Pension Plans - Impact of the New Rules and Regulations

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1 Global Retirement Update July 2012 Due to the summer holiday in the U.S., this report will not be published in August. The next edition will be ed to you in September 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 Belgium The Program Act of 2012 was passed, changing the special social security contribution and the taxation of occupational pensions, and published in the official gazette on June 21, The special social security contribution of 8.86% paid on premiums for and contributions to occupational pension plans will increase by 1.5% if total contributions (employer and employee) exceed EUR 30,000 per year. The increase is effective from first quarter 2012 until the end of Effective January 1, 2016, the additional contribution must be paid if total contributions exceed the pension target if the sum of statutory and occupational pension rights exceeds the pension of a civil servant. Effective July 1, 2013, the tax on supplementary pension will increase to 20% if the pension or lump sum is paid at age 60 and 18% if it is paid at age 61. The 16.5% rate remains applicable to pensions received after age 60 or upon retirement or death of the employee. Also, the redemption value of life insurance is subject to a 6.5% income tax, except when the policy provides for payment only in the case of death or for the redemption of a mortgage. The tax on life insurance reserves has been reduced from 26.5% to 20% when the insured reaches age 60. Belgium Employers that internally fund pension commitments to company directors or through key man insurance must externally fund these commitments as of January 1, The government announced this change at the end of 2011; however, it indicated that companies would have three years to implement this change. Under the Program Act of 2012, new pension commitments and increases in existing commitments must be externalized as of January 1, Existing pension commitments may be maintained. Key man insurance contracts cannot be used to finance new or increase existing pension commitments. Copyright 2012 Aon Hewitt 1

2 United States President Obama recently signed a transportation bill that is partially funded by pension funding stabilization provisions and an increase in premiums that employers pay to the Pension Benefit Guaranty Corporation (PBGC). Under the pension funding stabilization provisions, interest rates for minimum contributions and benefit restrictions will generally increase for the next several years, potentially significantly reducing cash funding requirements. However, these higher interest rates do not apply to the liabilities used for PBGC premiums or ERISA Section 4010 reporting. The new law increases PBGC flat-rate premiums for single-employer plans by 40%, from USD 35 per person in 2012 to USD 42 per person in 2013 and USD 49 per person thereafter (these figures are further increased for inflation by law). It also doubles and indexes to inflation variable-rate premiums, from 0.9% of unfunded vested benefits in 2012 to 1.3% (before indexation) in 2014 and 1.8% (before indexation) in In addition, the law includes provisions regarding the governance and operations of the PBGC, and a provision to extend the ability of employers to transfer excess pension assets to retiree health accounts and expand it to allow transfers for retiree life insurance. Venezuela's new labor code, effective May 7, 2012, introduces changes affecting length-of-service benefits, a minimum guarantee equal to 30 days' pay per year of service that is based on final "integrated" (total cash) pay. According to different accounting standards, all compensation paid to employees after completing their term of employment must be recognized, measured, and disclosed in the financial statements of the entities. Employers should perform an actuarial valuation under local regulations VEN-FRS, and where appropriate under International Accounting Standards (IAS 19) or U.S. GAAP (ASC715). For a comparison of benefits under the former and current labor codes, please refer to the Global Report--Venezuela: New Labor Liabilities that Should Be Considered for Disclosure in Financial Statements. Recent Developments Africa In South Africa, the National Treasury s 2012 Taxation Laws Amendment Bill includes provisions affecting the taxation of retirement lump sums. Currently, retirement fund members are required to purchase an annuity with two-thirds of their retirement savings and may take the remaining one-third as a tax-free lump sum. If the amount is not taken as a lump sum and is taken as an annuity, the entire monthly pension is taxable. The Bill would correct this tax treatment, allowing that amount to be tax free. Americas The U.S. Internal Revenue Service (IRS) published proposed regulations that would provide guidance under the anti-cutback rules of Section 411(d)(6) of the Internal Revenue Code, which generally prohibit plan amendments eliminating or reducing accrued benefits, early retirement benefits, retirement-type subsidies, and optional forms of benefit under qualified retirement plans. The proposed regulations would provide an additional limited exception to the anti-cutback rules to permit a plan sponsor that is a debtor in a bankruptcy proceeding to amend its single-employer DB plan to eliminate a single-sum distribution option (or other optional form of benefit providing for accelerated payments) under the plan if certain specified conditions are satisfied. The proposed regulations would affect administrators, employers, participants, and beneficiaries of such a plan. The regulations are proposed to apply to plan amendments that are adopted and effective after August 31, Copyright 2012 Aon Hewitt 2

