Global Retirement Update February 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 Kingdom Employers may wish to begin to review the draft Pensions Bill 2013, which provides for the implementation of the new flat-rate state pension and the abolition of contracting out of defined benefit plans. On the new flat-rate state pension, the Bill makes detailed provisions including: Transitional arrangements giving additional protected payments to individuals who, when the new pension is introduced, already have a higher entitlement under the current regime; Inheritance: with two exceptions, entitlement to the new pension will be based only on the individual s own National Insurance record; and Deferral: an increased weekly amount will be available to individuals choosing to defer their pension, but the option of a lump sum based on a pension foregone will be removed. The Bill will bring forward the increase in State Pension Age (SPA) from age 66 to age 67, which now takes place between April 2026 and April 2028. It provides for periodic reviews of future increases in SPA, based on life expectancy and other factors that the Secretary of State considers relevant. Reports must be published at least every six years, with the first report published before May 7, 2017. A guiding principle is that the proportion of adult life spent after SPA should be maintained. The Bill also provides for the abolition of salary-related contracting out, from the date that the new state pension is introduced. National Insurance contracting-out rebates will be removed. To reflect this, the Bill gives an overriding power to employers to amend the rules of contracted-out plans. This power may be used only to increase employee contributions or to alter future accrual of benefit, and will last for five years only. Regulations, not yet published, will set out how this restriction will operate. Copyright 2013 Aon plc 1
Recent Developments Africa In South Africa, same-sex partners are not entitled to survivors benefits unless they have been named in writing as a beneficiary. The Pension Funds Adjudicator recently ruled in a dispute over the payment of a spouse s pension provided by an employer-provided pension fund. Both partners were members of the same fund, and the survivor had been the deceased s life partner since 1984. The survivor claimed that he met all the conditions to be considered an eligible spouse, and since the partners shared the same address, the pension fund administrator should have realized that they were partners. The deceased, however, was listed as single and no beneficiary was named. The Adjudicator ruled that same-sex partners must formally register their relationship with pension funds for survivors to be eligible for benefits. Morocco s government has pledged to pursue social security reforms, starting in 2013. In a speech to parliament, Prime Minister Benkirane noted that only 27% of the economically active population contributes to the pension system, in contrast to the 80% participation in OECD (Organization for Economic Cooperation and Development) countries. Reforms under consideration include an increase in the retirement age from age 60 to age 67, an increase in employer and employee contributions, and the establishment of a complementary pension system. Americas Common-law partners in Canada are not subject to the partition of pension plan benefits accrued during their union, unless they agree in writing to split the benefits. In January 2013, the Supreme Court of Canada confirmed the validity of the Civil Code of Quebec partition of family patrimony regime, which does not apply to common-law partners. This includes benefits accumulated by a member in a pension plan governed by the Supplemental Pension Plans Act or by any other law recognized by the Civil Code for the partition of family patrimony. Asia According to press reports, the China Insurance Regulatory Commission, tax authority, and the Shanghai municipal government have reached agreement on a pilot program for a third-pillar pension. Contributions to the third-pillar pension would be tax deferred, and the ceiling on contributions would be CNY 1,000. Employees and employers could participate. The plan must be submitted to the State Council for review. It is not yet known when the pilot program will be launched. Individuals in India may soon be entitled to additional tax relief for savings in pension and insurance products. Currently, pension contributions and life insurance payments are tax deductible up to INR 100,000 each year. Under a proposal introduced by the Finance Ministry, an additional tax deduction of INR 50,000 would be made available for savings in pension products. Hong Kong s Mandatory Provident Fund (MPF) Authority proposes to change the minimum and maximum contribution salary to the MPF. The minimum monthly contribution salary would increase from HKD 6,500 to HKD 7,100, and the maximum would increase from HKD 25,000 to HKD 30,000. Employers and employees each Copyright 2013 Aon plc 2
