Occupational Pension Arrangements for Researchers in the EEA

Transcription

1 Occupational Pension Arrangements for Researchers in the EEA 1st Workshop Brussels, 4 April 2011 Leonardo Sforza, Research Europe & EU Affairs Yves Corne, International Benefits Thierry Verkest, Retirement and Financial Management

2 Today Focus Project Goals and Road Map Occupational Pension Regimes IORP EEA Map of Current Restrictions for Membership Lunch Break Benefit Design Models Benchmark of Possible Country Location Practical Business Cases Questionnaire on expectations and workshop evaluation LSYCTV - EC project researchers

3 Background Key Conclusions of the Study Cross-border arrangements relevant and valuable Increasing importance of occupational pension benefits Multinational organisations leading the way EU IORP Directive appropriate legal framework Step wise implementation possible Benefits standards by country Decision stay with Employers /MS EC can only raise awareness and play the role of facilitator LSYCTV - EC project researchers

4 Project Overall Plan August - December 2010 : Call for tender selection and assignment January 2011 : New project kicks off 1st Year : Workshops to potential sponsor undertakings 2nd Year : 2012 Assist Consortium to make informed decision on occupational pension set up If Sponsors Agree: Possible Consortium If Consortium Agrees: Definition of pension arrangements 3rd Year : 2013 Assist consortium to operationalise pension arrangements If Consortium Agrees: Fund established & operations start LSYCTV - EC project researchers

5 1st Year Implementation : Workshops 1st (4 April) Scene Setting Business cases Revue of Expectations 2nd (23 June) Analysis of Six Key Issues (Governance, Funding, Investment, Administration, Transfer, Taxation) Business Cases Sponsors Orientations for Consortium 3rd (October) Mission, Nature and Scope of Consortium Membership Functions & Accountability Reporting LSYCTV - EC project researchers

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7 Occupational Pension Regimes

8 Focus EU Legal and Policy Context The Three Pillars System The Occupational Pension Regime LSYCTV - EC project researchers

9 People s Sentiment About Future Pension Entitlements Source: EC, Flash EB n 289 June 2010 LSYCTV - EC project researchers

10 EU Legal Context A Unique System of Governance Empowerment For Action Only When Delegated by Member States Different Levels of Empowerment by Topic Pension-Related Competences at the Crossroad of Financial, Labour, Social and Tax Laws LSYCTV - EC project researchers

11 EU Policy Context The Way to Actionable Reforms Generalised Awareness About Challenges and Solutions Updated Policy Agenda Fostering Complementarity of Pension Systems EU and Peers Pressure for Holistic Reforms LSYCTV - EC project researchers

12 The Three Pillars System In many countries, retirees claim benefits from different sources: the three pillar system. The sources are: Social Security Company provided benefits, ie, occupational pension regimes Private or individual savings Weighting of pillars varies between countries LSYCTV - EC project researchers

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14 The Three Pillars System Social Security retirement benefits under pressure due to: Longevity, i.e., people today are healthier and live longer Increasing old age dependency ratio due to decreasing natality Absence of funding, i.e., no assets put aside to pay future pensions Financial crisis Share of funded pensions and importance company provided benefits expected to increase LSYCTV - EC project researchers

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16 Occupational Pension Regime Employer provides employees or a group of employees a supplementary pension: Pension plan design Pension plan financing Design Structure (Defined Benefit/Defined Contribution) Type of benefit (ie. pension, lump sum) Level of benefit Plan rules (retirement age) Employee contributions Integration with State Benefits Ancillary Benefits (spouse s pension, children s pension) Financing Funded (e.g., Insurance, Trust) Unfunded (e.g., pay as you go, book reserve) LSYCTV - EC project researchers

17 Pension Plan Financing Retirement benefits can be either funded or unfunded: Funded: Institutions for Occupational Retirement Provisions (IORP) Pensioenfonds in the Netherlands Pension trust in the UK and Ireland Pensionskasse and Pensionfonds in Germany Organisation for Financing Pensions in Belgium ASSEP, EEPCAV and CAA Pensionfond in Luxembourg Insurance Unfunded: Benefits paid as they become due LSYCTV - EC project researchers

