Regulatory Trends and Impacts On Retirement Plans

Transcription

1 NORTHERN TRUST 2010 INSTITUTIONAL CLIENT CONFERENCE Reaching for the New Gold Standard of Investing Regulatory Trends and Impacts On Retirement Plans Michael Barry Founder, Plan Advisory Services Lisa Chavez Senior Attorney, Northern Trust 2010 Northern Trust Corporation northerntrust.com

2 Biographies Michael Barry is President of the Plan Advisory Services Group, a consulting group that helps financial services corporations with the regulatory issues facing their plan sponsor clients. He has had over 30 years experience in the benefits field, in law and consulting firms. Plan Advisory Services provides information concerning regulatory developments affecting defined benefit and defined contribution plans, focusing on the challenges, opportunities and consequences for sponsors regulatory changes present. Before founding Plan Advisory Services, Mike was a Managing Director at Bankers Trust and, before that, the New York benefits partner at LeBeouf, Lamb, Greene & McRae. Lisa Chavez is a Senior Attorney in the Corporate Legal department responsible for tax matters, with a focus on the global application of U.S. tax withholding and tax information reporting requirements. Lisa earned her J.D. degree from The University of Chicago Law School, and her B.A. degree in Accounting from St. Ambrose University. She was appointed to the U.S. Internal Revenue Service s Information Reporting Program Advisory Committee (IRPAC) in 2008, and currently serves as its Chairperson; and has also been appointed a member of the Tax Information Reporting Advisory Group of the American Bankers Association Institutional Client Conference

3 NORTHERN TRUST 2010 INSTITUTIONAL CLIENT CONFERENCE Reaching for the New Gold Standard of Investing Changing rules for ERISA plans: challenges and opportunities Michael Barry Founder, Plan Advisory Services 2010 Northern Trust Corporation northerntrust.com

4 A Dynamic Regulatory Environment Pension professionals have gotten used to constant changes in the rules applicable to retirement savings programs These programs must respond to exogenous factors changes in demography, the culture of work, storms in the financial markets They are a key element in social policy both left and right Mastering the consequences of each regulatory innovation is a basic part of the benefits professional s toolkit Institutional Client Conference

5 Key Changes in DB Finance Dodd-Frank PPA funding and recent funding relief Accounting changes Institutional Client Conference

6 Dodd-Frank Four Big Issues Fiduciary rules Stable value Plans as MSPs Clearing requirement Institutional Client Conference

7 Dodd-Frank Time Line Likely that implementation will be after a regulatory process with full opportunity for notice and comment Particularly for plans that use swaps to manage risk, participation in that process will be critical Institutional Client Conference

8 Dodd-Frank Fiduciary Rules New fiduciary rules Advisors must consider whether swap is appropriate for plan Counter-parties may have to determine that plan is advised by expert-fiduciary So long as rules are clear and not overly burdensome, plans, advisors and counter-parties should be able to adapt Institutional Client Conference

9 Dodd-Frank Stable Value Under the statute, there will be no change unless the regulators think one is needed Expect a solution that allows most of current practice to continue Institutional Client Conference

10 Dodd-Frank Plans As MSPs Major swap participants (MSPs) are subject to special rules with respect to capital, margin, clearing, etc. In determining whether a plan is an MSP, positions that hedge plan operational risk are disregarded what is the scope of this exclusion? Sponsors that use swaps tactically will want to understand where the line is when they may become an MSP and what the consequences are Institutional Client Conference

11 Dodd-Frank Clearing Requirement A centerpiece of reform affects all derivatives market participants Critical for plans that use interest rate swaps that markets remain liquid and efficient Senator Dodd: No one will know until this is actually in place how it works Institutional Client Conference

12 Do you expect Dodd-Frank to significantly affect plan finance? A. A lot B. A little C. Not at all Institutional Client Conference

13 PPA and Funding Relief Requirements of PPA and plan contributions took on greater significance because of the global financial crisis Funding relief helps some years 15 years Institutional Client Conference

14 PPA and Funding Relief But at a significant cost Strings attached may be a particular problem If you take relief in two years, there s a double claw back Companies that pay executives over $1 million will have a hard time reconciling relief with executive compensation policy Institutional Client Conference

15 Are you considering using funding relief? A. Yes B. No Institutional Client Conference

16 How significant is the pay limit in your decision? Very significant Somewhat significant Not significant at all Institutional Client Conference

17 Accounting Changes are Coming IASB rules are likely to be adopted in the US Proposal Book normal cost to operating income Book a fixed rate of return (generally, the plan s discount rate) on net asset (liability), as a finance charge Book actual (i.e., mark-to-market) return to other comprehensive income Eliminate expected return on assets and various buffers All of this reduces the appeal of equities Institutional Client Conference

18 Will accounting changes affect plan finance decisions? A. Yes B. No Institutional Client Conference

19 Key changes in DC regulation Fee disclosure Regulation of target date funds Questions about adequacy and retirement income Institutional Client Conference

20 Fee Disclosure New detailed rules for disclosure from providers to sponsors and from sponsors to participants Institutional Client Conference

21 Fee Disclosure Key Issues for Sponsors Increased review burden and litigation exposure Opportunity to improve fund efficiency Challenge to explain or otherwise deal with uneven impact of revenue sharing arrangements Huge administrative challenge Institutional Client Conference

