Global Retirement Update

Transcription

1 Aon Hewitt Legislative Reporting Global Retirement Update October 2014 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 Italy The government is considering a measure that would allow employees to receive their termination indemnity contribution (Trattamento di Fine Rapporto, TFR) with pay instead of at the end of employment. Employers, depending on their size and decisions made by employees, must contribute 6.91% of gross annual pay each year into a pension fund or the social security system (INPS), or record the amount as a book reserve. Under the proposed plan, employees in the private sector (excluding domestic and agricultural workers) could opt to receive their TFR contribution with pay from March 1, 2015 to June 30, The TFR payment would then be subject to tax at the employee s marginal rate, instead of taxed at a reduced rate. Additional information is expected when the government releases its 2015 budget proposal. Recent Developments Americas The U.S. Treasury and Internal Revenue Service (IRS) issued final and proposed regulations on hybrid retirement plans. The final and proposed regulations on hybrid retirement plans were released on September 18, Final Regulations Regarding Hybrid Retirement Plans: The long-awaited final regulations provide additional guidance on certain issues that were not addressed in hybrid plan final regulations issued in The latest regulations relate to applicable defined benefit (DB) plans that use a lump sum-based benefit formula, including cash balance plans and pension equity plans, as well as other hybrid retirement plans that have a similar effect. The regulations provide guidance relating to certain provisions that apply to applicable DB plans that were added to the Internal Revenue Code (Code) by the Pension Protection Act of 2006, as amended by the Worker, Retiree, and Employer Recovery Act of These regulations affect sponsors, administrators, participants, and beneficiaries of these plans. The regulations became effective on September 19, The regulations generally apply to plan years that begin on or after January 1, However, please see the Effective/Applicability Dates section in the preamble for additional information. Risk. Reinsurance. Human Resources.

2 Proposed Regulations on Transitional Amendments to Satisfy the Market Rate of Return Rules for Hybrid Retirement Plans: The proposed regulations provide guidance regarding certain amendments to applicable DB plans that use a lump sum-based benefit formula, including cash balance plans and pension equity plans, as well as other hybrid retirement plans that have a similar effect. The proposed regulations would permit an applicable DB plan that does not comply with the requirement that the plan not provide for interest credits (or equivalent amounts) at an effective rate that is greater than a market rate of return to comply with that requirement by changing to an interest crediting rate that is permitted under the final hybrid plan regulations, without violating the anti-cutback rules of Section 411(d)(6). These regulations would affect sponsors, administrators, participants, and beneficiaries of these plans. The IRS stated that the proposed regulations would apply to amendments adopted on or after the date the regulations are finalized in the Federal Register. Comments on the proposed regulations are due by December 18, The IRS has scheduled a hearing for January 9, 2015, on the proposed rules. Outlines of topics to be discussed at the public hearing must be received by December 18, The Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor (DOL) proposed new rules on September 29, 2014, that would require electronic filing for top hat pension plan statements. Top hat plans in general are pension plans for select groups of management or highly compensated employees. The DOL receives approximately 2,000 top hat plan statements filed in paper form each year, which it converts to electronic format. The DOL has concluded that the current paper filing system is not the most efficient or cost-effective. The proposed regulations would require top hat plan statements to be electronically filed with the Secretary of Labor through the DOL s website. Once filed, the statements would be posted on EBSA s website and be available to the public. The plan administrator would receive an electronic confirmation that the filing had been received by EBSA. In conjunction with the proposed regulations, the DOL also launched its new web-based filing system on September 29, Plan administrators may use it in place of paper-based filing on a voluntary basis until regulations are finalized. Comments on the proposed regulations are due by December 29, The U.S. IRS has simplified procedures for U.S. taxpayers living in Canada and participating in a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) to receive favorable tax treatment. Under Revenue Procedure , eligible U.S. citizens and residents will be treated as making an election under Article XVIII(7) of the U.S.-Canada Income Tax Treaty to defer U.S. income tax on income accruing in their retirement plans until a distribution is made. Retroactive relief will be provided to taxpayers who failed to properly make this election in the past. The IRS is eliminating Form 8891, on which taxpayers had to report details about each RRSP or RRIF, including contributions made, income earned, and distributions made. Proposed regulations to modernize and strengthen the framework governing federally regulated private pension plans were published in the Canada Gazette on September 27, The proposed regulations would: Permit the payment of variable benefits under defined contribution plans; Require that plan administrators provide retirees and other former pension plan members with an annual statement, as currently required for active members; and Modernize pension investment rules by amending the rule prohibiting plan administrators from investing more than 10% of plan assets in one entity by basing the calculation on market value, which reflects the change in the value of investments over time, as opposed to the current practice of using book value, and clarifying that the limit applies to the total of debt and equity; and tightening prohibitions against investing in related parties, such as the employer. Changes to the investment rules also would affect pension plans regulated by jurisdictions that have adopted Schedule III of the federal Pension Benefits Standards Regulations, 1985, specifically Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Ontario, and Saskatchewan. The Ontario (Canada) government released draft regulations on socially responsible investments. In April 2014, the Ontario government proposed amendments to Regulation 909 under the Pension Benefits Act (Ontario) that would require plans to file statements of investment policies and procedures (SIP&Ps) with the Superintendent. In addition, subsection 40(1) of Regulation 909 would be amended to require that the annual statement indicate whether or not environmental, social, and governance factors are addressed in the SIP&P. This proposal was initially announced in the Ontario Budget Global Retirement Update Aon Hewitt October