18 Pension Plan Financing - Funded IORP Self administered Flexible rules Choice of administrator/investment manager Board of trustees Can be multi-employer/industrywide Funding legislation Full control of providers LSYCTV - EC project researchers

19 Pension Plan Financing - Funded Insurance External provider (unless captive insurance) Standard product Can be multi employer Administration/investment management typically included Funding legislation Limited control of providers LSYCTV - EC project researchers

20 Pension Plan Financing - Unfunded Employer pays retirement benefits directly to retiree as if paying a continued (but reduced) salary Roughly equivalent to investing pension contributions back into the Company Insolvency Funds (e.g., Germany) The accrual of this benefit will normally be recorded in the Company accounts as a Book Reserve Other examples of unfunded method: Senior executive top up plans State benefits LSYCTV - EC project researchers

21 The EU IORP

22 Focus What s New How It Works Why State of the Art and EU Further Developments LSYCTV - EC project researchers

23 What has Changed A New Pan-European Legal Vehicle A Basic Distinction: - Fund Governance (EU) - Plan/Scheme Governance (MSs) Key Planck for Single Market in Occupational Pensions in Place (IORP) IORP Governs Financial Legal Vehicle Only Taxation, Labour and Social Law Remain Country Specific LSYCTV - EC project researchers

24 Key Changes - IORP Applies Only to Funded, Occupational and Independent (from employer) vehicles - 1 Financial Legal Vehicle for Multiple Plans (IORP) - Financial control of 1 MS of Choice - Cross-Border Affiliation - Prudent Man Investment Principle - Tax-Discrimination Free Photo Credit: EC LSYCTV - EC project researchers

25 What Does Not Change - Labour and Social Law of Relevant MSs - Tax Regime on Contribution, Capital Gains, Benefits IORP does not apply to institutions managing social security benefits, unfunded vehicles such as book reserved plans (ref. D, A), PAYGO regimes (ref. ARRCO/AGIRC in F), or vehicles where employees have no legal rights to benefits. MS can opt out for Funds with <100emps Photo Credit: EC LSYCTV - EC project researchers

26 How It Works Cross Border IORP Structure - Pension institution and benefit schemes IORP Directive IORP* Pension institution (financing vehicle, Legal entity) Benefit scheme A Benefit scheme C Benefit scheme B Single lead supervisor Regulated by the country of domicile of the pension institution ( Home country ) Determined by the social & labour law of the country where employees are located ( Host countries ) IORPs*: Institutions for Occupational Retirement Provision LSYCTV - EC project researchers

27 How It Works Max 3 months 1. Application by IORP to home country supervisor 2. Authorization of IORP to operate cross-border Home Country Max 2 months Host Country 3. Notification by home country supervisor to host country(ies) supervisor 4. Host requirements communicated to home country - no Host approval 5. IORP starts cross-border operation LSYCTV - EC project researchers

28 HR and Pension : Views and Drivers - Talent Attraction & Retention Top HR Challenge - Occupational Pension Benefits More important in Future (76%) - 55% provide occupational pension benefits already - Main Drivers for pension arrangements: Market Practice, Attract talent - Cross-Border Arrangements Relevant and Valuable (81%-88%) - Drivers for EU IORP: Consistency, Manage Mobility, Meet employee expectations - Main Detractors: Cost, Tax Incentives, Soc. Sec.Generosity Removal would expand pension provision (79%-94%) Source: EC feasibility study on pension fund for EU researchers, Hewitt, June 2010 LSYCTV - EC project researchers

29 Overview of registered IORP 23 Host Countries 2010 Romania Netherlands Austria Hungary Luxembourg Liechtenstein France Italy Finland Sw eden Denmark UK Estonia Poland Italy Spain Slovakia Bulgaria Czech Greece 78 Cross border IORPS - June Home Countries 1% Ireland Germany Belgium 5% 3% 4% 6% 4% Austria Belgium Germany Ireland Source: CEIOPS, 2010 Report on Market Developments, 24 June 201 UK 42% 35% Liechtenstein Luxembourg (CSSF) Luxembourg (CAA) LSYCTV - EC project researchers

