Global Retirement Update January 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 United States On January 2, 2013, U.S. President Obama signed the American Taxpayer Relief Act into law, which includes provisions on Roth retirement plans. The new law allows 401(k), 403(b), and 457(b) plans to be amended to permit the conversion of taxable vested amounts (e.g., elective deferrals, matching contributions, and nonelective employer contributions) to a designated Roth account maintained within the plan. Previously, in-plan Roth conversions were only permitted for participants who were eligible for a distribution from the plan (e.g., for participants who were age 59½ or older). The newly expanded Roth conversion provisions apply to requests made after December 31, 2012. Recent Developments Americas In Canada, mandatory retirement has been abolished in federal employment. Bill C-13, Keeping Canada s Economy and Jobs Growing Act, received Royal Assent on December 15, 2011 and amended the Canada Labor Code and the Canadian Human Rights Act to repeal mandatory retirement within federal employment. However, implementation of these changes was delayed for one year. As a result, effective December 16, 2012, employers within industries such as banking, transportation, and telecommunications can no longer require employees to retire once they become entitled to a pension under a plan contributed to by the employer that is registered pursuant to the Pension Benefits Standards Act, or to an Old Age Security, Canada Pension Plan, or Quebec Pension Plan pension. On December 14, 2012, Bill C-45, the Jobs and Growth Act, 2012, received Royal Assent in Canada, bringing into force the federal regulatory regime for Pooled Retirement Pension Plans (PRPPs). Related income tax rules for both federally and provincially regulated PRPPs also have come into force. The Quebec government will table a bill to implement new voluntary retirement savings plans in spring 2013. Copyright 2013 Aon plc 1
The Act provides that income received from Retirement Compensation Arrangements (RCAs) is eligible for pension income splitting in certain circumstances, effective for the 2013 and subsequent tax years. To qualify, the RCA must supplement benefits provided under a Retirement Pension Plan, other than an individual pension plan, and the RCA payments must be paid from a life annuity or from a RCA that self-annuitizes. Qualifying RCA pension income is limited, for a year, to 35 times the defined benefit limit for the year, minus the recipient s other eligible pension income. Correction: Puerto Rico s Department of Treasury extended the deadline for the adoption of qualification amendments to retirement plans required by the Internal Revenue Code of 2011, as amended. Circular Letter No. 12-09 extends the deadline to June 30, 2013 or the last day of the first plan year beginning on or after January 1, 2012, whichever is later. The deadline to submit a Request for Qualification letter under the Internal Revenue Code of 1994 and under the Internal Revenue Code of 2011 is September 30, 2013 or the deadline to file the income tax return of the employer for the first taxable year beginning after December 31, 2011, whichever is later. The Request for Qualification letter under the 1994 Code must be submitted with the Request for Qualification letter under the 2011 Code. Social security contribution thresholds increased in Brazil, effective January 1, 2013. Employee contributions to social security are levied on the employee s contribution salary, which is the employee s total earnings according to three salary brackets BRL 0 1,247.70, 8%; BRL 1,247.71 2,079.50, 9%; and BRL 2,079.51 4,159.00, 11%. The employee contribution is based on 12 months of pay only. The employer contribution is levied on total payroll with no ceiling. Employer contributions may vary slightly according to the nature of the business. In related news, the minimum pension and minimum unemployment insurance payment increased to BRL 678 per month, the same as the minimum wage. Amendments to Colombia s tax code affect distributions from voluntary pension plans. Contributions to voluntary pension funds continue to be exempt up to 30% of employment or general income if contributions are held for a minimum of 20 years (previously 5 years). In related news, the monthly minimum wage increased from COP 566,700 to COP 589,500, effective January 1, 2013. The minimum monthly wage serves as the basis for social security contributions. Asia The implementation of guidelines recently issued by India s Employee Provident Fund Organization (EPFO) has been suspended until further clarification can be provided. At the end of November 2012, the EPFO issued a circular intended to clarify the definition of basic wages on which contributions to the Employee Provident Fund (EPF) are calculated. The circular defines basic wages as all income earned by employees according to the terms and conditions of employment, which is payable in cash. Basic wages exclude the cash value of food concessions, the dearness allowance, and gifts made by the employer. All other allowances ordinarily paid to employees are considered basic wages. The Ministry of Labor is seeking further clarification, specifically as to whether special, transportation, medical, and other allowances, which previously were not considered part of the basic wage, should now be subject to EPF contributions. The EPFO is expected to release additional guidance. In Malaysia, the retirement age in the private sector will increase from age 55 to age 60, effective July 1, 2013. The Malaysian Trade Union Congress is encouraging employers to extend the retirement age immediately. Under the amended law, employers cannot force employees to retire before age 60. Copyright 2013 Aon plc 2
