catch-up contributions for age 50 and over remains unchanged: USD 5,500; Section 414(q) pay threshold for highly compensated employees remains unchanged from 2012: USD 115,000; Section 415 limit for defined benefit plans: USD 205,000 (the 2012 limit was USD 200,000); Section 415 limit for defined contribution plans: USD 51,000 (the 2012 limit was USD 50,000); Section 401(a)(17) recognizable pay limit: USD 255,000 (the 2012 limit was USD 250,000); and Section 416 pay threshold for key employees in a top-heavy plan remains unchanged from 2012: USD 165,000. The U.S. Pension Benefit Guaranty Corporation (PBGC) announced the 2013 flat-rate premiums for single-employer and multi-employer plans. For the 2013 plan year, the per-participant flat-rate premium for single-employer plans is USD and USD for multi-employer plans. (The 2012 per-participant flat-rate Copyright 2012 Aon Hewitt 2

3 premium for single-employer plans was USD and USD 9.00 for multi-employer plans.) Adjustments to the premium rates are based upon inflation and changes resulting from the Moving Ahead for Progress in the 21st Century Act (MAP-21) and the national average wage index. The U.S. IRS and Treasury have released final regulations on the prohibited payment option under single-employer defined benefit plans of plan sponsors in bankruptcy. The final regulations provide guidance under the anti-cutback rules of Section 411(d)(6) of the Internal Revenue Code, which generally prohibit plan amendments eliminating or reducing accrued benefits, early retirement benefits, retirement-type subsidies, and optional forms of benefit under qualified retirement plans. These regulations provide an additional limited exception to the anti-cutback rules to permit a plan sponsor that is a debtor in a bankruptcy proceeding to amend its single-employer defined benefit plan to eliminate a single-sum distribution option (or other optional form of benefit providing for accelerated payments) under the plan if certain specified conditions are satisfied. The regulations affect administrators, employers, participants, and beneficiaries of such a plan. The regulations became effective on November 8, The regulations apply to plan amendments that were adopted and effective after November 8, The Canada Revenue Agency (CRA) has announced the 2013 maximum pensionable earnings and other limits. Maximum pensionable earnings under the Canada Pension Plan will be CAD 51,100, up from CAD 50,100 in The basic exemption amount for 2013 remains CAD 3,500. Employee and employer contribution rates remain unchanged, at 4.95%, and the self-employed contribution rate remains unchanged, at 9.9%. The maximum employer and employee contribution will be CAD 2,356.20, up from CAD 2, in 2012, and the maximum self-employed contribution will be CAD 4,712.40, up from CAD 4, in The Registered Plans Directorate also has announced updated 2013 rates for the Money Purchase limit, Deferred Profit Sharing Plan limit, Defined Benefit limit, and the 2014 Registered Retirement Savings Plan limit. The Canadian federal government is seeking stakeholder input on its second and final set of Pooled Registered Pension Plans (PRPP). Topics addressed include: general disclosure requirements; exceptions to locking-in (what constitutes disability and nonresidence); transfer of funds from a PRPP to prescribed vehicles, restrictions on fund transfers, and the purchase of life annuities; variable payments, including factors determining the maximum payment for members between age 55 and age 90, and notification requirements for administrators; preparation of termination reports by an actuary, accountant, or other professional advisor; electronic communications; remittance requirements for employee and employer contributions; and the process for providing notices of objection and appeals in cases involving revocation of a plan s registration. In Ontario (Canada), filing extension and 2009 funding relief measures have been extended. Regulation 909 has been amended to extend the filing date of the first report for which the valuation date is on or after September 30, 2011 and before May 31, 2012, from December 31, 2012 to February 28, In 2009, the government made 3 temporary relief options available: Option 1 deferral by up to 1 year the start of special payments to liquidate any new going concern unfunded liability or solvency deficiency; Option 2 consolidation of existing solvency special payments; and Option 3 extension of the 5-year amortization period to a maximum of 10 years. These options have now been extended, as follows: Option 1 is now permanent and generally applicable for all plans, with no specific election or notice required; Option 2 is reinstated as new Option 4, with the continued requirement of member notification; Option 3 is reinstated as new Option 5, with the continued requirements of Copyright 2012 Aon Hewitt 3