30 EU Developments Revised Protocol of Co-opeeration among National Supervisory Authorities New Pan-European Agency (EIOPA) Tougher Actions for Non Compliance, Notably on Taxation White Paper on Pension Proposal for IORP Revision Towards Standardisation of Some Technical Requirements LSYCTV - EC project researchers

31 In Conclusions - Are Pan-European Pension Arrangements a Feasible Option? YES Transparency - What are the Incentives For Employers Coherence Effectiveness Branding Complementarity LSYCTV - EC project researchers

32 EEA Current Membership Restrictions

33 Membership Restrictions Assume the decision is taken to set up a pension plan for the researchers in the EEA The plan provided will need to reflect the design requirements rolled out by Member States through their Social and Labour laws Requirements will vary by Member State, some will be limited others may make participation to a common plan most difficult LSYCTV - EC project researchers

34 Membership Restrictions The type of restrictions: Flexibility in benefit design Flexibility in investment options Flexibility to make extra contributions Representation issues Reporting requirement Private Sector access Public Sector access Tax/Social charge issues Portability issues LSYCTV - EC project researchers

35 Membership Restrictions Countries with most Researchers LSYCTV - EC project researchers

36 Membership Restrictions All EEA Countries PR PB BE BG CZ DK DE EE IR EL ES FR IT CY LV LT LU HU MT NL AT PL PT RO SL SK FI SE UK IS NO LI Private Sector: Public Sector: PR PB Legally possiible: Some restrictions apply: Significant issues: Possibility to have issues solved under specific circumstances: LSYCTV - EC project researchers

37 Benefit Design Models

38 Benefit Design Models Country related social security benefits Type of employee benefits Main benefit design models Definition of contribution level Definition of investment choices Combining retirement / death benefit Conditions of affiliation Vesting period and transfer rights General approach : Quality requires simplicity LSYCTV - EC project researchers

39 Country Related Social Security Benefits A variety of principles in each member state: Level of statutory pension Social and Labour Law (SLL) Taxation of contributions and benefits Form of benefit payment Indexation of pension rights LSYCTV - EC project researchers

40 Type of Employee Benefits Provide income when no longer employed In case of retirement Life annuity Lump sum In case of death Widow s pension Orphan s pension Lump sum In case of disability Premium waiver Income guarantee Compensation for medical care expenses LSYCTV - EC project researchers

41 Type of Employee Benefits Cont d What is being considered when defining the employee benefit? Local legislation Collective agreements Local market practice Sponsor objectives Tax effectiveness Budget LSYCTV - EC project researchers

42 Main Benefit Design Models Defined Benefit Plans (DB) Service related final salary schemes Focus benefit amount on those employees who retire Reward specific career milestones: working a full career, attaining a certain age Keep benefits up-to-date for fasttrackers Predictable retirement income; unpredictable cost Employer manages assets and retains investment risk Defined Contribution Plans (DC) Award benefit amount more evenly throughout employees careers De-emphasize magic ages and career milestones Principle of savings account: make retirement benefits easier to understand In line with increased mobility: make benefit more valuable to employees who do not anticipate staying at a company for a full career Predictable cost; unpredictable retirement income Shift investment risk to employees LSYCTV - EC project researchers

43 Main Benefit Design Models Cont d Hybrid Benefit Plans Cash Balance (CB): pension plans designed to look like savings plans Why they look like DC plans Account balance replaces monthly contribution Benefit accruals expressed as additions to account Accounts earn interest each year Credited interest is not the actual return on assets, but pre-defined (usually government bond indices) Why they are DB plans Accounts are bookkeeping entries and not actual divisions of assets IORP directs investment of assets not the employees Employer responsible for any funding shortfall Plan costs actuarially determined, not necessarily equal to the credited contribution LSYCTV - EC project researchers

44 Definition of Contribution Level (DC/CB) Flat amount > usually indexed Percentage of income S (= pensionable salary) Flat rate = % S Step rate = %S1 + %S2 with S = S1 + S2 S1 = salary limited to pension ceiling S2 = salary exceeding pension ceiling Occupational pension up to pension ceiling (S1) Occupational pension exceeding pension ceiling (S2) State Pension LSYCTV - EC project researchers

