Global Retirement Update
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1 Global Retirement Update September 2013 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 Global Foreign Financial Institutions (FFIs) that do not qualify for an exemption or exclusion from the U.S. Foreign Account Tax Compliance Act (FATCA) reporting are required to register with the Internal Revenue Service (IRS) and sign a participating FFI agreement. Registration must occur by April 25, 2014 in order for the FFI to be listed as compliant when the initial withholding obligations become effective (i.e., for payments made after July 1, 2014). Failure to register may result in the FFI being subject to a 30% U.S. withholding tax on U.S.- source payments. The IRS has established an online web portal (the FATCA Registration Portal) to enable FFIs to register with it. The portal is designed to provide information, along with a paperless registration process. The Portal may be found by clicking on this link: Compliance-Act-(FATCA). If a program fails to comply with FATCA reporting (and is not the subject of an intergovernmental agreement or exempt under the FATCA rules), U.S. tax will be withheld at the rate of 30% on its U.S.-source income, including certain capital proceeds. This withholding tax is applicable, regardless of whether the benefit program actually covers any U.S. taxpayers. Please join us on October 3rd at 10 AM EST for our Global Pension Risk webinar which will examine the key pension risk findings from four of Aon Hewitt s global regions: Canada; Europe, the Middle East, Africa (EMEA); the United Kingdom and the United States. This webcast will highlight key findings from each of the regional Global Pension Risk surveys and will compare and contrast how each region has responded to key issues such as: Canada: Solvency and funding position; EMEA: Interest in making plans more sustainable; United Kingdom: Managing benefits and liabilities; and United States: Risk transfer solutions. Click here to register for the global webinar. Copyright 2013 Aon plc 1
2 Recent Developments Africa Ghana s Constitution Review Implementation Committee has drafted bills that would increase the retirement age from age 60 to age 65. The increase is supported by the Social Security and National Insurance Trust and managers of state pension funds. The Committee also proposes to create a paternity leave entitlement for new fathers. It is not known when action will be taken on the proposed measures. Americas The U.S. Pension Benefit Guaranty Corporation (PBGC) released proposed regulations on premium rates, payment of premiums, and reduction in the regulatory burden. The PBGC proposes to amend its regulations on premium rates and payment of premiums to simplify due dates, coordinate the due date for terminating plans with the termination process, make conforming and clarifying changes to the variable-rate premium rules, provide for relief from penalties, and make other changes. Large plans would no longer have to pay flat-rate premiums early; small plans would have more time to value benefits. These amendments would be effective beginning The Ontario (Canada) Superior Court of Justice determined in O Neill v. General Motors of Canada that GM was not contractually entitled to reduce the health care and basic life insurance benefits of salaried retirees after they had retired (except with respect to executive retirees). The question before the Court was whether applicable contractual language was sufficiently clear and unambiguous to allow the employer to reduce postretirement benefits for salaried and executive retirees. The Court ruled that while the employer, under the reservation of rights (ROR) clauses, had every right to reduce benefits, even retirement benefits while the salaried employee was actively employed, they had no right to do so after the employee had retired. In deciding that contractual language was not clear enough to reduce benefits for existing salaried retirees, the Court considered the relevant booklets, brochures, letters, and other communications provided to salaried employees during the relevant years. The Court found that the language in these documents created a reasonable expectation that the employees could rely on a core of health care and life insurance benefits in their retirement. Language such as, Your health care coverage will be provided at GM s expense for your lifetime reinforced that expectation. The ongoing correspondence relating to life insurance did not contain an ROR clause. In fact, it stated a specified amount of insurance that would be in effect for the rest of your life. The Court found that benefits under the executive retirement program which were to provide for monthly payments above the individual s pension, liability insurance, and supplemental life insurance were not guaranteed. Additionally, the printed warning that benefits could be reduced or eliminated even after retirement was clear and unambiguous. Therefore, GM was contractually able to reduce or terminate the executive s retirement benefits. The Court agreed with GM that it was not reasonable to add an ROR clause to every letter or communication, and it was sufficient if it was included in the main benefit documents provided to employees. This case reinforces the uncertainty and complexities associated with changes to retiree benefits, although changes to the postretirement benefits of employees not yet retired were acceptable. Reducing benefits for Copyright 2013 Aon plc 2
