Global Retirement Update

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1 Global Retirement Update June 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 Puerto Rico The Pension Benefit Guaranty Corporation (PBGC) recently withdrew two opinion letters on defined benefit plans in Puerto Rico. According to the opinion letters, Puerto Rico-qualified plans were subject to the PBGC s mandatory plan termination coverage and premiums, even if they did not make an ERISA Section 1022(i)(2) election, as long as they met the tax qualification requirements of Section 401(a) of the U.S. tax code. It is not yet known if the PBGC will require an election under ERISA Section 1022 (i)(2) as a dual-qualified plan to be covered by the PBGC. New guidance is expected. In other retirement-related news, Puerto Rico s Department of Treasury extended the deadline for employers with Puerto Rico-qualified plans to adopt required amendments under the 2011 Tax Code. The new deadlines are April 15, 2014 for calendar year plans and three and one-half months after the close of the employer s tax year for noncalendar year plans, according to Circular Letter No Recent Developments Africa Under Nigeria s Pension Reform Bill, 2013 coverage would be expanded and contributions would increase. The 2013 Bill would replace the Pension Reform Act (No. 2) of Private-sector employers with three or more employees would be required to participate in the Contributory Pension Scheme; currently, employers with five or more employee participate. The total contribution rate would increase from 15% to 20% of gross pay. Employers would contribute 12% and employees would contribute 8%. Currently, employers and employees each contribute 7.5%. The National Pension Commission would assume regulatory responsibility for the pensions industry. The Bill passed its second reading in the Senate and is under review by the House Committee on Pensions. Copyright 2013 Aon plc 1

2 Americas The Canadian Accounting Standards Board released its final standard for the accounting of employee benefits for private enterprises using CICA For fiscal years beginning on or after January 1, 2014, private enterprises will no longer be able to smooth gains and losses over a number of years in their income statements nor be able to use an early measurement date, similar to the newly revised IAS19. Plan sponsors will now need to recognize all gains and losses in the fiscal year in which they occur. Unlike IAS19, this recognition must be through profit and loss with no Other Comprehensive Income option. With regard to the finance cost/credit on the income statement, the new standard combines the interest cost and expected return on assets on the liability/(asset) using one interest rate. The concept of expected rate of return on plan assets is eliminated. With regard to remeasurement, it eliminates gain and loss amortization as well as past service cost amortization. The new standard also eliminates deferred recognition. The balance sheet must reflect the actual surplus/(deficit) of the plan. In Brazil, new rules for retirement due to disability will be effective November 9, Complementary Law No. 142 establishes the following eligibility requirements for retirement with a disability: Serious disability: 25 years of contributions for males and 20 years of contributions for females; Moderate disability: 29 years of contributions for males and 24 years of contributions for females; and Minor disability: 33 years of contributions for males and 28 years of contributions for females. Males age 60 and females age 55 with a minimum of 15 years of contributions and proof of disability, regardless of level, also are eligible for retirement. The Law defines serious, moderate, and minor disabilities, including the medical and functional criteria. Disabled individuals who meet the requirements will receive 100% of the benefit salary (average earnings based on earnings in the best 4/5 ths of the total number of months of earnings). If the individual reaches the normal retirement age (age 60 males and age 55 females), he or she is entitled to 70% percent of the benefit salary plus 1% of the benefit salary for every 12 months of contributions up to a maximum of 30%. Implementing regulations must still be issued. Asia Hong Kong s government proposes to increase the minimum and maximum contribution salary to the Mandatory Provident Fund (MPF). The Amendment Notices to the Mandatory Provident Schemes Ordinance were submitted to the Legislative Council in early June The minimum monthly contribution salary would increase from HKD 6,500 to HKD 7,100, and the maximum monthly salary would increase from HKD 25,000 to HKD 30,000. These increases are consistent with recommendations made by the MPF Authority earlier this year. Employers and employees each contribute 5% of covered pay. If passed, the increase in the minimum contribution salary would be effective November 1, 2013, and the increase in the maximum salary would be effective June 1, Copyright 2013 Aon plc 2