45 Definition of Contribution Level (DC/CB) Cont d Employee / employer contributions Different definition per employee category / country Age and/or service related contributions Expense and/or taxes included (or in excess) of contribution Flexible plans based on total budget (cafetaria) Individual choice between level of retirement / death / disability benefit Rate for conversion of accumulated savings account into life annuity Maximum allowed contribution levels (tax limit) Need to comply with country related SLL LSYCTV - EC project researchers

46 Definition of Contribution Level (DC/CB) Cont d Interactive modeler Based on career pattern Given replacement rate (70%) Showing expected contribution rates Very salary sensitive LSYCTV - EC project researchers

47 Definition of Investment Choices (DC) Getting the return on assets of the IORP if no investment choice Offering range of mutual funds with different risk levels Periodicity of choice can be limited to reduce expense (e.g. annually) Life cycle: default investment options, decreasing risk exposure with age Example of life cycle investment Need to comply with country related SLL Definition of asset classes Possibility of individual choices Interest guarantee Equity Bonds LSYCTV - EC project researchers

48 Combining Retirement / Death Benefit (DC/CB) Benefit in case of death equal to accumulated savings Minimum amount in case of death (e.g. multiple of pensionable salary) Appropriate death cover as from affiliation Capital at risk to be covered until savings exceed death benefit Savings Death LSYCTV - EC project researchers

49 Conditions of Affiliation Voluntary or compulsory Minimum age and/or minimum service before affiliation No minimum period will not hinder mobility Affiliation for employees belonging to a specific group Category / company / organisation / country Need to comply with country related SLL LSYCTV - EC project researchers

50 Vesting Period and Transfer Rights Minimum years of affiliation (or years of service) to acquire pension rights Increase mobility by reducing to vesting period to maximum 1 year Transfer of pension rights within and outside the IORP Transfer between countries / companies / organisations Increase mobility by allowing transfer of pension rights Possibly tax sensitive in case of transfer outside IORP Need to comply with country related SLL LSYCTV - EC project researchers

51 Quality Requires Simplicity A good understanding of the pension plan will increase attractiveness Start with a simple concept Facilitate communication using a simple pension design Introduce a standardized framework applicable to each country Complexity leads to administrative hurdles Simplification will reduce expenses and increase benefits LSYCTV - EC project researchers

52 Benchmark Pension Fund Country Location

53 Location of Choice for Cross-border IORPS Location is of key importance Location influences many critical factors Need to identify key features LSYCTV - EC project researchers

54 Location of Choice for Cross-border IORPs Cont d Local pension environment characteristics Availability of appropriate IORP vehicles Flexibility to permit ring-fencing Regulatory framework and governance How has the IORP Directive been implemented? Tax framework Financing requirements Home country supervisor Level of knowledge and experience Level of pro-active support Dedicated team for cross-border issues Ability to handle English as working language Willingness to consider alternative solutions LSYCTV - EC project researchers

55 Location of Choice for Cross-border IORPS Cont d Short list of selected countries Belgium Germany Ireland Luxembourg Netherlands UK LSYCTV - EC project researchers

56 Why Focus on a Country like Belgium? Regulator very accessible, open-minded and supporting No quantitative rules for investments and financing (except EU regulation) Flexible funding definition, ring-fencing possible Investment policy according to prudent person principle Comply or Explain governance requirements Zero tax base Establishment of social committees to comply with SLL of host country More than 20 year of experience with pension funds Multi-cultural, multi-lingual community in the centre of Europe LSYCTV - EC project researchers

57 Why focus on a country like Belgium? Licensed IORPs in Belgium with cross-border activity ( BP Pensioenfonds [50521] BE / IR CITCO IBP, IBP [50598] BE / CY / LI / LU / MA Fonds de Pension Groupacier [50233] BE / LU Fonds de Pension Pfizer [50402] BE / LU Fonds de Pension Ricoh [50119] BE / LU Fonds de Pensions Nestle (FPN) [50111] BE / NL / LU Hewitt Associates Pensioenfonds [50543] BE / IT Pension & Co IBP [50429] BE / NL LSYCTV - EC project researchers

58 Thank You And the Aon Hewitt Project Team LSYCTV - EC project researchers