3 In June 2012, the U.S. IRS published proposed regulations that would provide guidance relating to automatic extensions of time for filing certain employee plan returns by adding the Form 8955-SSA, Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits, to the list of forms that are covered by the income tax regulations on automatic extensions. The proposed regulations also would provide guidance on applicable reporting and participant notice rules that require certain plan administrators to file registration statements and provide notices that set forth information for deferred vested participants. The regulations would affect administrators of, employers maintaining, participants in, and beneficiaries of plans that are subject to the reporting and participant notice requirements. The proposed regulations became effective on June 21, According to the IRS, taxpayers may rely on the proposed regulations pending release of the final regulations. Comments on the proposed regulations are due by September 19, In Canada, Bill C-25, The Pooled Registered Pension Plans (PRPPs) Act, has received Royal Assent, and regulations will soon be published. Bill C-25 comes into force on proclamation, and provides a framework to introduce PRPPs for employees in federally regulated industries and the self-employed by pooling funds in member accounts to achieve lower administrative and investment management costs. Highlights include: 1) employer participation is voluntary; 2) the administrator is the plan trustee and must exercise the degree of care that a reasonably prudent person would exercise in dealing with the property of another person; 3) employers are not liable for the acts or omissions of an administrator; 4) administrators can provide investment choices, with default investment options; 5) all full-time employees in a class must become members, while parttime employees join after 24 months of continuous employment; 6) members are automatically enrolled, and contributions only begin after the expiration of a 60-day opt-out period; 7) although contribution rates are set by the administrator, members may reduce that rate to 0%; 8) automatic escalation is optional; 9) gender must not be considered in determining contributions, which are held in trust by the employer pending receipt by the administrator and form no part of the employer s estate in bankruptcy; 10) funds are locked-in, with optional withdrawals in cases of disability or small amounts on member termination; 11) the Pension Benefits Standards Act is amended to allow the transfer of separate defined benefit assets to a PRPP, with regulatory approval; 12) the spouse or common-law partner is the automatic beneficiary, but survivors can surrender their rights and designate a different beneficiary; 13) variable payments may be provided after retirement, with various transfer options; and 14) the federal government can enter into bilateral and multilateral agreements with provinces regarding aspects of the PRPP framework. In Canada, Bill C-38, The Jobs, Growth and Long-term Prosperity Act, has received Royal Assent. The Act amends the Old Age Security Act to provide the Minister of Human Resources and Skills Development with the authority to waive the requirement for an application for Old Age Security (OAS) benefits for many eligible seniors; gradually increase the age of eligibility for the OAS Pension, the Guaranteed Income Supplement, and the Allowance for the Survivor; and allow individuals to voluntarily defer their OAS Pension up to five years past the age of eligibility in exchange for a higher, actuarially adjusted pension. It also amends the Pension Benefits Standards Act, 1985 to give retroactive effect to subsections 39(2) and (3), which deal with the applicability of regulations to pension plans or to one or more classes of pension plans, and various statutes to prohibit the issuance of life annuity-like products by entities other than insurance companies. The Ontario (Canada) government has extended the filing date for valuation reports. Effective June 22, 2012, the filing date for all valuation reports prepared as of a date on or after September 30, 2011 and before March 31, 2012 was extended by up to six months, until December 31, 2012, to provide plan administrators Copyright 2012 Aon Hewitt 3