4 consent (from members, retired members, and former members) and progress reports; and new Options 4 and 5 are temporary provisions and apply to an initial report filed under section 13 or 14 for which the valuation date is on or after September 30, 2011 and before September 30, In addition, the Financial Services Commission of Ontario has advised that plan administrators can elect under Option 4 to consolidate existing solvency special payments into a new 5-year schedule, including special payments consolidated under Option 2, but excluding special payments which were extended to a maximum of 10 years under Option 3 and also excluding special payments required only on plan windup pursuant to section 75 of the Pension Benefits Act. Also, an election under Option 5 will only apply to new solvency deficiencies revealed in the new report, so that if a plan administrator has elected to extend solvency special payments under both the 2009 and 2012 measures, each solvency deficiency would be liquidated over a different (but overlapping) 10-year period. The Canadian federal government will implement measures proposed in Budget 2010 relating to the taxation of nonresident trusts and their beneficiaries and Canadian taxpayers who hold interests in offshore investment fund property. According to the Explanatory Notes Part I, an exempt foreign trust includes certain foreign trusts established to provide benefits with respect to services provided by employees or former employees, and certain trusteed foreign pension plans or similar arrangements. An exempt person includes certain federal or provincial pension or workers compensation administrators and their wholly owned intermediaries. Explanatory Notes Part V outlines the following changes to the Income Tax Act and regulations relating to pensions: 1) lump-sum amounts and pension repayments; 2) credits for Employment Insurance and Canada Pension Plan contributions and Quebec Parental Insurance Plan premiums; 3) conditions that a profit sharing plan must satisfy to be registered as a Deferred Profit Sharing Plan (DPSP); 4) relief for excess contributions; 5) transfers to an Registered Pension Plan (RPP), Registered Retirement Savings Plan, Registered Retirement Income Fund (RRIF) or DPSP, including premium refunds; 6) default or failure under the terms of a letter of credit; 7) deductibility of eligible RPP contributions relating to the purchase of a business, and RPP issues related to previous employment, predecessor employers, and business re-organizations; 8) rules applicable to the transfer of member contributions under a defined benefit provision of an RPP; 9) tax-exempt pension investment corporations; 10) changes in the definition of pension income to allow money purchase RPPs to provide benefits in the same manner as under a RRIF, to ensure they qualify for the pension credit and pension income splitting; 11) joint liability for tax on split income; 12) the interest exemption for foreign pension entities and other tax-exempt entities; 13) prescribed annuity contracts; and 14) changes to the prohibited investment rules for multi-employer plans. Puerto Rico s Treasury Department has released key limits on retirement plans for Elective deferrals for Puerto Rico only qualified plans and for dual qualified plans will increase from USD 13,000 to USD 15,000 and from USD 17,000 to USD 17,500, respectively. Catch-up contributions will remain the same for both plans USD 1,500. The annual limit on compensation will increase from USD 250,000 to USD 255,000. The annual benefit limit on defined benefit and defined contribution plans will increase from USD 200,000 to USD 205,000 and from USD 50,000 to USD 51,000, respectively. The threshold for highly compensated employees remains USD 115,000. Copyright 2012 Aon Hewitt 4

5 The Mexican tax authority has issued changes to fiscal regulations affecting pension plans. Similar to the changes issued by the Commission on Retirement Savings (CONSAR) (refer to the October 2012 Global Retirement Update), employers with pension plans must complete new registration forms with the following information employee names, employee status, federal tax identifiers, social security numbers, and personal identification numbers (clave única de registro de población, CURP). The tax authority must be informed of the employees participating in the plan on an annual basis. As the result of another reform, employees with personal retirement plans can now change from one pension fund provider to another without paying taxes. Also, pensioners must inform their employer about all pension income received in order to have their taxes calculated. In Brazil, the legislature is expected to vote on a measure that would affect early retirement benefits. Currently, individuals who first enrolled in the social security system after November 29, 1999 may opt to have their benefits calculated according to the Fator Previdencíarío formula, which is based on contribution rate, contribution period, age, and life expectancy. The monthly benefit equals the Fator Previdencíarío times 70% of the benefit wage. Under the proposals that are up for review, individuals would be permitted to retire when the total of their age and length of service equaled 95 (males) and 85 (females) or when the total equaled 105 (males) and 95 (females). Under the Colombian government s 2013 budget, the tax treatment of contributions to voluntary pension funds may change. Contributions up to 30% of employment or general income up to 3,800 tax units would be deductible only if the contributions