3 existing retirees is difficult and each situation must be considered on its own merits. Employers contemplating changes to their retirement benefit programs should consider whether a right to make changes to postretirement benefits has been reserved; consider whether applicable language is clear and unambiguous in its intention; and review postretirement benefits promise language to ensure it is aligned with intentions. It has been reported in the press that GM intends to appeal the decision. Amendments to the Pension Benefits Regulations, 1993 (Saskatchewan, Canada) were filed. The most significant change was the removal of solvency funding requirements. For the purposes of calculating the solvency ratio of a plan, the windup expenses will now be treated as an offset to the solvency assets instead of a liability. Transfer deficiency holdbacks will no longer be required in the case of a preretirement death where the benefit is paid to the member s beneficiary or estate. This will enable quicker closing of estate finances and ease some burden on plan administrators. The exemption from transfer deficiency holdbacks already existed for spouses of deceased members. Also, filing fees for Annual Information returns increased, retroactive to January 1, The plan minimum fee increased from CAD 100 to CAD 150, and the maximum fee increased from CAD 5,000 to CAD 15,000. A report from the Canadian Institute of Actuaries (CIA) confirms the need for mortality tables and improvement projection scales for pension valuation purposes that specifically reflect Canadian mortality experience. The report shows that current standard tables used for pension valuations understate improvements to life expectancy. Furthermore, the CIA report recommends separate tables for public-sector pension plans and private-sector pension plans, with adjustments based on the pension amounts payable under the plan concerned. The recommended tables could result in increases to going concern pension liabilities in the order of 5-12%, with the results varying according to the characteristics of the plan. Plans with large baby boomer populations are the most likely to be affected. However, pension plans that already use mortality tables customized to their own experience could see a lesser impact, most likely in changes to expected improvements going forward. Adoption of the new pensioner mortality tables could affect cash funding, financial reporting, risk management, plan design, and retirement planning tools. The CIA has asked for comments on the draft report by September 30, The timing for finalizing the tables was not in the report. Once the tables in the draft report have been finalized and approved for the use in pension plan valuations, the appropriate CIA standards of practice committees will have to review the suitability of the new tables for determining pension commuted values for termination settlements and for determining pension values for marriage breakdown calculations. The Mexican government s 2014 budget includes provisions for a universal old age pension. A pension would become a human right established by the constitution. Individuals age 65 or older would be entitled to the pension, which would be sufficient to cover basic expenses. The government estimates that 7.8 million citizens would benefit from the pension in The universal pension would be funded through tax reforms, including the elimination of an estimated two-thirds of deductions and credits; creation of a 32% tax on income exceeding MXN 500,000 per year; imposition of a 10% tax on capital gains and dividends; and harmonization of the Value Added Tax (VAT) across the country (border zones would no longer have a lower VAT). Employment costs increased for employers in the Dominican Republic, effective August 1, The average minimum wage for the private sector, used to calculate the contribution ceiling for old age, survivors, and disability premiums as well as health care premiums, increased to DOP 8,645. The contribution ceiling for old Copyright 2013 Aon plc 3
4 age, survivors, and disability premiums is ten times the average minimum wage for the private sector; the health care contribution is ten times the average wage. In Uruguay, employees who voluntarily opted into the mixed pension fund system would be permitted to transfer to the social security system, under draft legislation. All employees who were age 39 or younger at the time of the implementation of the mixed system were required to join. Employees age 40 or older were given the choice of remaining in the old system or joining the new one. The government also is reviewing plans for partial retirement under which an employee would be permitted to work up to 50% of the statutory workweek and receive a retirement benefit. Asia India s Lok Sabha (lower house of parliament) passed the Pension Fund Regulatory and Development Authority (PFRDA) Bill. The Bill would make the interim pension authority the statutory regulatory body for the New Pension System. Its provisions include: Create funds that guarantee a minimum return; Permit members to withdraw funds from their accounts subject to specified conditions (purpose, frequency, and limits); and Allow up to 26% foreign investment in pension funds or a percentage approved by the Insurance Authority. Also, a pensions advisory committee would be established to advise the PFRDA on the development of regulations. At least one pension fund manager would come from the public sector. The Bill must now be passed by the upper house of parliament. India s Employee Provident Fund Organization (EPFO) has launched an online transfer claim portal. With the new portal, employers can access members claim and transfer requests, correct information, and approve requests online. Employers must register their digital signature certificate with the EPFO. Paper forms will still be available for those employees without Internet access. An expert committee has published its recommendations to reform India s Employee Pension Scheme (EPS). The committee, established by the government, recommends one of two options: 1) creation of a provident fund/pension annuity scheme with the pension linked to members accumulated balances; or 2) modifications to the current system. The modifications would include an increase in the wage ceiling from INR 6,500 to INR 10,000; a minimum pension of INR 1,000 for all pensioners; and annual relief of 3%. To offset the costs of the change, pensionable salary would be based on average pay for the last three years; the withdrawal option would be abolished; the two-year bonus would be eliminated; the superannuation age would be raised to age 60; and the early retirement age would increase to age 55. In other retirement news, a proposal for reducing the threshold from 20 to 10 employees for coverage under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 is under consideration by the government. Copyright 2013 Aon plc 4
5 New Zealanders may be able to set their own retirement age. The government released a policy discussion document Flexible Superannuation, that calls for the creation of a flexible retirement system. Currently, superannuation benefits are payable at age 65. Employees would be permitted to retire up to five years early with a permanent reduction in benefits or could delay retirement and receive a higher benefit. In the discussion document, the government cites a 6% reduction and a 10% increase as examples, but indicates the actual figures would be determined after detailed analysis. The Labor Party supports an increase in the retirement age to age 67. In South Korea, a presidential advisory committee on reforming the public pension system released its preliminary recommendations. President Park created the committee following her campaign pledge to give KRW 200,000 per month to every citizen age 65 or older. The committee determined that it would be difficult for President Park to keep her pledge without creating an undue burden for younger generations. It proposes three options for further consideration: 1) make senior welfare payments to individuals in the lowest income bracket, with the amount determined by monthly income and contributions to the national pension system; 2) limit senior welfare payments to individuals whose income does not exceed 150% of the basic living cost, approximately KRW 830,000 per person; or 3) distribute the same amount KRW 200,000 per month to all individuals in the lowest income bracket. Europe In the United Kingdom, final regulations that revise directors disclosure requirements have been published. The regulations are effective October 1, 2013 and apply to financial years ending on or after September 30, Under the new requirements, a single total figure must be given for each director, which includes pension benefits. Defined pension benefits are valued using a HMRC (Her Majesty s Revenue and Customs) methodology for testing against the annual allowance. Other disclosures also are required, including scenarios for what directors will be paid if their performance is at maximum, minimum, or target levels, and the details of pension benefits available. Currently, U.K. listed companies must provide additional disclosure of director compensation. However, the Financial Conduct Authority has now proposed that the relevant listing rules be removed for years ending on or after January 1, Regulations that expand the information administrators are required to provide to the U.K. HMRC and the notifications that members must give to plan administrators are effective August 12, The changes affect: 1) reliance on the new Fixed Protection 2014; 2) transfers to Qualified Recognized Overseas Pension Schemes (QROPS); and 3) the Event Report, where the plan has members whose Pension Input Amount exceeds the Annual Allowance. In the United Kingdom, the Pension Protection Fund (PPF) cap for longer-serving members will be increased. For most members under normal pension age at the point that an employer becomes insolvent, the PPF protected benefit is 90% of the member s pension, subject to a compensation cap. The cap (currently GBP 34,867 per year at age 65 for 2013/14, prior to the 90% multiplier) will be increased by 3% for every full year of service above 20 years, up to a maximum of double the standard cap. Copyright 2013 Aon plc 5