4 sufficient time to comply with and reflect the pending solvency funding relief provisions (as announced in the 2012 Budget) in their valuation reports. Also announced in its 2012 Budget, the Ontario government is proposing solvency funding relief measures that would allow plan administrators to elect among the following options, when filing the first valuation report prepared as of a date on or after September 30, 2011 and before September 30, 2014: consolidate existing solvency payment schedules into a new longer five-year payment schedule and/or extend the solvency payment schedule to a maximum of ten years (from the current maximum of five years) for a new solvency deficiency determined in the report, subject to the consent of plan beneficiaries. Additional relief measures, to be introduced in stages, would permit solvency and going concern special payments to be amortized beginning one year after a plan valuation date and allow employers to use irrevocable letters of credit from financial institutions to cover up to 15% of a plan s solvency liabilities. In New Brunswick (Canada), Bill 63, An Act to Amend the Pension Benefits Act, effective July 1, 2012, introduces phased retirement and shared risk pension plans. It implements the government s new pension model characterized by risk sharing between employers and members by introducing shared risk pension plans with the following characteristics: 1) the employer and members contribute in amounts set in accordance with the plan and a funding policy, which can provide for the increase, reduction, or suspension of contributions and for the increase or reduction of base benefits and enumerated ancillary benefits; 2) the sole obligation of contributors is limited to making or remitting required contributions within prescribed time limits; 3) a funding policy, investment policy, and risk management goals and procedures must be established at inception and reviewed at least annually by the administrator; 4) escalated adjustments may only be granted with respect to past periods, and if the funding policy so permits; 5) contributions shall not be reduced or suspended except in accordance with the federal Income Tax Act (ITA) and the funding policy; 6) prescribed disclosure of the purpose and characteristics of the plan is made to members; and 7) a dispute resolution process is established at inception in the plan text to resolve deadlock among members of a board of trustees. Bill 63 also introduces phased retirement for members who have reached or are within ten years of a plan s normal retirement date, provided the plan also provides for a member s pension to be adjusted on retirement in accordance with the ITA, and an agreement is in place reducing the member s hours of work and compensation. Effective July 2, 2012, employees in Chile must meet new early retirement eligibility requirements. Previously, retirement at age 55 or older (men) and age 50 or older (women) was permitted if accumulated assets were sufficient to purchase an annuity at least equal to 70% of the average of the employee s indexed covered wages for the last ten years and 150% of the solidarity pension. The new requirement is 70% of gross income or 80% of the maximum pension plus the solidarity contribution. The new minimum capital requirement for early retirement is 9.15 tax units (UF). Brazil s Ministry of Social Welfare has indicated that it is reviewing options for replacing the Fator Previdencíarío formula. Individuals who first enrolled in the social security system after November 29, 1999 may opt to have their benefits calculated according to the Fator Previdencíarío formula, which is based on contribution rate, contribution period, age, and life expectancy. The monthly benefit equals the Fator Previdencíarío times 70% of the benefit wage. An alternative under consideration is a new minimum retirement age for individuals entering the labor market and a transitional rule of minimum age plus contribution years for current employees. It is not known when Copyright 2012 Aon Hewitt 4

5 action will be taken on the Fator Previdencíarío. A Senate subcommittee was reviewing the potential elimination of the Fator in El Salvador s parliament has passed legislation reforming the private social security system. The monthly commission of pension fund managers (AFPs) has been reduced from 2.7% to 2.2% of an employee s earnings. The monthly commission includes administrative fees and premiums for disability and survivors insurance. Individuals who reach retirement age may continue to contribute until they have 25 years of contributions. Currently, individuals with less than 25 years of contributions must cease contributing and take a lump-sum payout. AFP investment limits also changed. Asia India s Pension Fund Regulatory and Development Authority (PFRDA) has issued new rules for the registration of pension fund managers. Any pension fund manager meeting eligibility criteria established by the PFRDA will be permitted to operate; there will be no limit on the number of managers. Also, pension fund managers will be permitted to set their own fee, subject to a ceiling established by PFRDA. Previously, there was a limit on the number of pension fund