Amendments to South Korea s tax code, effective January 1, 2013, affect the taxation of pension income. Pension income (National Pension and private pension) is tax free up to KRW 12 million per year (previously KRW 6 million). Private pension income is subject to tax rates that vary by age and pension type: general, 5%; income from lifetime pension received at or after age 70, 4%; and retirement income received at or after age 80, 3%. The tax-free threshold for retirement and severance payments increased in Taiwan. Effective January 1, 2013, the exemption is capped at TWD 758,000 for payments received in installments. The taxation of payments received as lump sums varies according to the amount received. If the amount is less than TWD 175,000 times years of service, the total amount is exempt. If the amount exceeds TWD 175,000 times years of service but is less than TWD 351,000 times years of service, one-half of the amount exceeding TWD 175,000 times years of service is taxable. If the amount exceeds TWD 351,000 times years of service, the taxable amount equals (amount received minus TWD 351,000 times years of service) plus (TWD 351,000 minus TWD 175,000) times years of service times 0.5. The minimum monthly pension increased in the Philippines, effective January 1, 2013. For employees with 10 years of credited service, the minimum monthly pension increased from PHP 1,500 to PHP 1,700. For employees with 20 years of credited service, it increased from PHP 2,400 to PHP 3,400. In 3 years, the 2 pensions are scheduled to increase by PHP 500 and PHP 1,000, respectively. Europe The U.K. government s long-promised detail on reform to state pensions has been released in a White Paper. Highlights include: A single flat-rate state pension payment set above the basic level of the means test, which is currently GBP 142.70. This compared to a current basic state pension of GBP 107 per week plus highly variable levels of additional state pension. The White Paper assumes that the start rate will be GBP 144 per week, up-rated annually by the triple lock ; An end to contracting out for defined benefit pension schemes (employers would be permitted to reduce future benefits to compensate for the increase in their National Insurance contributions). The savings credit would be abolished; Thirty-five qualifying years to receive the full amount, with over 80% of new pensioners achieving this by the 2040s; A minimum number of qualifying years (up to 10 years) for any single tier; Self-employed individuals brought fully into the state pension for the first time; and Recognition of all state pension rights accrued under the old system. According to the executive summary, the Government intends to implement the single-tier pension in April 2017 at the earliest. Copyright 2013 Aon plc 3
The government indicates that the new regime will particularly benefit women, low-income earners, and the self-employed who, under existing rules, find it difficult to earn a full state pension. Also, there will be a regular review of the State Pension Age. Draft legislation has since been published. On December 17, 2012, the U.K. Pension Protection Fund (PPF) confirmed its Levy Determination for 2013 14. There are no substantive changes from the draft published in September 2012. The PPF will, therefore, make the two suggested amendments to the parameters: 1) reduce the risk-based levy scaling factor from 0.89 to 0.73; and 2) reduce the scheme-based levy multiplier from 0.0085% to 0.0056%. Although exact estimates will not be possible until market conditions and D&B scores up to March 28, 2013 are known, plans can now gauge the impact of the new scaling factors, estimate their potential 2013 14 levies, and consider any appropriate mitigating action. Following the consultation on possible changes to the Retail Price Index (RPI), the U.K. National Statistician has published the conclusion of the consultation and recommendations. The main recommendations are: 1) existing RPI will continue to be used; 2) some improvements to the measurement of private housing rents are proposed; and 3) a new RPI-based index (RPIJ) will be published using a geometric formulation. The options in the original consultation could have resulted in future RPI inflation moving closer to the (generally lower) Consumer Price Index (CPI) measure of inflation. The new RPIJ is intended to aid analysis of the impact that the formula effect has on the