6 The government subsequently introduced provisions to achieve this into the Pensions Bill, which currently is proceeding through parliament. This increase in benefits paid by the PPF will ultimately be funded by an increase in plans levies. The U.K. PPF published its consultation on the calculation of the 2014/15 levy, including a draft of its formal Levy Determination. For 2014/15, the PPF proposes to retain the parameters at 2013/14 levels a risk-based scaling factor of 0.73 and a plan-based levy multiplier of %. The risk-based levy cap remains at 0.75% of a plan s s179 liabilities. The PPF estimates this will raise GBP 695 million in levy income in 2014/15, some 10% higher than the level it is now expecting to collect for 2013/14. This increase had been anticipated. However, actual levy bills will see a greater average increase (around 15%) reflecting, among other factors, the declining number of levy-paying plans. The Determination is expected to be finalized in December Plans can now estimate their potential 2014/15 levies using the draft parameters and consider any appropriate mitigating action. As originally planned when the new levy structure was implemented, all levy parameters for levy years 2015/16 to 2017/18 will be reviewed, and the PPF proposes to consult on the rules early in Some changes will be required (e.g., to accommodate the use of Experian as the insolvency risk provider from the 2015/16 levy year rather than Dun & Bradstreet). In the United Kingdom, regulations amending the disclosure regulations for occupational and personal pension plans, including the use of electronic communication, are now due to come into force on April 6, Consultation took place between February and April 2013, and the government s response was published on July 29, The proposed amendments are permissive, with the exception of a new requirement for defined contribution arrangements to provide additional information on lifestyling. The commencement date of the regulations has been moved back six months to April 6, 2014 in order to give plans more time to prepare for the changes. Even after these amendments, the disclosure requirements will still be spread among a number of different pieces of legislation; the Department of Work and Pensions (DWP) has decided not to take forward plans for further consolidation. It also has dropped the idea of moving to a more principles-based, less prescriptive, approach. The U.K. DWP issued its response to consultation on removing National Employment Savings Trust (NEST) restrictions. The response states that the government intends to: Legislate as soon as possible to remove the annual contribution limit (GBP 4,500 for 2013/14) from April This is despite the government s view that the limit has no impact for the vast majority of target employers; Legislate to remove restrictions on individual transfers to coincide with the launch of automatic transfers; and Remove restrictions on bulk transfers from April The French government s draft bill on pension reform was approved by the Council of State and has been sent to the parliament for review. Major provisions of the bill include: Copyright 2013 Aon plc 6
7 Increase in the number of contributions needed for a full retirement pension depending on the individual s year of birth. Beginning in 2020, the contribution period would increase by one quarter every three years until it reached 43 years in 2035 for individuals born in or after For individuals born between 1958 and 1960, the number of contributions would be 41 years and 3 quarters; between 1961 and 1963, 42 years; between 1964 and 1966, 42 years and 1 quarter; between 1967 and 1969, 42 and one-half years; between 1970 and 1972, 42 years and 3 quarters; and 1973 and thereafter, 43 years; Increase in the employee and employer social security contribution rates over four years 0.15 percentage points in 2014, and 0.5 percentage points in 2015, 2016, and 2017; Introduction of special accounts for individuals who work in hazardous or arduous conditions as defined by the social partners (unions and employers associations) in The accounts would enable these employees to retire early, work part time at the end of their career, or learn new skills. The accounts would be funded by two employer contributions one based on payroll and one based on the percentage of wages paid to employees in hazardous or arduous conditions; Revaluation of pensions on October 1 st rather than April 1 st ; Coverage of the entire maternity leave period; and Elimination of the tax exemption on pension supplements paid to parents with three or more children. The bill s 33 provisions will be debated by the parliament beginning October 7, In related news, the government is considering an increase in the General Social Contribution (CSG) to finance pension reform. Two options are under review an increase of 0.2% to 0.3% that would be used just for pension reform or a more substantial increase of 0.5% that would be used to finance family and health insurance funds in addition to pensions. The Dutch government released its proposals for a new financial assessment framework (FTK) for consultation. The proposals cover real and nominal pension plans. Real plans would have to be indexed to the price