managers, which had to bid for available slots, and all pension fund managers were required to charge the same fee. According to PFRDA, the changes are designed to create a more economically viable business model for the pension fund managers, with market competition driving fee structures. Also, India s Insurance Regulatory and Development Authority (IRDA) has issued guidelines for pension products. Policyholders must purchase a single premium deferred annuity or immediate annuity product from the same insurer that provided the pension plan. Surrender value after the lock-in period (five years) cannot be less than the fund value. Also, the entry of new members into group pension plans is prohibited. Existing members can continue to contribute. Employees in Malaysia will have access to private retirement schemes by September Prime Minister Razak announced that the Securities Commission approved 24 funds offered by 8 retirement plans administrators. Employee contributions up to MYR 3,000 will be tax deductible. Employers will receive tax relief for contributions above the statutory rate, up to 19% of the employee s pay. The Malaysian government has submitted the Minimum Retirement Age Bill to parliament for review. Under the draft legislation, the minimum retirement age would increase from age 55 to age 60. Employees would be permitted to continue to retire at the age established by collective agreement or individual employment contract. If passed, the increase would be effective in January In related news, the government has not yet made a decision on the age limit for Employee Provident Fund withdrawals for private-sector employees. It is likely that employees will be permitted to continue to withdraw funds at age 55 for a specified period if the retirement age is increased. The South Korean government will subsidize National Pension Plan and unemployment insurance contributions for small business owners. The All Together Social Insurance Project would apply to small business owners with fewer than ten employees and low-wage employees. Small business owners and employees earning between KRW 350,000 and KRW 1,050,000 per month receive a 50% subsidy on contributions. Copyright 2012 Aon Hewitt 5

6 A 33% subsidy is payable if the employee earns between KRW 1,050,000 and KRW 1,250,000 per month. The goal of the program is to increase the enrollment rate in the National Pension Plan and unemployment insurance programs. Europe The U.K. Pensions Regulator has updated its guidance on multiemployer schemes and employer departures. The guidance includes updates on the amendments to the Occupational Pension Scheme (Employer Debt) Regulations, which came into force on January 27, These include: Introduction of flexible apportionment arrangements a new mechanism which allows an employer to depart from a multiemployer scheme and without the section 75 debt being due (which also can be used when the scheme is closed to future benefit accrual); and Changes to the grace period conditions. The document also gives further guidance on the factors trustees should take into account when assessing who is responsible for supporting their multiemployer scheme, including the potential implications of recent court cases. On July 17, 2012, the U.K. government released its response to the consultation on the abolition of short-service refunds and small pension pots. The government plans to bring forward primary legislation at the earliest opportunity to abolish short-service refunds (but to enable an alternative mechanism for refunding micro pots, of perhaps GBP 200 or less). The government proposes to deal with small defined contribution pots by automatic transfer into a new employer s plan. This would only include pots created in automatic enrolment schemes and members would have the option to opt out of the transfer. Many of the details, including the threshold below which transfer would take place, remain to be confirmed. No firm timetable is given, but the government would like to achieve change as soon as practicable. In the meantime, more immediate changes may be made to the current voluntary framework. Alongside the automatic transfer proposals, the government also intends to explore a virtual amalgamation tool, which would allow individuals to see all their pension pots in one place. In the United Kingdom, the Takeover Panel has launched a consultation on extending the Takeover Code to cover pension plan trustee issues. The Takeover Code is designed principally to ensure that shareholders are treated fairly and not denied an opportunity to decide on the merits of a takeover. The proposals would require the entity making the offer to disclose its intentions regarding the company pension plan of the target and the likely repercussions of its strategic plans. In addition, it would need to disclose to the trustees all the information currently required to be disclosed to the target s employee representatives. The Board of the target also would be required to express its views on the effect of the offer on the pension plan. The trustees would have the right to make their views on the effects of the offer on the plan known. Where this leads to an agreement between the trustees and the possible new owner in relation to future funding arrangements, that agreement would be included in the offer document and put on display. However, there is no requirement for the parties to reach a definitive position on future funding. The consultation closes on September 28, Copyright 2012 Aon Hewitt 6

