International Pensions Guide

Transcription

1 International Pensions Guide

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3 Introduction Welcome to this second edition of our International Pensions Guide, which has been updated and this time also includes information about pension provision in the Netherlands and Malaysia (with thanks to our ASEAN + group member firm and Azmi & Associates for this contribution). How to provide pensions for the elderly has been a problem for businesses and governments for a millennia, and the solutions offered have varied widely between countries. As a result, the provision for the retirement of employees is organised and regulated across different jurisdictions in a wide variety of ways, which are often not particularly consistent with each other. The importance of caring for the elderly means that this is a highly regulated issue in many countries and legal requirements must always be considered on a national basis. In addition, the cost of an ageing population can render this an expensive area for any business, easily dwarfing other employee costs and at times threatening the cash flow of the business. Pension provision is a complex matter and the issues that arise for each country are numerous and varied. This guide draws out some general themes, comparing and contrasting issues between countries on the funding of pensions and benefit structures, employee rights and benefits, and the effect of events such as transactions and employer insolvency. Any business that wishes to adopt a reward strategy covering retirement provision across different jurisdictions should be aware of these issues, and of the need to understand the different impacts this will have on businesses across the globe. Mark Smith Head of Pensions

4 Contents Pension provision Pension funding Employer obligations to provide pensions Adjustment for cost of living increases Employer s right to change the pension Pensions and discrimination Employee influence on pension provision Pension of a departing employee Pension rights on employer insolvency Pensions on a corporate sale About Us Key contacts

5 Pension provision Pensions are provided by a wide range of institutions using a number of different methods. Classifying pensions so that it is clear what is being discussed is difficult, but the European Union ( EU ) describes three types of pension provision under three pillars to support old age: First Pillar: Second Pillar: Third Pillar: State-run pension systems which provide a basic income. Private pension plans by the employer, often also partially funded by the employee. Private individual pensions which are operated entirely by the individual. For the purpose of this guide, we focus on the second pillar; the private pension plans funded, at least in part, by the employer. Most countries also have at least some first pillar provision, but it is the second pillar that most affects businesses and their reward policies. The second pillar pensions are highly regulated and are longstanding and particularly well developed in countries such as Germany, Austria, the Netherlands and the UK. Similar provision is developing in countries such as Hungary, the Czech Republic and the Ukraine, with take up of such benefits slowly progressing. In Poland, for instance, as of 31 December 2015, only 1054 companies offered pensions, covering 2.4% of all employees in the country. Provision is slowly developing in China as well, in the form of enterprise annuities, which have only been formally and legally established since

6 Exactly what is provided varies greatly between countries. In the United Arab Emirates ( UAE ), second pillar pensions for ex-pats are provided by way of a lump sum payment on leaving service, intended to provide for retirement or the move to a new role. In Malaysia, private sector employers are required to contribute to a government-established fund that employees may use in part for retirement provision and part for medical expenses or financing a property purchase or education. In most other countries, the provision is by way of a pension that is paid out from retirement until death, providing some guaranteed income in old age. Where the benefit is provided as an ongoing pension, it will be in one of two forms: uu defined contribution, in which the pension provided depends on the contributions paid and the returns achieved on investments; uu defined benefit, where the pension is calculated on a formula usually related to the individual s salary and length of time in the plan. In certain countries, such as China, Singapore, the Czech Republic, Poland and Slovakia, the pensions provided are on a defined contribution basis only. In others, there is a choice between defined contribution and defined benefit, with the plan design being very much in the hands of the employer. 04

7 In Slovakia, the only pension available is by way of private insurance arrangements into which individuals and occasionally employers pay, similar to the Singaporean Supplementary Retirement Scheme, which is also operated largely by individuals. In France, there are mandatory pay-as-you-go plans that provide broad benefits, but also smaller top-up arrangements that are less common, but attempt to provide a pension that complements the larger pay-as-you-go pension and first pillar state pension. 05