are not withdrawn for at least 20 years (currently, 5 years). Pensions that exceed COP 10 million per year would be subject to a 5% tax (currently, these pensions are exempt from tax). Also, the government would introduce a new top marginal tax rate and a new minimum tax. As the result of the new pension reform law, pension fund administrators (AFPs) in Peru have lowered their commissions. In a pilot tender held in September, the AFP Prima offered the lowest commission, and all new entrants in the AFP system between October and December 2012 will be assigned to Prima. New members may move to another AFP that offers a different fee or higher rate of return for one year. As a result of the competition introduced by the tender, all four AFPs lowered their commissions, which now range from 1.60% (Prima) to 2.10% (Profuturo). The government will hold the first full tender at the end of December 2012, and tenders will be held every two years thereafter. The AFP that wins the tender must maintain that fee for two years. The Nicaraguan government proposes to raise the retirement age and the number of contributions needed for an old age pension. The retirement age would increase from age 60 to age 65, and the number of contributions needed for a full old age pension would increase from 750 to 1,500. The proposed changes are incorporated into a new economic agreement that the government has submitted to the International Monetary Fund for review. Asia In Japan, the ruling parties have agreed to cut pension benefits as of October 1, Pension benefits are indexed to inflation. Current benefits are 2.5% higher than they should be following two years of deflation. Under the agreement, benefits would be reduced by 1.0% in October 2013, 1.0% in April 2014, and 0.5% in April 2015 to eliminate the overpayment. The Diet is expected to approve legislation providing for the reduction. Japan s Ministry of Health and Labor has established an expert panel to develop a plan to dissolve the Employees Pension Insurance Plan (EPIP). The EPIP (kosie nenkin kikin) provides pay-related benefits that supplement the National Pension Plan. The EPIP also provides limited flat-rate benefits. Employers and sole Copyright 2012 Aon Hewitt 5

6 proprietors with five or more full-time employees and all corporations, including employers (legal directors and auditors) and employees, must participate in the EPIP. This includes branches and sales offices of foreign companies that are treated as incorporated businesses and representative offices that are treated as sole proprietorships. (Part-time employees also must be covered if their working hours are 75% or more of the working hours of full-time employees.) Employers with at least 1,000 employees may contract out of the EPIP under certain conditions. Since most of the funds in the EPIP are in poor financial condition and there is an estimated JPY 1.11 trillion shortfall in reserves, the Ministry wants to phase out the system over a 10-year period. Funds that have a reserve shortfall would be required to dissolve themselves. Member firms of an EPIP would not be required to cover public pension reserve shortfalls upon dissolution. Funds with shortfalls would be permitted to pay reduced benefits or pay benefits over an extended period. Funds that do not face shortfalls would be permitted to convert to a defined benefit or defined contribution fund. Europe In the United Kingdom, the draft Occupational Pension Schemes (Miscellaneous Amendments No 2) Regulations 2013 were published for consultation. These regulations would make technical changes, from April 6, 2013, in three areas: Bridging pensions Trustees would be given the power to amend scheme rules to take account of increases in state pension age beyond age 65 when setting the duration of temporary bridging pensions. Current taxation legislation requires bridging pensions to cease on or before age 65 but this is due to be changed; Cash Equivalent Transfer Values (CETVs) An exemption from the requirement to offer cash equivalent transfer values applies to pre-january 1, 1986 leavers in schemes revaluing deferred pensions in line with uncapped Retail Price Index (RPI) increases. This exemption would be extended to apply also to schemes revaluing deferred pensions in line with uncapped Consumer Price Index (CPI) increases; and Pension credit benefits The rules relating to the indexation of pension credits benefits arising on divorce would be amended in line with the amendments that have been made to the indexation of members benefits. This would essentially require CPI-based increases, but allow schemes to continue using RPI-based increases as an alternative. The U.K. Department of Work and Pensions (DWP) has issued a call for evidence on the impact of two constraints that the National Employment Savings Trust (NEST) operates under the contribution limit (GBP 4,400 for 2012) and the ban on most transfers in and out of the scheme. These restrictions were introduced in order to minimize any distortion in the market (in consideration of its public service obligation, NEST had benefited from state aid) but were due to be reviewed in However, in March 2012, the Work and Pensions Select Committee published a report recommending that the restrictions be removed as a matter of urgency. The government considered the report but did not find the evidence that the restrictions were acting as a barrier to be conclusive. Therefore, it has launched the consultation to inform its thinking. Copyright 2012 Aon Hewitt 6