7 As promised when the voluntary Code of Good Practice on Incentive Exercises was issued in June 2012, the U.K. Pensions Regulator has now reviewed its guidance on incentive exercises and replaced it with a short principles-based statement on incentive exercises. The practical guidance in the industry code as to how employers should properly conduct incentive exercises, if they choose to do so, is well aligned with the Regulator s principles. Therefore, the Regulator has abbreviated its guidance to avoid any confusion arising from two standards and is focusing on the overarching principles published in its December 2010 guidance. The guidance also addresses the role of trustees. It remains the Regulator s view that trustees should approach such exercises with caution and presume that they will not be in most members interests. This will involve taking advice, where necessary, and acting in accordance with their legal obligations to plan members. In the United Kingdom, proposals for simplifying the state pension system will now be released in autumn In April 2011, the Department for Work and Pensions issued a Green Paper for public consultation on proposals for a move to a flat rate state pension, the reform of the current system of means tested support, and the determination of the state pension age in future. The two options for moving to a flat-rate state pension were accelerating the current arrangements for moving to a flat rate S2P or a more radical move to a single flat-rate benefit. The latter option would result in the end of contracting-out. In the spring 2012 budget, the government announced it had decided to reform the state pension for future pensioners into a single-tier pension, set at a level above the means-tested standard Guarantee Credit (GBP in 2012/13). Further detail was to be published in a White Paper in spring 2012, but it has since been delayed. In France, Decree No , changing early retirement eligibility requirements, was published in the official gazette on July 2, Employees who began to work at age 18 or age 19 are permitted to retire at age 60 instead of age 62 if they meet contribution requirements (41 years or 41 years and 6 months, depending on their year of birth). Six months of unemployment and 6 months of maternity leave will be included in the calculation of length of service. Employers in France should track the progress of the draft supplementary budget, which includes provisions affecting payroll and employee benefits. Employers with 20 or more employees would no longer be exempt from the social tax on overtime pay. The social charges (forfais social) payable by employers on statutory or voluntary profit sharing plans and savings plans (PEE and PERCO) would increase from 8% to 20%.The employer and employee social security contribution on stock options and bonus shares would increase from 14% and 8% to 30% and 10%, respectively. The Dutch houses of parliament approved the bill raising the social security (AOW) retirement age. From 2013 to 2015, the retirement age will increase by one month each year. From 2016 to 2018, it will increase by two months each year, and from 2019, it will increase by three months each year until it reaches age 67 in In Norway, the Banking Law Commission has submitted a report to the Finance Ministry that includes a proposal for a new occupational pension insurance plan. In the report, the Commission seeks to solve the problems of controlling costs and risk-sharing in individual pension plans. It proposes hybrid plans that would vary from the two pension plan models the standard plan similar to a defined benefit pension and the basic plan in which annual payments are predictable. The Commission proposes a basic savings rate of 8% of pay for the standard model and a premium of 7% to 25% of pay, depending on the level of pay, for the basic model. The report is being circulated for consultation. The Ministry expects to submit a bill during the winter of 2012/2013. Copyright 2012 Aon Hewitt 7