8 Pension funding The funding of pensions is a very significant cost for businesses. Over recent years, particularly with defined benefit plans, the cost and unpredictability of pension funding has led many businesses to look for ways to limit or remove the pension cost, as it can severely damage profitability. Funding of defined contribution plans is simple the money is held in a fund and returns are added from investments. In countries such as Singapore, where the funds are held in a separate defined contribution arrangement, there are no funding complications and the funds are added to as the individual thinks appropriate. If a pension is provided on a defined benefit basis, it is generally the case that the employer is under an obligation to ensure that there are sufficient funds to provide the pension. It is this cost and obligation that has made pensions so expensive in recent years. The funding is often effected by an obligation of the employer to pay money into a separate fund. In the UK in order to obtain favourable tax treatment, a separate fund must be established under a trust structure, where legal ownership of the assets is with trustees. In this structure the employer is obliged to provide funding which is reviewed and agreed with the trustees, at least every three years. Similarly, in Hungary pensions must be funded through an institution for the provision of occupational pensions, which must be a public limited company either founded by the employer or a third party such as an insurer or bank. Many countries allow pensions to be funded through insurance companies, where the employer makes the contributions required by the insurer, and the insurer agrees to pay the pension on retirement. In France, for example, all top up pensions are provided in this way. 06

9 Although the second pillar pension schemes in the Netherlands are private schemes, these schemes are regulated by law. Both the pension funds and the insurance companies under the second pillar must comply with Dutch pension laws under supervision of the Dutch Central Bank. Whilst in Europe on average approximately 80% of all paid out pensions are funded through a pay-as-you-go system, distinctive for the funding of Dutch pensions is that almost half of all pensions are fully funded. In Germany, pensions are not required to have separate funding and a direct commitment to pay a pension from the assets of the employer is very common. In this situation, the pension of each individual is paid following their retirement from the assets of the employer itself. However, some German employers use an external vehicle to fund their pension obligation, such as an insurance company, an investment fund, a support fund or a contractual trust arrangement (which mimics the legal position of a UK trust) to which the employer makes contributions. The German model is replicated in many central European countries. In Austria, the pension may be provided by direct commitment or through an insurer. In the Ukraine, direct commitments are permitted, although most employers choose to use a Non-State Pension Fund, which is a non-profit pension vehicle, or alternatively an insurance company or a bank. 07

10 All businesses wish to understand the level of obligation they may have to fund pension benefits, but it is important to remember that such liabilities are generally difficult to measure accurately, because of the large number of assumptions that must be used in the calculation, such as future investment growth, future salaries and, importantly, life expectancy and thus the length of time for which the pension will be paid. The basis for calculating these varies greatly between countries and valuations of pension liabilities cannot be directly compared without advice. Conversely, because the pensions in the UAE are lump sum payments, the liability for them, which is not pre-funded, is much easier to accurately account for on the balance sheet. 08

11 Employer obligations to provide pensions Generally, there is no statutory obligation for employers to provide pensions to their employees, except the obligation to make social security contributions that cover state first pillar pensions. However, in many jurisdictions particularly across Europe, there are many collective bargaining arrangements that apply to certain employers which oblige the employer to provide a pension. The termination payment due on leaving service in the UAE for non- UAE nationals (who make up about 80% of the UAE s workforce) is compulsory. Discussion on establishing a compulsory full pension system for non-uae nationals has been ongoing for several years, but nothing has, as of yet, been announced. The UK has been phasing in a compulsory provision of pension to employees who will be automatically enrolled in a pension plan without their choice and stay in unless they choose to opt out. The employer must at a minimum contribute 1% of earnings for a 1% employee contribution to a money purchase arrangement, rising to a 3% contribution for a 5% employee contribution by April This is in addition to the National Insurance Contributions paid to fund the UK s first pillar provision. In Malaysia, private sector employers are required to contribute 12% of an employee s salary, with the employee contributing 11%. The contributions are paid into a government-established fund, but a proportion may be placed in certain approved externally-managed funds. 09

