Global Retirement Update February 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 United States In the State of the Union Address, President Obama announced that he will be using his executive authority to direct the Treasury to create a new retirement program called myra. The program is to be offered through employers and targets employees who currently lack access to a workplace retirement saving plan, such as a 401(k). According to a fact sheet released by the White House, the product will be offered via a familiar Roth IRA account, and savers will benefit from principal protection, so the account balance will never go down in value. The security in the account, like all savings bonds, will be backed by the U.S. government. Contributions can be withdrawn tax free at any time. The program will be available to households earning up to USD 191,000 a year and be offered through an initial pilot program available to employers that choose to participate by the end of 2014. According to the Administration, employers will neither administer the accounts nor contribute to them. Participants can save up to USD 15,000, or for a maximum of 30 years, in their accounts before transferring their balance to a private-sector Roth IRA. Recent Developments Americas The U.S. Internal Revenue Service (IRS) issued guidance (Announcement 2014-4) that extends to February 2, 2015 (from January 31, 2014) the deadline to submit on-cycle applications for opinion and advisory letters for pre-approved DB plans for the plans second six-year remedial amendment cycle. According to the IRS, the extension applies to DB mass submitter lead and specimen plans, word-for-word identical plans, master and prototype minor modifier placeholder applications, and nonmass submitter DB plans. The extension was in response to recent requests from the employee benefits community that the IRS develop a pre-approved plan program for DB plans with cash balance features, as referenced in Section 411(a)(13)(C) of the Internal Revenue Code, that would be available for the second six-year remedial amendment cycle. The IRS previously extended the application deadline from October 31, 2013 to January 31, 2014. Copyright 2014 Aon plc 1
After lengthy negotiations, Canada and the United States have signed an intergovernmental agreement under the longstanding Canada-U.S. Tax Convention to address U.S. Foreign Account Tax Compliance Act (FATCA) requirements. FATCA requires non-u.s. financial institutions to report accounts held by U.S. taxpayers to the U.S. Internal Revenue Service (IRS). FATCA raised a number of issues in Canada, including a concern that the reporting obligations would compel Canadian financial institutions to report information on account holders who are U.S. residents and U.S. citizens (including U.S. citizens who are residents or citizens of Canada) directly to the IRS, potentially violating Canadian privacy laws. Without an agreement in place, obligations to comply with FATCA were scheduled to be imposed on Canadian financial institutions and their clients as of July 1, 2014. Under the intergovernmental agreement, significant exemptions and relief have been obtained. For instance, certain accounts are FATCA exempt and, hence, not reportable. These accounts include registered pension plans, registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered disability savings plans, tax-free savings accounts, and others. However, funded executive retirement plans (SERPs) and individual pension plans are not excluded, and sponsors of these plans may be required to take action. Canada s Federal Budget 2014 proposes to extend tax-sheltering relief for individuals transferring benefit entitlements from underfunded defined benefit pension plans. Since 2011, relief has only been available if the plan was wound up due to an employer s insolvency. The 2014 Budget would extend relief to transfers from underfunded plans in the following circumstances: Benefits promised under the registered pension plan (RPP) have been reduced due to plan underfunding; Where the plan is an RPP other than an individual pension plan, a permanent benefit reduction is approved pursuant to the applicable pension benefits standards legislation; Where the plan is an individual pension plan, the transfer of the commuted value of the member s benefit entitlements is the last payment made from the individual pension plan; and Use of the special rule for a particular pension plan as approved by the Minister of National Revenue. As a result of the changes, if the commuted value of an individual s reduced annual pension were less than or equal to the transfer limit that would have applied to the unreduced pension amount, the individual would be entitled to a tax-free transfer of that commuted value. If the commuted value of the reduced annual pension exceeded the transfer limit that would have applied to the unreduced pension, only the excess portion of the commuted value above that limit would be paid to the individual and included in his or her income. The measures would apply to transfer payments made after 2012. The Ontario (Canada) 2013 Budget includes provisions to modernize investment rules applicable to Ontario-registered pension plans, including regulatory amendments under the Pension Benefits Act (Ontario) that would provide plan administrators with greater flexibility to pursue investment strategies that allow a better match with plan liabilities. Draft amendments to Regulation 909, Pension Benefits Act have been released. The proposed amendments would modify one of the quantitative investment limits applicable to registered pension plans in Ontario, namely the 10% rule, by restricting a plan administrator from investing more than 10% of a pension plan s assets in a single entity, or two or more associated entities or affiliated companies. The proposed Copyright 2014 Aon plc 2