22 Will new fee rules be a major management challenge? A. Yes B. No Institutional Client Conference

23 Regulation of Target Date Funds Policymakers still seem to like these funds, even after 2008 A lot of truth in advertising rules better labeling A less obvious challenge: getting a handle of fees Institutional Client Conference

24 Adequacy and Retirement Income Adequacy = more participation by lower paid and more contributions by or for lower paid Encouraging automatic enrollment, automatic increase is clearly the preferred solution Institutional Client Conference

25 Adequacy and Retirement Income Retirement income = annuities Generally, right now, focus is on jawboning solutions e.g., statement of account as retirement income Still struggling with ingrained participant hostility to annuities Institutional Client Conference

26 On the Horizon Debt commission considering: Raising Social Security retirement age to 70 VAT Institutional Client Conference

27 Age 70 Social Security Retirement Age Basic structural reason for doing this Current demographic profile Need to retain skills and experience What is sponsor response? Do nothing? Make up difference? Move to an age 70 NRA in plan? Do the adequacy and retirement income issues just go away? Institutional Client Conference

28 Would your company consider raising retirement age to 70? A. Yes B. No Institutional Client Conference

29 VAT Generally VAT will not affect retirement savings tax incentives If paired with, e.g., reductions in income tax it presents issues Institutional Client Conference

30 NORTHERN TRUST 2010 INSTITUTIONAL CLIENT CONFERENCE Reaching for the New Gold Standard of Investing FATCA: Foreign Account Tax Compliance Act Lisa Chavez Senior Attorney 2010 Northern Trust Corporation northerntrust.com

31 Under FATCA, all US financial institutions will have new US withholding responsibilities effective 1 January 2013 U.S. Financial Institutions Examples: Northern Trust & Branches U.S. Banks U.S. Brokers U.S. Insurance Companies U.S. Investment Companies (including NTGI and NT-sponsored funds) U.S. Transfer Agents U.S. Fund Distributors Apply NRA Withholding Tax (may be reduced by treaty) Apply 30% FATCA Withholding Pays U.S.-sourced Income Examples: Dividends & income Gross proceeds from sale of U.S. securities Rents, salaries, wages, premiums, annuities, etc. Sourcing rules changing for branch deposits and substitute dividends FATCA Compliant Foreign Institutions Non-Compliant Foreign Institutions Institutional Client Conference

32 Any U.S. Financial Institution paying U.S.-sourced income to a foreign institution must collect evidence of FATCA Compliance. U.S. Financial Institution Proof of Compliance with FATCA 1) Proof that not an FFI 2) Details of U.S. ownership Proof of exception from FATCA Foreign Financial Institution (FFI) Northern Trust subsidiaries (such as NTGS, NTGL, NTFS Ireland, NT Luxembourg Management Company Northern Trust clients (such as banks, brokers, fund companies, insurance companies, transfer agents and fund distributors) Non-Financial Foreign Entity (NFFE) Non-financial foreign companies If no evidence of compliance, 30% FATCA withholding applies. Exempt Foreign Institution Government International organizations (e.g., UN) Central Banks Insurance companies that do not issue cash value insurance or annuities Retirement Plans (definition unclear) Status of charities is not clear Institutional Client Conference

33 To comply with FATCA, a Foreign Financial Institution (FFI) must: Enter into an agreement with the IRS. Identify and classify all account holders Report to U.S. individuals and to US institutions on a 1099 light with a copy to the IRS Apply 30% FATCA withholding to any noncompliant recipient of U.S.-sourced income. FFI Collect proof of compliance NFFE Collect proof that not an FFI and details of U.S. ownership, if any Name Address Taxpayer ID Account Number Exempt Foreign Institution Collect proof of exemption Foreign individual No reporting requirement U.S. institution report to the IRS U.S. individual Report to the IRS Gross receipts Gross withdrawals or payments Reporting is required on all accounts, not just those generating USsourced income Institutional Client Conference

34 U.S. Investors may be affected by FATCA in the following ways: U.S. Institutional Investors U.S. Financial Institutions (e.g. U.S. Fund Management Companies) must apply FATCA withholding rules to any foreign institution to whom they pay U.S.-sourced income. U.S. institutions who operate globally and have established foreign financial institutions (FFI) or Non-Financial Foreign Entities (NFFE) have compliance requirements. Unclear whether FATCA applies to vendor payments to foreign institutions for services. U.S. institutions investing with FFIs will want to make sure the FFI is compliant with FATCA. U.S. Individuals U.S. individuals with foreign financial assets >$50,000 will be required to disclose these assets effective for tax years beginning after March 19, U.S. persons investing with non- U.S. institutions will want to make sure these institutions are compliant with FATCA. U.S. persons will want to be aware that their foreign holding will be reported by FFIs to the IRS Institutional Client Conference

35 Northern Trust has formed an enterprise-wide FATCA implementation team Working Group is evaluating impacts to Northern Trust clients and ways that Northern Trust can help Working Group is evaluating required changes to Northern Trust operations and services Northern Trust is working with clients and industry groups to comment on proposed FATCA implementation guidance issued by the IRS Institutional Client Conference

36 NORTHERN TRUST 2010 INSTITUTIONAL CLIENT CONFERENCE Reaching for the New Gold Standard of Investing Thank you. Michael Barry Founder, Plan Advisory Services Lisa Chavez Senior Attorney, Northern Trust 2010 Northern Trust Corporation northerntrust.com