7 A major area on which the government will need to reach a conclusion is whether the restrictions will result in consumer detriment because employers will be discouraged from using NEST as opposed to another auto-enrollment scheme, and the same employers will not have access to suitable low-cost alternative provisions. The government also is interested in how the restrictions on transfers in and out of NEST will impact the proposed pot follows member solution to the perceived problem of fragmented benefits and dealing with small pots. The consultation closes on January 28, A government response is expected in spring The U.K. Office of National Statistics has opened a consultation on changes to the Retail Price Index (RPI) that could result in future RPI inflation moving closer to the (generally lower) Consumer Price Index (CPI) measure of inflation. The four options presented are: 1) no change to current calculation methodology; 2) change the relevant averaging methodology in the clothing sector (where the differences between RPI and CPI are largest); 3) change the relevant averaging methodology in all areas that use it; and 4) fully align the formulae for calculating RPI and CPI. The aim is that any changes to RPI would be introduced and effective from February 2013 (i.e., the index figure published in March 2013). This consultation proposes that the other differences between RPI and CPI (such as their coverage) be left unchanged. The Bank of England will need to be consulted on whether any proposal to change the basic calculation of RPI would be materially detrimental to the interests of holders of relevant index-linked gilts. The Office for National Statistics also has announced that a new additional measure of CPI will be launched, which includes owner occupiers housing (OOH) costs. The new index will initially be known as CPIH, and will measure OOH costs by looking at changes in rental prices to measure the costs of owning, living in, and maintaining a property. CPIH will be introduced in March 2013, at the same time as the annual CPI/RPI basket of goods and services review. The U.K. s DWP is relaunching Combined Pension Statements (previously called Combined Pension Forecasts), following suspension due to technical updates to allow for the increase in State Pension Age. The Combined Pension Statement service allows employers (and pension providers) to include State Pension information when they give employees details of their workplace or private pensions, for example in annual benefit statements. The service remains a voluntary one; employers and pension providers are free to choose whether or not to take part. The Pensions Act 2004 included a regulation-making power to require trustees to provide combined (state and private) pension information to their members, but these powers have never been brought into force. As promised in the U.K. s 2012 budget, a draft annual allowance order has been released, which makes technical changes to the Pension Input Amount used for calculating a member s liability to the Annual Allowance charge in some circumstances. The draft legislation also amends the requirements where a member coming up to retirement wants to elect for his scheme to pay the Annual Allowance charge. There also is a suggestion that further draft regulations will soon be issued to cover provisions for a reduction in the scheme pension as a result of a scheme paying a member s Annual Allowance charge. At the end of October 2012, the German Bundestag voted to reduce the statutory pension contribution from 19.6% to 18.9%; this contribution finances old age, survivors, and disability benefits. The contribution is divided evenly between employers and employees. It is assessed on pay up to a specified ceiling, which differs for West Copyright 2012 Aon Hewitt 7

8 and East Germany. Opposition parties are concerned that the reduction could endanger the stability of the system and support instituting a buffer instead. The Building Bridges coalition agreement signed by the Dutch PvdA and VVD political parties includes provisions affecting the taxation of pension income. Under the agreement, second- and third-pillar pension income equal to or exceeding EUR 100,000 would no longer receive a tax credit. Also, the maximum annual accrual rate would be reduced by 0.4%. Hence, a tax credit would be applicable only to annual accruals up to a maximum of 1.75% of pensionable salary. Employers in Belgium with occupational pension plans must make certain that their plan is registered with Sigedis or it will not be eligible for tax deductions. Sigedis is an organization that is responsible for the collection of data on occupational pension plans. Any plan not registered with Sigedis as of January 1, 2013 will be denied tax deductions. A reduction in tax relief on pension contributions is likely to be included in the 2013 Irish budget. The government rejected a recommendation