12 Adjustment for cost of living increases Pensions can easily be eroded by inflation in the cost of living. A pension that seemed valuable at 65 may be worth substantially less in real terms at 85, when the individual is usually too old to take any actions to supplement their income. Many countries have sought to legislate to ensure that pensions are increased in line with inflation. In Germany and Austria, the revaluation is triennial and must be put in place (trienially in Germany and annually in Austria) except in extraordinary circumstances such as financial distress, or if a lower increase was agreed when the plan was established. In Hungary, there is an obligation to increase the benefit from the date it is earned until the date of payment in line with certain factors such as price and wage increases. In the Netherlands the obligation to revalue pension annually is very common under compulsory sectoral pension funds, but is decreasing under pension insurances. The UK requires increases both to the pension up to payment and to the pension being paid. These only apply to the pension earned after a certain date and are subject to a cap, so that significant inflation would still reduce the real value of benefits being paid. 10

13 Employer s right to change the pension Generally, changes to a pension plan that affect employees require the agreement of employees or their representatives, and may be controlled in any event by a collective bargaining arrangement. Where the pension is provided with the assistance of a third party, the agreement of that third party (such as the trustee and the investment manager in China, the non-state pension fund s founders in the Ukraine or the trustees in the UK) must be obtained, and that agreement is not necessarily forthcoming. Many countries, such as Germany, the Netherlands and the UK, have restrictions that ensure that benefits already earned cannot be reduced and in practice it is difficult to amend benefits for existing employees for the future in many jurisdictions, such as Hungary. Amendment of benefits in Austria, where there is a collective agreement, requires that that collective agreement permits the change, there is consultation with the works council and that a compelling economic reason exists. To close the plan down all together requires that the compelling economic reason be that the economic situation has substantially deteriorated so that continuing to provide the promised benefits endangers the continued existence of the employer. The tests in Germany are similar. In France, changes to pensions depend on how the pension provision was first agreed upon with the employees. For example, if it is provided under a collective agreement the changes must be agreed in line with the modification rules of the collective agreement. 11

14 Similarly, if it was initially agreed following a referendum of the workforce, the amendment requires the agreement of the majority of the workforce. If the employer had provided the pension unilaterally, it may amend so long as employees and their representatives have been given sufficient information and time to consider the changes. In Poland, there is provision specifically allowing the employer to change pensions in the short term or to deal with economic distress. The employer may reduce or suspend contributions unilaterally for a maximum period of three months in any 12 months (or up to six months in any 12 months if the plan rules provide). Employees consent is required for a longer suspension. Pensions and discrimination Laws that apply in a jurisdiction about discrimination will also apply to the provision of pensions. Within the EU, there are requirements to comply with the Equal Treatment Directive 2006/54/EC which prohibits discrimination in the employment sphere on the grounds of age, sex, disability, sexual orientation or race. In France for instance, any reference to such factors in the founding documentation of the plan renders it void. In addition, the case of Test-Achats in 2011 in front of the European Court of Justice held that insurance products (such as pension annuities) must not discriminate on the grounds of sex, and so may not provide a better annuity rate to men who have, on average, a slightly lower life expectancy than women. In the Netherlands, where the state pension age is gradually increasing from 65 to 67 (in 2021), it is becoming more and more unattractive as far as taxes are concerned for the employer to cooperate with a prepension scheme and on top of that such arrangements with employees in general are voidable. Most pension schemes in the Netherlands have an admission age of 21, irrespective of the type of employment contract. 12

15 Discrimination on the grounds of age is a particularly difficult issue for pensions, which provide benefits on the basis of age. In the UK, the government has allowed for a number of permitted exceptions to age discrimination requirements particularly for pensions. In Germany, the issue is still one of significant debate. Historically, most UK plans have had different retirement ages for men and women, mirroring the then differing state pension ages. Following a case in 1990 of the Court of Justice of the EU, where it was decided that pensions were pay and that these different retirement ages were therefore contrary to the equal pay article of the Treaty of Rome, UK pension plans have had to provide the same retirement age for pensions earned since 1990, and many are still struggling to ensure compliance. In some countries, discrimination is more prescriptive. For instance, in the Ukraine, a pension may either provide the same contribution rate for all employees, or may be based on age or length of service. In Austria, differentials in provision between employees must be objectively justified. 13