inflation rate at a minimum. Nominal plans would be required to guarantee pension rights with a 97.5% certainty level. Funding rates would be calculated using a 12-month average; liabilities would be discounted against the stable and realistic ultimate forward rate. Since publication, the proposals have been widely criticized by the pensions industry. A draft bill is expected to be presented to parliament by the end of December Belgium s Ministry of Pensions has drafted legislation on the harmonization of white- and blue-collar pensions. In 2011, the Constitutional Council ruled that employment terms and conditions for white- and blue-collar employees had to be harmonized. Anticipating that the Constitutional Council would rule that pension benefits had to be harmonized, the Ministry of Pensions has drafted legislation on the treatment of occupational pensions. The social partners (unions and employers associations) would be required to harmonize industry-level pension plans by January 1, 2018 or Employers would be required to harmonize company-level pension plans by July 1, 2023 or Copyright 2013 Aon plc 7
8 Denmark s 2014 budget includes provisions that would affect pension income. The income threshold for the 6% compensatory tax assessed on pension payments would increase from DKK 362,800 to DKK 369,400. This tax is scheduled to be effective until 2020; the tax rate is scheduled to decrease by one percentage point annually from The Spanish government has published its proposals for social security reform. The indexation of pension benefits to the inflation rate would be modified to provide a floor and a ceiling to increases. Pension benefits would increase by a minimum of 0.25% even when the economy is in recession, and the maximum increase would be capped at the year-on-year change in inflation plus 0.25%. Also, the sustainability factor would be based on life expectancy and the social security system s revenues. It would be reviewed every five years. If passed, the modification of the index would be effective January 1, The sustainability factor would be introduced in In Switzerland, the federal commission on occupational pensions (BVG/LPP) recommends that the minimum interest rate increase from 1.5% to 1.75%, effective January 1, Under the Retirement 2020 proposal, the rate would be set at the end of the year rather than the beginning and be based on actual returns instead of forecasts. The Polish government released its plans for second-pillar pension reform. Participation in the second pillar (OFEs) would be voluntary. Employees would be given three months to decide to remain in the system or to move back to the first pillar. Employees that failed to respond would default to participation in the first pillar. For employees that remain in the second pillar, 2.92% of contributions would be deposited in the specified fund. OFE assets held in government bonds would be transferred to the social security system (ZUS) and credited to individual accounts. Employees OFE account balances would be transferred to ZUS ten years preceding retirement, and the retirement pension would be paid by ZUS. OFEs would be permitted to diversify their investments; however, they would not be permitted to invest in government bonds. Also, commission fees would be reduced. The government s plan has been widely criticized by the pensions industry. If passed, the reformed system would be effective January 1, Middle East Egypt s interim president issued a decree (Decree No. 79/2013) that abolishes the 2010 social security reform law. In 2010, Egypt enacted a social security reform law Law No. 135 of 2010, Law of Social Insurance and Pensions that would increase the retirement age, shift from a pay-as-you-go to a defined contribution (DC) system with individual accounts, reduce employer social security contributions, and implement new unemployment benefits. The new system was scheduled to be effective in 2012, but implementation was abandoned following the January 25 th Revolution. In abolishing the 2010 law, President Mansour cited a lack of societal consensus over a DC system In Jordan, the social security reform bill includes new provisions on early retirement. To be eligible for early retirement, male employees would be required to have 252 contributions and female employees would be required to have 228 contributions. To be eligible to retire at age 45, employees would be required to have 300 contributions. Previously, early retirement was possible at age 45 with at least 18 years of contributions (males) or 15 years of contributions (females). In early 2010, the Cabinet issued a temporary law eliminating early retirement, effective January 1, Other changes to the social security system include an increase in the Copyright 2013 Aon plc 8
9 number of contributions for an old age pension (refer to the July 2013 Updates for additional details) and the creation of an Investments Council to oversee the Social Security Corporation s investment decisions. * * * * 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 2013 Aon plc 9
10 About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit Copyright 2013 Aon plc 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 2013 Aon plc 10
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