contribute 5% of covered pay. The change reflects the anticipated increase in the minimum wage to HKD 30 per hour. However, it is not yet known when the increase would be implemented. Employee representatives want the increase instituted in June 2013, while employers want it implemented in November 2013. The Taiwanese government has published draft Labor Insurance pension reforms. To keep the system sustainable, the government proposes to increase the contribution rate from the current 8% to 9% in 2015. Thereafter, the rate would increase by 0.5% each year until it reached 19% in 2036. Benefits would be reduced. Currently, the standard formula for a Labor Insurance pension is average monthly insurable pay x years of insurance x 1.55%. The first option for reduction would be to continue to use the current standard formula for the first 8 years of retirement and then pay 70% of that amount for the remainder of the beneficiary s life. Under the second option, the multiplier would remain 1.55% for employees with insured monthly pay up to TWD 30,000 and fall to 1.3% for employees with insured monthly pay between TWD 30,000 and TWD 43,900. Also, benefits would be based on the highest 180 months of pay instead of the highest 60 months. In Thailand, the tax exemption on income from provident funds has been expanded. Previously, income paid by a provident fund was exempt from tax only upon the death of the beneficiary. Effective January 1, 2013, benefits paid as a result of death, disability, or retirement at age 55 are exempt from tax if the individual has been a member of a provident fund for at least five years. Also, to ease the impact of the increase in the minimum wage, the government has reduced social security contributions for one year. The Cabinet approved a proposal to reduce total employer and employee contributions from 5% to 4% (each). Contributions for death, accident and sickness, disability, and maternity will be reduced from 1.5% to 0.5% of annual covered pay. Once the reduction is published in the official gazette, it will be retroactive to January 1, 2013. Europe The U.K s Department of Work and Pensions (DWP) has issued a call for evidence on pensions and growth. The Chancellor s Autumn Statement explained that the Government is determined to ensure that defined-benefit pensions regulation does not act as a brake on investment and growth and outlined two related issues on which DWP would be asked to consult: Whether to allow plans undergoing valuations in 2013 or later to smooth asset and liability values; and Whether to provide the Pensions Regulator with a new statutory objective to consider the long-term affordability of deficit recovery plans to sponsoring employers. In January 2013, the DWP published a call for evidence on both these issues. If the call for evidence prompts changes to legislation, the government will bring forward more detailed proposals and implement any changes to legislation as soon as practicable in 2013. The U.K. government has announced that it will consult on proposals to simplify automatic enrollment. Based on feedback, the government has drawn up a shortlist of areas that could benefit from improvement, including making assessments of the workforce easier; making it easier for money purchase plans to show they meet the plan quality requirements; and removing the duty to enroll particular groups, such as those who benefit from protection because they have already exceeded the lifetime allowance for tax purposes. Copyright 2013 Aon plc 3
The precise timing of any changes has not been confirmed, but the Pensions Minister stated that the timing of the consultation should allow any changes to be made before automatic enrolment is rolled out to small- and medium-sized businesses (companies with fewer than 250 workers and with staging dates of April 1, 2014 or later). The U.K. government has announced a delay to its proposed regulations that would affect how Pension Input Amounts (PIAs) are calculated for Annual Allowance purposes and released further draft regulations in relation to payment of the Annual Allowance charge. Draft technical amendments were issued in November 2012 and are expected to apply as of April 2013. Discussions between the Association of Consulting Actuaries (ACA) and Her Majesty s Revenue and Customs (HMRC) have highlighted HMRC s interpretation of the requirements of existing legislation, which could have a significant impact on the PIA for defined benefit and cash balance arrangements following a bulk transfer. However, the proposed amending wording could have unintended consequences. HMRC has listened to ACA s concerns and is considering delaying this change and also possibly allowing some retrospection. Separately, HMRC has released draft regulations which aim to permit a scheme pension to be reduced if this is due to the scheme paying the member s Annual Allowance charge. The regulations are due to become effective April 6, 2013. The latest draft of the Marriage (Same-Sex Couples) Bill in the U.K. would not require occupational pension plans to offer same-sex married partners the same survivor benefits as married heterosexual partners. The Bill, which would legalize same-sex marriage, passed its second reading in the House of Commons. It would not change requirements established by the Equality Act 2010 that allow occupational pension plans to base a survivors benefit for a same-sex partner on the employee s service since 2005 (when civil partnerships were created). Typically, plans base survivor benefits for married heterosexuals on an employee s entire period of service. The government estimates that, in practice, two-thirds of plans already pay the same survivor benefits to spouses, civil partners, unmarried partners, and unmarried same-sex couples. The government intends to treat same-sex married couples in the same way as civil