16 Employee influence on pension provision The degree to which employees can influence pension provision varies significantly. In countries such as Singapore where the provision is under the employee s control they are, subject to legislation, able to direct their pension entirely. In many countries, control is through the collective bargaining arrangement or other union agreement. For instance, in the Netherlands the articles of association of (both industry-wide and company) pension funds often contain provisions on a number of minimum employee representatives in the composition of the board of the pension fund, which representatives are also protected by a prohibition of termination of the employment agreement. In the Netherlands as well as in Austria and Germany, control is often weakest where there is a third party holding the pension, such as the trustees that operate in China and in the UK. However, in the UK, legislation requires that at least one third of trustees (or, if the trustee is a company, a third of its directors) are nominated and voted for by the employees who are earning benefits in the plan and those receiving pensions. The process may also include ex-employees who have benefits in the plan, if the trustees and employer choose to include them. This allows some employee influence. However, in practice it can be difficult to find volunteers to be trustees amongst employees, and it is therefore quite common for the places not to be taken or to be taken by management who are the only candidates. 14

17 Pension of a departing employee What happens to a pension when an employee leaves service can vary significantly. Whereas in some countries the employee has an absolute right to control their benefit once they leave, in others the benefit may be lost as a result of the departure. The first issue is whether the pension vests in the employee, that is, whether they retain a right to receive it. Pensions vest immediately in a number of jurisdictions, such as China, Singapore, the UAE, the Czech Republic, Poland, Slovakia, the Netherlands and the Ukraine. In the UK, pensions vest after months 30 days (defined contribution plans) or up to two years (defined benefit plans), and in Hungary, after an agreed period of up to three years. In Germany and Austria, the vesting period is five years (although it may not vest at all for a direct pension) and in Germany the employee must be at least 30. In France, vesting depends on the arrangement, with some arrangements vesting immediately and some (such as defined benefit arrangements) not vesting at all and being lost when the employee departs. The treatment of the vested pension also varies. In the UAE, it becomes immediately payable to the individual, but in most jurisdictions it will stay in the plan or transfer to the new employer. In the UK, the Ukraine, Austria, Hungary, Poland, the Netherlands and France the employee can choose whether or not to transfer their pension to a new scheme, but in countries where the benefit is largely held with insurers, such as the Czech Republic and Slovakia, the pension stays in its existing arrangement. In Germany, the agreement of the old and new employers is required for the transfer. In China, where pension provision is a new phenomenon, this is one area that is still to be more fully regulated. 15

18 Pension rights on employer insolvency The effect of the insolvency of the employer on the pension fund can be very dramatic. If an insolvency means that employees lose their jobs, they will of course be concerned that they do not lose their pensions as well. Insolvency is much less of a concern if the pension is funded separately from the employer. In the UK, Singapore, China, the Czech Republic, Poland, Slovakia, the Ukraine, the Netherlands and France the pension is held separately and therefore should be protected from the insolvency. In these cases, the creditors of the employer cannot attack the fund. However, if the pension is provided on a defined benefit basis, it may be underfunded and therefore members may receive a reduced pension on insolvency. In the UK, the Pension Protection Fund has been established to secure pensions up to a limit when the employer has become insolvent and the pension is underfunded. The Netherlands has specific legislation that makes it possible to hold the directors of the employer personally liable for the underfunding. The issue becomes more acute with pensions that may not be separately funded. Germany operates a National Pension Assurance Fund funded by employers, that provides pensions up to a limit for employees who have lost their pension in the insolvency of the employer. 24 months worth of pension benefits are guaranteed in Austria under the Insolvency Remuneration Fund. In Hungary, a limited amount is available from the Wage Guarantee Fund. 16

19 A number of countries provide some form of preference to pensions and employee rights in the insolvency of the employer. In Austria, 50% or more of an employee s pension rights can be privileged creditors for a direct pension. In France, there is preferential treatment of employee creditors, as there is in the UK. The UK in addition has a Pensions Regulator with the power, in certain circumstances, to impose liability for the pension obligations on other group companies, contributing shareholders and directors of plan employers. 17