3 In October 2014, the government published draft regulations, incorporating the feedback received during the prior consultation period. It may soon be easier for individuals in Ontario (Canada) to transfer the commuted value of their pension benefits. A draft amendment has been proposed to subsection 20(3) of the General Regulation under the Pension Benefits Act (Ontario) to make it easier for individuals to transfer the commuted value of their pension benefits from an Ontario registered pension plan to a pension plan registered elsewhere in Canada, when the receiving plan allows. The transferee pension plan would no longer have to agree to administer the amount in accordance with the Act and the Regulation. However, transfers into a prescribed retirement saving arrangement or for the purchase of a life annuity would still require the transferee to agree to administer the amount in accordance with the Act and the Regulation. Asia Pacific The Filipino Social Security System (SSS) will open a new voluntary provident fund program that will give individuals a new vehicle for retirement savings. The SSS Personal Equity and Savings Option (SSS PESO) will open in December SSS members under age 55 with six consecutive SSS contributions within the last 12 months prior to enrollment and who have not yet filed a claim with SSS are eligible to participate. SSS PESO contributions can be made at any time as long as an SSS contribution is made in the same month. Qualified individuals can contribute a minimum of PHP 1,000 and a maximum of PHP 100,000 per year. SSS PESO savings will be invested in sovereign guaranteed investments. Sixty-five percent of contributions will be allocated for retirement; the remaining 35% will be allocated for medical and general purposes. The retirement allocation is guaranteed to earn income based on the interest rate of five-year Treasury yields; the medical and general purpose allocation earnings will be based on 364-day Treasury bill rates. In addition to guaranteed earnings, SSS PESO Fund members may receive additional earnings based on the year-end performance of the Fund. Accounts will be assessed a 1% annual administration fee. SSS PESO account balances may be withdrawn on the member s effective date of retirement or total disability with the SSS. A monthly pension may be paid over a minimum 12-month period and a PHP 1,000 payment per month, as a lump sum, or a combination of programmed withdrawal and lump sum. Early withdrawals are permitted only from the medical and general purposes allocation. Penalties and service fees apply if funds are withdrawn before five years. Upon death of the SSS PESO member, his or her beneficiaries will receive savings paid as a lump sum. Europe The U.K. government has released draft regulations on governance requirements for defined contribution (DC) plans and the charge cap, to be applicable from April Trustees of DC arrangements would be required to: Design default arrangements in members interests and keep them under regular review; Ensure that core financial transactions are processed promptly and accurately; Assess the value of costs and charges borne by plan members; and Have a chair of trustees who would be responsible for signing off an annual statement of how the governance requirements have been met. From April 2015, there would be a 0.75% cap on the charges applied to default arrangements (e.g., DC funds where members have ended up without taking any action) in plans used to meet the employer s obligation to ensure workers are in plans of suitable quality. The legal duty to comply would fall on trustees (or the provider of a general pension plan). The consultation on the draft regulations runs until November 14, Global Retirement Update Aon Hewitt October