3 Europe The U.K. Pensions Regulator has published its 2013 annual funding statement for defined benefit (DB) plans. This statement builds on its 2012 statement and sets out its views on acceptable approaches to valuations in the current economic environment. While the statement is relevant for all DB plans, it is primarily aimed at those with effective dates from September 22, 2012 to September 21, The Regulator highlights five key points from the statement: Trustees may need to make greater use of the flexibilities available than needed for their preceding valuations; Trustees can use the flexibility available in setting the discount rates the assumptions made for the relative returns of different asset classes may rise or fall from preceding valuations; As a starting point, trustees should consider whether the current level of contributions can be maintained; Trustees should allow for an appropriate level of risk to be taken that is neither overly prudent nor overly optimistic; and The Pensions Regulator is moving away from setting triggers focused on individual items and continues to evolve a suite of risk indicators. As with last year, the Regulator intends to proactively engage with a small number of plans with 2013 valuations to address issues at an early stage. In the autumn, the Regulator will consult on revisions to its Code of Practice on plan funding, as well as on its approach to the regulation of DB plans. These will reflect its new statutory objective. In the United Kingdom, Her Majesty s Revenue and Customs (HMRC) is consulting on arrangements for protection against the forthcoming reduction in lifetime allowance. Before the lifetime allowance is reduced from GBP 1.5 million to GBP 1.25 million on April 6, 2014, individuals with benefits exceeding the new threshold will need to consider applying for transitional protection. In June 2013, HMRC launched a consultation on the details of a new option Individual Protection (IP14). This will enable some individuals to have a personalized lifetime allowance, with any savings above this subject to the lifetime allowance charge. IP14 will be available only to members with benefits valued in excess of GBP 1.25 million on April 5, It cannot be used by those who already have transitional protection relating to the introduction on the new tax regime in 2006 (Enhanced Protection or Primary Protection), but it is expected to be available to members with either form of fixed protection in addition to those with no protection. Individuals are expected to be able to register up to April The U.K. Pensions Regulator has released new codes of practice on monitoring contributions to defined contribution (DC) plans. It published its response to the 2012 consultation on maintaining contributions to DC plans, alongside documents incorporating revised codes of practice and accompanying guidance for both occupational plans and personal pension plans. Copyright 2013 Aon plc 3

4 The codes set out how trustees and pension providers should meet their obligations to monitor the payment of contributions, provide information to members, and report to both the regulator and plan members on material payment failures. The supporting guidance is a new addition to the codes and offers practical help and examples in relation to the specific sections of the codes. The codes have been laid out in draft before Parliament and are expected to come into force in Autumn The Regulator also has published a guide for employers, which provides information on their responsibilities in the payment process. The Irish government announced regulatory changes designed to help DB pension plans as they prepare their funding proposals to meet the June 30, 2013 Funding Standard deadline. If a DB plan does not meet the Funding Standard, the trustees must submit a funding proposal to the Pensions Board that explains how they will deal with the deficit. The regulations will help DB plans by: Widening the type of assets that can be used to reduce the reserve requirements of the Funding Standard to include bonds guaranteed by a European Union (EU) Member State; bonds issued by bodies considered to be financially secure (listed in article 3(b) of the regulations); Euro-denominated bonds issued by any entity where the investment yield does not exceed the yield on an identified German bond by more than a specified percentage; assets invested in a collective investment fund or an insurance fund as specified by Section 44(2)(a) of the Pensions Act; and annuities and sovereign annuities held by a pension plan; Reducing the level of the risk reserve from 15% to 10%; and Changing Section 42 guidance to reflect recent changes in bond yields. The impact of the change is to ensure that plans can value pensions in payment on a sovereign annuities basis to the extent that they hold matching sovereign bonds. The government also is delaying the introduction of proposed changes to the calculation of transfer values. The French government will undertake another round of social security pension reforms this year. An independent advisory board the Moreau Commission was appointed by the government after the Conseil d Orientation des Retraites concluded that the pension reform introduced in 2010 was not sufficient to address the system s deficit. The Commission s recommendations include: An increase in the years of contributions from 41.5 years to 43 years for individuals born in 1962 and to 44 years for those born in or after 1966; A 0.1% increase in pension contributions per year for four years for employees exceeding a specified salary cap. The increase would be equally divided between employers and employee; and A limit on the indexation of pensions for wealthy retirees. Wealthy pensions would receive fewer tax rebates and pay higher social security contributions. The European Commission (EC) also has weighed in on French pension reform after it granted the government a delay in correcting its deficit. The EC recommends an increase in the early and normal retirement ages, an Copyright 2013 Aon plc 4