20 Pensions on a corporate sale In most jurisdictions, a sale of a company transfers the pensions right with the company so that, in fact, there is no change to the pension provided and a purchaser s sole concern is to fully understand the pension obligation. In certain jurisdictions such as Poland where provision of the pension is voluntary, the new owner may choose to end the arrangement. In the UK, the pension arrangement may be connected to a group of companies and the effect of the sale would be that the company leaves the pension arrangement and be liable for an immediate payment of its liabilities. On a business and assets sale, the situation is different. In the UAE, the pension payment would be immediately due as employment will have terminated. In countries within the EU, employment will automatically transfer and pension rights may transfer too, most notably in Germany and Poland. In other EU countries, such as the Netherlands, the right may not transfer automatically, but if a collective bargaining arrangement exists that does transfer, the purchaser will be obliged to provide the same pension. In France, the employee s right to the existing pension continues but the right to the new pension with the new employer may also arise, resulting for a short time in the employee having both plans in operation. In countries outside the EU, the employment does not continue on an asset sale and the pension arrangement does not need to be continued. However, in practice arrangements are often continued if the employees are taken on by the new employer, in order to ensure the employees accept their new role. 18

21 Taylor Wessing About Us Taylor Wessing is a leading international law firm in Europe, Asia and the Middle East. Our clients include pension scheme trustees and managers, leading financial institutions, major corporations, public sector bodies and wealthy individuals and families. What makes us different is our forward-thinking approach to serving clients. We think creatively about business issues and are constantly looking for new and better ways to add value. By doing this, we come up with truly innovative solutions that help to grow our clients businesses. Europe Austria: Vienna Klagenfurt Americas United States: New York* Menlo Park* Belgium: Brussels Netherlands: Amsterdam Eindhoven Czech Republic: Prague Brno Poland: Warsaw France: Paris Slovakia: Bratislava Germany: Berlin Düsseldorf Frankfurt Hamburg Munich Ukraine: Kiev Hungary: Budapest London Tech City Cambridge United Kingdom: London Asia China: Beijing Shanghai Hong Kong: Hong Kong Indonesia: Jakarta Singapore: Singapore South Korea: Seoul Vietnam: Ho Chi Minh City Hanoi Middle East Saudi Arabia: Riyadh Jeddah UAE: Dubai Taylor Wessing locations: Office Associated firm *Representative office Taylor Wessing s international offices offer clients integrated international solutions, but are established as distinct legal entities registered as separate law practices in their jurisdictions. For further information about our offices and the regulatory regimes that apply to them, please refer to and 19

22 Key contacts Mark Smith Partner, London +44 (0) Sascha R. Grosjean Partner, Düsseldorf +49 (0) Dr. Jan Kern Partner, Hamburg Wolfgang Kapek Partner, Vienna +43 (0) Markus Asshoff Partner, Paris +33 (0) Brigitte Sammer Partner, Vienna b.sammer@taylorwessing.com Bart Hunnekens Counsel, Eindhoven b.hunnekens@taylorwessing.com Ralph Koppitz Partner, Shanghai +86 (21) r.koppitz@taylorwessing.com Kaylee Kwok (RHTLaw Taylor Wessing) Partner, Singapore kaylee.kwok@rhtlawtaylorwessing.com Thenji Macanda Associate, Dubai t.macanda@taylorwessing.com 20

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24 Europe > Middle East > Asia taylorwessing.com Taylor Wessing LLP 2017 This publication is intended for general public guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice. Taylor Wessing s international offices offer clients integrated international solutions. Though our offices are established as distinct legal entities and registered as separate law practices, we are able to help our clients succeed by providing clear and precise solutions with high-level legal and commercial insights. For further information about our offices and the regulatory regimes that apply to them, please refer to taylorwessing.com/regulatory.html and rhtlawtaylorwessing.com. TW_001200_09.17