4 The U.K. Pension Protection Fund (PPF) has published a response to its consultation on calculating PPF levies over the next three years, to , together with another consultation on the detailed rules for the levy and a draft of its formal Levy Determination. The PPF set out its triennial review of the levy framework in May It has now confirmed that the underlying principles of the existing approach will remain unchanged. The PPF received strong support for the move to Experian to calculate the insolvency risk of employers (in place of Dun & Bradstreet), although some detailed changes to the suggested scoring methodology are proposed. Following feedback, the PPF will now allow all asset-backed contributions to be recognized for levy purposes, subject to additional certification and valuation requirements being met. The PPF confirms there will be no transitional protection against large levy increases, and credit ratings will not be used to assess insolvency risk for some entities. However, there will be significant changes to individual plans levies as a result of the move to Experian for measuring insolvency risk. Some of these details are subject to further consultation. The PPF proposes a risk-based levy scaling factor of 0.65 and a plan-based levy multiplier of %, which are expected to apply for the next three years. For , this is expected to raise GBP 635 million in levies, a 10% reduction from The consultation on these proposals runs until November 13, 2014, and the determination is expected to be finalized before the end of At the end of September 2014, the U.K. Chancellor announced a change to the taxation of defined contribution (DC) pension funds payable at death. Currently, there is a tax charge of 55% on all lump sums paid from drawdown funds (regardless of the member s age) and on lump sums from unused money purchase funds of members age 75 or over at the time of death. Under the proposed new system, for payments made after April 5, 2015: Anyone who dies below age 75 would be able to pass on any remaining money purchase funds tax free, either payable as a lump sum or accessible through drawdown. The funds would still have to be tested against the member s lifetime allowance if not previously tested; If the member dies at age 75 or over, funds accessed through drawdown would be subject to the recipient s marginal income tax rate. Alternatively, beneficiaries could take the funds as a lump-sum payment (taxed at 45% in , but expected to be taxed at the recipient s marginal rate if paid in a subsequent year); and The current restrictions on who qualifies as an eligible dependent for the purpose of passing down drawdown funds or paying a lump sum would be abolished. These measures were confirmed in the Taxation of Pensions Bill, which was introduced to the parliament in October 2014, following a consultation on the draft bill (refer to the August 2014 Update for additional information). The latest version also modifies some of the earlier proposals following responses to the consultation and introduces disclosure requirements associated with the reduced GBP 10,000 annual allowance. The Finnish social partners (government, unions, and employers associations) have reached an agreement on pension reform. The goals of the reform are to extend working life and increase the sustainability of the pension system. The reforms include: Increase in the early retirement age: As of 2017, the earliest eligibility age for retirement would increase by three months each year by birth year until it reaches age 65. For individuals born in 1955, the early retirement age would be age 63 and 3 months; 1956, age 63 and 6 months; 1957, age 63 and 9 months; 1958, age 64; 1959, age 64 and 3 months; 1960; age 64 and 6 months; 1961, age 64 and 9 months; and 1962, age 65. The upper age limit for an old age pension would be five years higher than the earliest eligibility age. As of 2027, the eligibility age for old age retirement would be linked to life expectancy. Other types of retirement: Employees working in strenuous or hazardous working conditions would be permitted to retire at age 63 with 38 years service. Part-time pensions would be abolished and replaced by partial early old age retirement. If the old age pension were withdrawn before the earliest eligibility age, the pension would be reduced by 0.4% per month. Also, the pension would be adjusted according to the life expectancy coefficient at the time of drawing the pension. Global Retirement Update Aon Hewitt October

5 Standardized pension accrual rates: For individuals of all ages, the annual accrual rate would be 1.5% of pay. Individuals who continue to work after reaching the earliest retirement age would receive a 0.4% increase in their accrued pension each month. A transition period for the change in accrual rates would be established. During the transition period, individuals age 53 to age 62 would accrue a pension at 1.7% per year. The transition period would last until 2025 when the accrual rate would be 1.5% for everyone. During the transition period, the employee contribution for individuals age 53 to age 62 would increase by 1.5 percentage points. Contributions for earnings-related pensions: Pensions would accrue from the full wage, and the earnings-related contribution would no longer be deducted from the pensionable wage. From 2016 through 2019, the combined earnings-related pension contribution for employees and employers would be 24.4%. In 2016, the contribution would be temporarily reduced by 0.4%; the reduction would be shared equally by employers and employees. The German government announced the 2015 social security ceiling. Two different earnings ceilings still exist for contributions to old age, survivors, and disability pensions, as well as employment promotion. With regard to old age, survivors, and disability pensions, the monthly ceiling will increase from EUR 5,940 to EUR 6,050 (EUR 72,600 per year) in the West and from EUR 5,000 to EUR 5,200 (EUR 62,400 per year) in the East. Under the Norwegian government s 2015 budget, employee social security contributions would decrease. For employees, social security contributions would decrease to 8.1%; for self-employed individuals, contributions would decrease to 11.3%. The basic allowance rate for pension income would increase from 27% to 29%. Disability benefits would be taxed as earned income. In Sweden, employees will likely be paying higher taxes in The maximum deduction for private pension premiums would be reduced from SEK 12,000 to SEK 1,800 per year if passed. The change would be effective January 1, The European Insurance and Occupational Pensions Authority (EIOPA) recently published a Report on issues leading to the detriment of occupational pension scheme members and potential actions for EIOPA. The report builds on previous initiatives and identifies the following areas for work: governance (including charges, value for money, and industry training standards); portability; disclosure (including transparency, availability, and comparability of information for members); and financial education initiatives and monitoring of consumer trends. The report also outlines the following priorities for work over the coming years: finalizing the report on good practices for the transferability of pension rights; tools and communication channels for employers and scheme managers to use in communicating with scheme members; market practices allowing information to be compared across pension funds and providers; charges; value for money; industry training standards relating to occupational pensions (factoring in the review of the IORP Directive); and possible advice regarding pension benefit statements (as a result of IORP II). Middle East and Africa Employers in Turkey should review the impact of Law No. 6,552 on the social security contributions of expatriates. Law No. 6,552 was published in the official gazette on September 10, Individuals from a country without a social security totalization agreement with Turkey are required to pay social security contributions to the Turkish system after three months. Previously, they were exempt from contributions if they could prove they were contributing to their home system. Turkish employees who are working for a Turkish employer in a country without a totalization agreement now pay contributions up to three times the minimum wage. Previously, contributions were based on 6.5 times the minimum wage. For More Information If you are a subscriber to the Aon Hewitt Country Profiles eguide platform and wish to access the full text of any Country Profile including all Updates, please click here and enter your eguide User Name and Password. Global Retirement Update Aon Hewitt October

6 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 aonhewitt.com 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 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. 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. Hewitt reserves all rights to the content of this document. Global Retirement Update Aon Hewitt October