amendment would remove this restriction for investments in securities issued and fully guaranteed by the U.S. government. The Superior Court of Quebec (Canada) released its much-anticipated decision in Timminco ltée, declaring that pension deemed trusts are a priority over secured creditors. The Court recognized that the Supplemental Pension Plans Act creates a valid deemed trust for unpaid pension contributions. The Court based its analysis on the combination of section 49, which creates a valid deemed trust for all pension contributions and section 264, which renders the contribution unassignable and unseizable. Puerto Rico s Secretary of the Treasury has published the 2014 limits for qualified retirement plans. The annual limit on compensation increased from USD 255,000 to USD 260,000. The limit for defined benefit plans increased from USD 205,000 to USD 210,000, and the limit for defined contribution plans increased from USD 51,000 to USD 52,000. The pay threshold for highly compensated employees remains unchanged at USD 115,000. Effective January 1, 2014, the monthly ceiling for contributions to old age, survivors and disability pensions, health care, and unemployment insurance increased in Chile. Monthly ceilings are indexed to the development unit (UF Unidad de Fomento). The daily value of 1 UF in pesos is reported early in each month, for each day of the following month, based on the previous month s Consumer Price Index. Contributions for old age, survivors, and disability pensions and for health care increased from 70.3 UF to 72.3 UF. Unemployment insurance contributions increased from 105.4 UF to 108.5 UF. The new ceilings apply to employee and employer contributions; contribution rates did not increase. Asia Chinese government officials indicate that an increase in the retirement age is inevitable. Currently, males retire at age 60 and females retire at age 55 (office and university workers) or age 50 (factory and other workers). Life expectancy is age 75. In related news, the State Council announced that it would integrate the urban and rural social security systems into a single system. A unified system is expected to encourage rural workers to move to urban areas where jobs are generally higher paying. Employers in India could be paying higher Employee Provident Fund (EPF) contributions. The EPF s Central Board of Trustees approved an amendment to the EPF Act, which would increase the monthly earnings ceiling from INR 6,500 to INR 15,000. A minimum pension of INR 1,000 per month would be guaranteed. The Central Board of Trustees postponed a decision on increasing the retirement age to age 60 until the government has conducted additional consultations on the issue. The changes would be effective as of April 2014; however, legislative action must still be taken. In related news, the Central Board of Trustees recommended an 8.75% interest rate payout in the fiscal year ending March 31. India s Pension Fund Regulatory and Development Authority has proposed National Pension System withdrawal provisions. Members would be permitted to withdraw up to 25% of their contributions to cover specified medical expenses, higher education for children, marriage of children, and construction of a residential dwelling. Members would be permitted to withdraw funds up to three times. There would have to be at least a five-year interval Copyright 2014 Aon plc 3
between withdrawals. Only members with at least ten years of contributions would be permitted to withdraw funds. Pakistan s Employees Provident Fund Organization (EPFO) has announced plans to make EPF accounts portable. The EPFO plans to assign permanent numbers to provident fund accounts in 2014 15, which would enable employees to keep these accounts when they change jobs. Currently, accounts must be transferred to a new employer. Europe The U.K. Department for Work and Pensions (DWP) confirms a delay to its proposed cap on fund charges in defined contribution (DC) schemes used for automatic enrollment. In October 2013, the DWP set out proposals to cap fund charges for default funds in DC schemes used to comply with the automatic enrollment duties, including those used for existing members. The consultation proposed that the cap would apply to employers whose automatic enrollment requirements start from April 2014 or later, but would be extended by April 2015 to capture all employers subject to the automatic enrollment requirements. However, a ministerial statement released in late January 2014 announced that a cap would not be introduced before April 2015. The U.K. Pensions Regulator has issued a template assessment