by the troika (European Commission, European Central Bank, and International Monetary Fund) last year to reduce tax relief on pensions from 41% to 20%. The Finance Minister informed the parliament that the troika has raised the issue of pension tax relief again. The Minister of Social Protection has stated that an option would be to keep the current rate of relief, but cap it so that individuals would be permitted to save for an annual pension of EUR 60,000. It is not yet known when action will be taken. Greece s latest austerity package, narrowly passed by the parliament, raises the retirement age and lowers pension benefits. Effective January 1, 2013, the retirement age increases from age 65 to age 67. Pension benefits will be cut by 25%, and public-sector pension bonuses will be eliminated. The rules for survivors pensions will be tightened. The Portuguese parliament passed the government s 2013 budget bill, which provisions affecting the taxation of pensions. Pension income will be subject to a 3.5% to 10% tax. An additional 15% tax will be levied on high-income pensions (between EUR 5,030 and EUR 7,454 per month), and a 40% tax will be levied on pensions exceeding EUR 7,454 per month. The Spanish government proposes to tighten early retirement eligibility requirements. The government recently proposed to the parliament and social partners (unions and employers associations) that early retirement be delayed until an employee reaches age 63 (currently age 61), and the number of contribution years increase from 30 to 33. The government argues that the changes are necessary to make the social security system sustainable. The tax-favorable treatment of contributions to voluntary pension funds may change in Hungary in Income derived from retirement savings accounts qualifies for favorable tax treatment (10% tax) if funds are held for at least 3 years. Under pending changes to the tax code, individuals would be required to hold the funds for at least 10 years, and payments made due to disability would not be tax exempt. The Czech parliament overrode President Klaus veto of the second-pillar pension system. For those who choose to participate, 3% of the first-pillar contribution will be transferred to their second-pillar account if they agree to contribute an additional 2% of pay. Once an employee chooses to join the second pillar, his or her decision is irrevocable. Pension companies must offer four funds that vary by risk. The override also includes an increase in Copyright 2012 Aon Hewitt 8

9 the Value Added Tax to make up for the reduced contributions to the first pillar. The second pillar will begin operating in Individuals who lose their job shortly before reaching retirement age will be eligible for an early retirement pension in the Czech Republic. Individuals must be able to withdraw 30% of the average national wage from their third-pillar account for a period of three years. Currently, this amounts to CZK 8,000 per year. Individuals cannot retire more than five years before reaching the normal retirement age. The old age pension will not be reduced, and the government will pay for health insurance. The changes are effective January 1, The Slovenian government has approved a proposal that would increase the retirement age. The retirement age for a full old age pension would increase to age 65 for both males and females. However, the retirement age for females with children would be reduced to age 62 with 38 years service and age 60 with 40 years service. The early retirement age would increase to age 60 with 40 years service. Employees who deferred retirement would be entitled to a 20% pension bonus. The cabinet has adopted the proposal; it is not yet known when legislation will be sent to the parliament for review. In Poland, the government plans to increase contributions to the mandatory open pension funds in Employers and employees each contribute 9.76% of pay up to 30 projected average monthly salaries in the calendar year; a portion of the employer contribution is directed to a second-pillar fund. As of May 1, 2011, theemployer contribution to the second pillar was reduced from 7.3% to 2.3%. The government has pledged to gradually increase this contribution. Effective January 1, 2013, 2.8% of the employer contribution will be diverted to the second pillar. Middle East The World Bank recommends that the UAE government set up a pension system for expatriate employees. The World Bank proposes three models a retirement savings account; a lump-sum payment based on length of service; and a mobility savings plan that would allow expatriates to withdraw savings while extending their visa and looking for a new job. In related news, the General Authority for Pensions and Social Security is reviewing a recommendation to lower the retirement age in order to facilitate the inclusion of young employees in the labor market. * * * * 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 2012 Aon Hewitt 9

10 About Aon Hewitt Aon Hewitt is the global leader in human resource 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. For more information on Aon Hewitt, please visit Copyright 2012 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 2012 Aon Hewitt 10