RPI, and there is no proposal to use RPI for pensions measurement or for index-linked gilts (the government will continue to issue new index-linked gilts on the current basis). However, it remains to be seen whether the new index proposed will be adopted in the long term in measuring inflation-linked liabilities and assets. The U.K. Pensions Regulator is consulting on a package of measures that will establish its approach to regulating workplace defined contribution (DC) plans. The documents include: an introductory consultation paper; a regulatory approach document that explains the regulatory framework and processes; a new code of practice for occupational DC trust-based plans; and regulatory guidance, setting out good practice in areas such as value for money, transparency of costs and charges, and member communications. The code of practice and accompanying regulatory guidance are underpinned by the Regulator s six DC principles and an updated version of the quality features. These represent the standards and behaviors the Regulator expects to see demonstrated. There also are various research documents, as well as initial analysis on the presence of the underlying DC quality features in the Financial Services Authority (FSA) regulatory regime. A final version of the analysis is expected later in 2013, and joint working protocols are to be agreed with the FSA. The consultation runs until March 28, 2013. Employers and employees in Spain are reminded that provisions of the social security reform law passed in 2011 will be implemented in 2013. The Law (Ley 27/2011 Sobre Actualización, Adecuación, y Modernización del Sistema) was published in the official gazette on August 2, 2011. Effective January 1, 2013, the statutory retirement age for a full old age pension increased from age 65 to age 65 and one month. It will continue to increase until reaching age 67 in 2027. The European Commission has advised the government to continue Copyright 2013 Aon plc 3
raising the retirement age in line with life expectancy. A full pension will be based on the final 16 years pay (previously 15 years pay); this basis will increase to 25 years in 2022. Early retirement provisions continue to be debated. Under the 2011 law, early retirement is possible at age 61 if an individual has been involuntarily terminated from work and has a minimum of 33 years of contributions and at age 63 if the individual retires voluntarily. The current government wants to increase these ages to age 63 and age 65, respectively. Pension benefits increased by 3.5% in Finland, effective January 1, 2013. The guaranteed pension increased by EUR 25.09 to EUR 738.82 per month. The full monthly national pension increased to EUR 630.02 for a single person and to EUR 558.83 for married persons or persons living together. The initial monthly pension is EUR 324.93 for spouses, and EUR 59.79 for orphans. The age limit for early retirement and the guaranteed pension in the national system increased from age 62 to age 63. In related news, occupational pensions increased by 2.82%. However, there are changes in eligibility requirements for early and part-time retirement. Early retirement has been discontinued in the earnings-related pension system for individuals born after 1952. Individuals born after 1954 must be age 61 (previously age 60) to take part-time retirement. Also, individuals with pension income exceeding EUR 45,000 after the pension deduction has been taken is subject to a 6% surcharge. Under an agreement initialed by the Swiss and U.S. governments, private retirement funds would be exempt from the Foreign Account Tax Compliance Act (FATCA). The relevant institutions in Switzerland would report on U.S. accounts directly to U.S. authorities, with the consent of the account holder. In the event consent was not obtained, information would be sent to the United States via a group request. The agreement has not yet been signed. Amendments made to Hungary s tax code, effective January 1, 2013, affect voluntary mutual insurance funds and retirement savings accounts. The 10% reduced tax rate on distributions applies only if funds are held for a minimum of ten years (previously, three years). Employment costs increased in Kazakhstan, effective January 1, 2013. The monthly minimum wage increased from KZT 17,491 to KZT 19,066. Social insurance contributions are capped at 10 times the monthly minimum wage, and individual pension account contributions are capped at 75 times the monthly minimum wage. In related news, the minimum pension increased to KZT 19,066 per month; the solidarity pension is KZT 9,330 per month. Middle East In Israel, employer contributions to National Insurance increased from 5.9% to 6.5% on pay that is 60% or more of the national average. The minimum employer and employee contribution rate for pension savings increased from 4.16% to 5% of pay. The changes are effective January 1, 2013. Copyright 2013 Aon plc 4
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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 www.aonhewitt.com. 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 6