8 The Spanish government has announced a new austerity package, which includes measures affecting retirement. The social security system reforms passed in 2011 provide for a review of the viability of the social security system every five years beginning in 2027 using a sustainability factor. The sustainability factor is, effectively, a dependency ratio of the number of active workers to pensioners. An early review of the system is likely to result in an increase in the retirement age and the number of contributions. The government proposes that the pensions of employees taking early retirement be reduced by 1.875% or 1.675%. The latest austerity package also includes a reduction in unemployment benefits after six months from 60% to 50% of the insured s average earnings and an increase in the Value Added Tax from 18% to 21%. Switzerland s new pensions regulator issued guidelines for second-pillar pension funds. Public pension funds would not be required to achieve full funding by Fully funded Pensionskassen would be permitted to discontinue payment of interest in order to avoid underfunding. In the Czech Republic, two changes to the social security system would affect retirement a change in the indexation of pensions and a new system of early retirement. The lower house of parliament voted to change the pension indexation formula for the next three years. Increases would be based on one-third of the inflation rate and one-third of real wage growth; currently, indexation is based on the full inflation rate. The Senate is likely to veto the bill; however, the lower chamber is expected to overturn the veto. If passed, the new indexation system would be implemented in Also, the cabinet approved a new system of early retirement for individuals in specified professions. These employees could opt to retire five years before the normal retirement age if their monthly pension equaled 30% of the average wage and they saved a specified amount within a private pension plan. Health insurance contributions would be covered by the state, and pension benefits would not be reduced when they reached the normal retirement age. If passed, the new system would be effective in The Slovak government has proposed several changes to the old age retirement system. Under the first proposal, employees will be permitted to move from the second-pillar pension system to the first pillar from October 1, 2012 through March 31, Under the second proposal, pensions would increase by a fixed monthly sum beginning January 1, The amount would be based on the average pension as of June 30, 2012, as well as the average growth in consumer prices and the average wage for the first six months of The fixed sum increase would be temporary. Under the third proposal, a minimum pension would be introduced as of The amount would vary according to years of service. The amount of tax-exempt employer contributions to a private pension fund may increase in Ukraine. Currently, employer-paid premiums and contributions for long-term life insurance and private pensions are tax exempt for the employee up to 15% of monthly salary or 1.4 times the minimum wage, whichever is lower. The parliament has just begun the second reading of a bill that would increase the amount to 15% of monthly pay or 5 times the minimum wage, whichever is lower. Middle East As of 2012, insurers in Israel will not be permitted to sell whole life insurance policies for retirement. According to the Finance Ministry, Israeli insurers are the only ones in the world that provide a guarantee that the life expectancy used at the time the policy is purchased by individuals will remain effective for the their entire life. These policies are also known as managers insurance. Copyright 2012 Aon Hewitt 8

9 Israel s Ministry of Finance recently published the Management Fees: Pension Savings Instruments Regulations. Effective January 2014, the maximum annual management fee for provident fund and managers insurance policies will be 10.5% of the accumulation and 4% of regular deposits. During a one-year transition period (2013), the maximum management fee will be 1.1% of the accumulation. The maximum management fee for dormant policies will be 0.3% a year. Pensioners will pay a fee of up to 0.6% of the accumulation each year. The Ministry of Finance also is requiring pension savings instruments to offer savers a minimum of two years of financial benefits (refunds on management fees and discounts) to discourage the selection of instruments based on short-term discounts. In Turkey, the Law on Individual Retirement and Savings Systems (No. 6327) was published in the official gazette on June 29, Under the new Law, effective as of the date of publication unless otherwise specified, the government will match 25% of an individual s contributions, up to the annual minimum wage to an individual pension savings account. Individuals are entitled to 15% of the government s contributions and earnings related to those contributions if they remain with the plan for at least three years. This percentage increases to 35% and 60% for individuals who remain with the plan for six years and ten years, respectively. Individuals who meet eligibility requirements for the old age pension or who leave the plan due to death or disability receive 100% of contributions and earnings. Also, employers will be permitted to contribute up to 15% of an employee s gross pay, up to the minimum wage, to an occupational pension plan. The same contribution limit would apply to insurance plans, if the employer and employee both contribute. * * * * 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 2012 Aon Hewitt 9

10 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 2012 Aon Hewitt Inc. 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 2012 Aon Hewitt 10