partners with regard to state pensions. France s National Assembly has approved a bill to legalize same-sex marriage. The Senate is expected to pass the bill. Pension asset pooling will soon be possible in Germany. The federal government passed legislation transposing the European Union Directive on Alternative Investment Fund Managers (Directive 2011/61/EU) and has drafted amendments to tax laws that correspond to the new legislation. Under the new law, a limited partnership company may be established to offer tax-transparent options for pension pooling. The new law is expected to become effective July 22, 2013. The European Commission s proposal for a financial transactions tax does not exempt pension funds. The Tobin tax would be rolled out in 11 European Union (EU) Member States Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia, and Spain and apply to any transaction that affects a party in one of the covered Member States. A 0.1% tax would be levied on stocks and bonds, and a 0.01% tax would be levied on derivatives. Copyright 2013 Aon plc 4
The Dutch Ministry of Social Affairs plans to introduce a bridge pension for individuals adversely affected by the increase in the retirement age. The retirement age for the state pension (AOW) is gradually increasing from age 65 to age 67, beginning with one-month increases in 2013, 2014, and 2015. The bridge pension will cover individuals who, as of January 1, 2013, have income that is less than 150% of the gross minimum wage and had retired early, were in receipt of a pre-pension, or were in receipt of a benefit from a private insurance scheme that began at age 65. It also will apply to individuals with private ANW shortfall insurance or pension, private WIA/WGA insurance, an annuity, or a life benefit, if income is less than 150% of the gross minimum wage. Benefits will not exceed statutory social minimum income. The bridge pension is expected to be implemented in the second half of 2013 and will be made retroactive to January 1, 2013. At the end of January, the Spanish government published the social security contribution rates for 2013. Effective January 1, 2013, the minimum and maximum monthly contribution base is EUR 753 and EUR 3,425.70, respectively. For old age, survivors, cash sickness, medical care, and family allowances, the employee contribution is 4.70% and the employer contribution is 28.30% of covered pay. Employers and employees in Luxembourg are reminded that the social security reform law became effective January 1, 2013. Under the new law, the number of contribution years will increase gradually from 40 years to 43 years. The total contribution rate also will increase gradually from 24% to 30% of covered pay. The government estimates that the social security system reserve fund would have been exhausted by 2030 without the changes. Effective January 1, 2013, temporary agency ( leased ) employees in Austria are entitled to the same treatment accorded to permanent employees under the amended Hiring-Out of Labor Act. As of January 1, 2014, temporary agency employees who have been hired out to a single employer for more than four years will be entitled to an occupational pension if a pension fund agreement or group life policy is in place. Slovenia s new Pension and Disability Insurance Law has been published in the official gazette. As previously reported, the retirement age increased to age 65 for males and females with 15 years of contributions or to age 60 with 40 years of contributions. In 2013, the pension rating base, or pensionable salary (pokojninska osnova), equals the average monthly salary in the 19 highest paid consecutive years of covered employment since January 1, 1970 (previously 18 years), indexed to the last year preceding retirement date. The number of years will increase by 1 year each year until it is based on the 24 highest paid contribution years. The minimum assessment base for contributions is 76.5% of average gross pay for the last calendar year; the maximum base is 4 times the minimum base. Annual adjustments are based on 60% of the growth in average wages and 40% of the increase in the Consumer Price Index. In the Czech Republic, individuals receiving a social security pension benefit or a benefit from a foreign social security system are not eligible for the personal income tax credit of CZK 28,840 for the period 2013 to 2015. Employer contributions to the state supplementary system or the new additional pension plan are tax exempt to employees up to CZK 30,000 per year. The contribution rate for second-pillar pensions in Romania is scheduled to increase under the 2013 budget. As a result of the economic crisis, the total contribution rate to second-pillar pensions was frozen at 2% in 2009. Subsequently, contributions increased by 0.5% each year. Under the new government s 2013 budget, the contribution rate is expected to increase from 3.5% to 4%. Copyright 2013 Aon plc 5
In Russia, the Ministry of Labor and Social Welfare is expected to publish a new pension formula in March 2013. The new formula is expected to place more emphasis on pay and length of service. In related news, President Putin indicated that he supports allowing employees to choose how 4% of their social contributions are invested in the solidarity (pay-as-you-go) system or in the funded system after 2013. * * * * 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 6
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 7