tool and governance statement to help trustees comply with its requirements for defined contribution (DC) arrangements. Following the earlier consultation on its approach to regulating workplace DC schemes, the Regulator s code of practice took effect in November 2013. The Regulator has now published a template to enable trustees to assess their scheme against the DC quality features, and a standardized governance statement to help them demonstrate the quality of their scheme to employers and retirement savers. The U.K. Department for Work and Pensions (DWP) has released additional draft legislation to simplify some of the auto-enrollment requirements. Following a consultation in the spring of 2013 on Technical Changes to Automatic Enrollment, the DWP laid final regulations in October 2013 with respect to some of the proposed changes, most of which came into force on November 1, 2013 (refer to the October 2013 Update). In order to reflect some of the other proposed technical changes, the Pensions Bill was amended in January 2014 to include alternative quality requirements for defined benefit (DB) schemes. The Bill would allow the following three alternative tests: A test based on the relevant quality requirement for defined contribution (DC) schemes to assist schemes that are close to DC in nature but, perhaps because of an investment return guarantee, are DB in legal terms; A scheme-level test based on the cost of providing accruing benefits to relevant members, expressed as a percentage of the members total relevant earnings; and A member-level test based on the cost of providing accruing benefits to individual relevant members, expressed as a percentage of the member s relevant earnings, with at least 90% of relevant members being required to pass the test. Most of the details will be consulted on and set out in regulations. Copyright 2014 Aon plc 4
In the United Kingdom, Her Majesty s Revenue and Customs (HMRC) revised guidance on recovery of value added tax (VAT) for pension funds. In July 2013, the European Court of Justice concluded that because a Dutch employer (PPG) was required to set up its pension fund as a legally separate entity, all of the costs of managing the fund paid by the employer should be regarded as part of its general business costs. This meant that it could deduct the VAT it incurred not just on the management services of the fund, but also on the investment costs incurred by the fund. This ruling was contrary to HMRC guidance that a business cannot claim back VAT that relates to the investment activities of its pension fund. HMRC has now amended its policy on the recovery of input tax in relation to the management of pension funds, introducing new conditions to be satisfied. France s Constitutional Council ruled that the provisions of the recent pension reform law are constitutional. Under the reform law, the number of insured contributions will increase, as will employer and employee social security contributions. The timing of pension revaluation will be moved to October. Also, special accounts will be established for employees who work in hazardous or arduous conditions, and the disabled will be able to retire at age 62 with a full pension. In Germany, the Federal Cabinet has approved a draft pension reform bill. Under the proposed reforms, an employee with 45 years covered service may retire at age 63 with a full pension. Pension benefits for mothers of children born before 1992 would increase, thereby equalizing these benefits with those paid to mothers of children born after 1992. If passed, the changes would be effective July 1, 2014. To encourage employees to retire later, eligibility requirements for an old age pension may change in Belgium. The maximum number of years of service (45 years) would be replaced by a maximum number of days of service (14,040 days). There would be no cap on the number of years of contributions, and employees who work part of a year prior to retirement would no longer lose their last months of contributions. Effective April 1, 2014, individuals born on or after January 1, 1969 will be exempt from participating in the second-pillar pension fund in Poland. Individuals will have four months to opt for participation in the open pension funds (OFEs) or have all contributions deposited in the first-pillar social security system (ZUS). The Constitutional Tribunal has not yet issued a ruling on whether the second-pillar pension fund reform is constitutional. The new Czech government announced its plans to dismantle the second-pillar pension system. The Minister of Labor and Social Affairs announced that the government will create a commission, consisting of representatives from political parties, employers associations, unions, and economists, to develop a plan for the transfer of funds. Preliminarily, second-pillar funds would be deposited into third-pillar accounts or into the first-pillar state system. The second pillar has been operational since January 2013; to date, participation has been limited. * * * * 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 2014 Aon plc 5
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 www.aonhewitt.com. Copyright 2014 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 2014 Aon plc 6