5 increase in the contribution period for a full pension, adaptation of indexation rules, a review of the number of exemptions for specific categories of employees, and no increase in employers social contributions. President Hollande dismissed the EC s recommendations, arguing that the EC cannot dictate French policy. President Hollande indicated that the social partners (government, unions, and employers associations) are not wed to the recommendations of the Moreau Commission. The social partners will meet in June 2013 to review the Moreau report and outline their positions. The government is expected to draft legislation following these consultations and share it with the unions and employers associations in August. The Cabinet will review the draft legislation in September, after which it will be presented to the parliament. A vote on the reforms will take place before the end of Belgium s Council of Ministers has approved a new pension bonus program, designed to encourage employees to retire later. The draft legislation amends the Law of December 23, 2005 on the Solidarity Pact between Generations. Employees would be entitled to the pension bonus if they deferred their retirement for at least one year from the time they qualified for early retirement. During the first 12 months, a bonus would not be paid. During the second year, employees would receive a bonus equal to EUR 1.50 per day. Thereafter, this amount would increase by EUR 0.20 per year, up to an additional EUR 2.50 for employees who continued to work 72 months after reaching the early retirement age. The bonus would continue to accrue even after the employee reached normal retirement age. Also, employees would be permitted to earn more if they worked while in receipt of a retirement pension. Currently, pensioners cannot earn more than 15% above a specified threshold, which varies according to the number of dependents. This percentage would increase to 25%. In the Netherlands, the lower house of parliament passed legislation on a new pension governance model. The participants and pensioners council (DPR) renamed the accountability body will have the right to advise and approve fundamental decisions affecting the pension fund. It also will have the right to change or terminate a contract for pension provision. Elections for the accountability body will be held at the request of at least 1% or 500 members of the pension fund. The number of pensioners serving on the pension fund board will be capped at 25%. The parliament also adopted an amendment that allows a company s employee council to approve pension contracts to be placed in a pensions fund. A government commission has published its recommendations on reforming Sweden s DC pension system. The commission recommends that the government open public consultation on two proposals. Under the first proposal, the existing system would be left largely intact. Currently, there are more than 800 funds in the system, which makes it difficult to differentiate between good and poor performers. Under the second proposal, the number of funds would be limited from one to ten. Individuals would choose their level of risk, rather than selecting a fund provider. This second option is expected to decrease the spread in returns and reduce fund management costs. In May 2013, the European Commission announced that it would put forward proposals for a directive to improve the governance and transparency of occupational pension funds in Autumn The directive will not cover the issue of solvency capital requirements. The announcement stated that: On solvency, the European Insurance and Occupational Pension Authority s (EIOPA s) study of certain pension funds highlights the need to deepen its knowledge before taking decisions on any European initiative; Copyright 2013 Aon plc 5

6 On governance, the current directive has gaps. For example, it does not require occupational pension funds to have an effective system of governance to guarantee a sound and prudent management of the fund. It does not impose minimal requirements for fund managers and lacks detail on internal risk management and control systems; and On transparency and reporting, the existing monitoring and supervision systems vary between Member States, thereby increasing costs for funds operating cross-border, hindering cooperation between supervisors, and restricting the circulation of information. The competencies of home and host Member State supervisors also need to be clarified. In May 2013, the European Insurance and Occupational Pension Authority (EIOPA) published a discussion paper on a possible European Union-single market for personal pension products (PPPs). EIOPA defines PPPs as pension plans that host members only on an individual basis; these plans do not have to be linked to an employment relationship, although employers may contribute. EIOPA has been asked to consider at least two approaches: 1) develop common rules to enable cross-border activity (similar to the Institutions for Occupational Retirement Provision (IORP) Directive); or 2) develop a completely separate legal framework, outside the laws of individual Member States. EIOPA notes that there do not appear to be major prudential obstacles for pure defined contribution personal pensions, although the situation is more complicated for products with guarantees. There also are tax law obstacles and challenges arising from social and labor laws. The final section of the discussion paper sets out an overview of the possible framework for protection of personal pension holders, such as transparency, distribution and selling practices, professional requirements, and product regulation. The discussion paper forms the first stage of EIOPA s proposed process and is intended to provide all stakeholders with an opportunity to make early submissions on the project. The discussion paper will be followed by a preliminary report outlining issues and options in order to receive a more specific request from the European Commission. EIOPA s final advice on what legislative changes are needed in the areas of prudential law and the protection of personal pension plan holders will then follow. This work is conducted in parallel with a separate initiative from the European Commission (as a follow up to the white paper) focusing on improving consumer protection in the area of individual pension plans ( third-pillar retirement products ) through voluntary codes coordinated at the EU level and possibly an EU certification plan. The deadline for responses is August 16, Employers in Russia that operate in hazardous industries may be required to provide early retirement pensions to their employees. According to the Ministry of Labor, 31.8% of all those employed in Russia work in hazardous industries. The government is considering plans to reduce its financing of early retirement pensions for new employees in these industries. Employers would be required to provide their own early retirement plan or pay additional contributions to the Social Insurance Fund. If an employer chose the latter, employees would be covered only for specified occupational illnesses. This move would reduce the deficit in the State Insurance Fund. It is not yet known when action will be taken. Copyright 2013 Aon plc 6

7 In Kazakhstan, employers old age retirement pension contributions may increase by 5%. President Nazarbayev s government is drafting amendments to the pensions law to require that employers pay an additional 5% contribution, making the total employer contribution 15%. In related news, the government plans to amend the pensions law so that the government will pay the 10% pension contribution for women on maternity leave. Also, the President has returned the current draft pensions law, which would raise the retirement age for women, back to congress without signature. The President wants the retirement age to increase as of January 1, 2018, instead of January 1, * * * * 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 7

8 About Aon Hewitt Aon Hewitt is the global leader in human resource solutions. The company partners with organizations to solve their most complex benefits, talent, and related financial challenges, and improve business performance. Aon Hewitt designs, implements, communicates, and administers a wide range of human capital, retirement, investment management, health care, compensation, and talent management strategies. With more than 29,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients and their employees. 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 8