Session 55 PD, Pension Funding Rules An International Comparison Moderator: Douglas J. Carey, FSA, EA, FCA, MAAA

Transcription

1 Session 55 PD, Pension Funding Rules An International Comparison Moderator: Douglas J. Carey, FSA, EA, FCA, MAAA Presenters: Jason Michael Gratson, ASA, EA, FCA, MAAA Mahasen S. Kunapuli, FSA, EA, FCA David Pittet

2 Pension Funding Rules An International Comparison October 27, :30 4:45

3 Agenda: United States United Kingdom Netherlands Switzerland Germany India Hong Kong Japan 2

4 3 United States Funding Overview

5 Structure of US DB Pension Plan Employer contributions Usually only the employer contributes, although employees contribute in some plans. The employer contribution is determined following actuarial funding valuation, which must happen annually. Plan benefits are protected by law and cannot be eliminated or reduced. As such the employer bears the full financial risk of the plan. The IRS mandates the funding method (unit credit), interest rate options, asset smoothing methods and mortality to be used in funding valuations. Interest rate options are based on high quality US corporate bonds and include the following: A full yield curve option with no smoothing A segment rate option that approximates a full yield curve and includes 24 month smoothing Current funding relief has limited the segment rates to a 90% 110% corridor around the 25 year average until 2017, which widens to a 70% 130% corridor by A poorly funded plan can result in benefit restrictions and accrual freezes. Annual Required Contribution = Normal Cost + Plan Expenses + 7 Year Amortization of Unfunded Liability (new base set up each year) 4

6 US Funding Timeline Since the enactment of PPA in 2008, plan sponsors have generally been given access to funding relief: PPA transition rules to use lower liability to calculate your unfunded ( ) PRA 2010 to use up to 15 year amortization unfunded ( ) MAP 21 to use 25 year average interest rates rather than market rates (2012 and later) HATFA to reset the MAP 21 corridor and use higher interest rates (2013 and later) MAP21 ERISA OBRA RPA EGTRRA PPA PRA 2010 HATFA 5

7 The Changing Finances of US Pensions Significant increases in PPA and GAAP liabilities due to expected mandatory increases in mortality standards are closing the gap between ongoing and plan termination costs. When coupled with drastically increasing administrative costs, including PBGC premiums, the termination cost and economic cost quickly converge. Traditional Cost to Terminate Termination Premium 115% 120% Revised Cost to Terminate 110% 115%+ Termination Premium 115% 120% 100% 6 PBGC Premium Increases Flat Rate $19 $35 $42 $49 $57 $64 Variable Rate per $1000 unfunded Accounting/ Funding Liability Estimated Termination Liability $9 $9 $9 $14 $24 or more $29 or more Economic Liability Estimated Termination Liability PBGC premiums will have more than tripled over the past 10 years. While fully funded plans avoid the variable rate premium, flat rate premiums will remain in force.

8 US Funding Summary Advantages Mandated assumptions provide little room for discretion and can help to protect participant benefits and the PBGC s interests The baseline funding formula is straight forward and easy to understand: Contribution = Normal Cost + Expenses + 7 Year Amortization of Unfunded Funding Relief has historically been provided after poor experience Valuations completed annually, allowing new experience to be reflected quickly Poorly funded plans automatically freeze or restrict certain benefit forms (lump sums) to protect participant benefits Disadvantages Does not reflect the financial strength of the plan sponsor Funding relief negates the protections participants receive, while also providing longer term uncertainty for plan sponsors Interest rate smoothing can make immunization difficult Not many options for plan sponsors who fall behind and are poorly funded. Historical movements in assumptions (mortality & interest rates) has left plans poorly funded 7

9 8 United Kingdom Funding Overview

10 Structure of UK DB Pension Schemes Employer contributions Usually both the employer and the employee contribute. The employer contribution rate is determined following actuarial funding valuation carried out by the trustees, which must happen at least every three years. Employer contributions will consist of regular contributions if the Scheme is open to accrual plus extra contributions to repair any deficit in the scheme. The Scheme Actuary calculates the employer contribution rate based on long term assumptions for interest rate, inflation rate, salary increases, mortality etc. The Pensions Act 2004 introduced the Statutory Funding Obligation (SFO) to replace the previous Minimum Funding Requirements (MFR). For most schemes the SFO requires the trustees and Company to negotiate the future contribution level. For most schemes, the trustees and Company must also come to an agreement over the assumptions to be used for the full actuarial valuation. The trustees and employer have 15 months from the effective date of the valuation to reach an agreement on future contributions. If agreement cannot be reached in this timescale, the Pensions Regulator has the power to intervene and impose a contribution schedule on the employer. 9

11 Pension Scheme Funding Different measures of liabilities Buy Out Section 179 liability/ PPF liability The purchase of an insurance policy for all pension scheme members in lieu of benefits from the scheme. Liabilities valued on a buy out basis are usually much higher than technical provisions due to several factors including needing to assure very low investment risk for the policies it is taking on. This is the value of the scheme s liabilities using a set of assumptions prescribed by the Pension Protection Fund. This value is used as part of the calculation of the scheme s PPF levy. Technical Provisions The value of the liabilities on a funding basis, these are calculated at each triennial valuation, using assumptions and methods determined by the trustees and employer on actuarial advice. Projected Benefit Obligation The value of the liabilities on an accounting basis (i.e. to go into the scheme s sponsor s corporate accounts). Transfer value This is the value assigned to the liability relating to an individual or group of individuals when they transfer their benefits out of the scheme to another pension arrangement. 10

12 Funding Valuation Valuation strategy Establish negotiation strategy Understand current position using assumptions from last valuation Understand employer covenant position & changes since last valuation Review key actuarial assumptions and establish areas for negotiation Consider length and nature of recovery plan Consider approach to funding (cash, non cash assets, contingent assets) 11

13 Funding Valuation Best estimate vs. prudent basis All parties should understand the degree of prudence included in the technical provisions basis. Average pension scheme 80% funding level under technical provisions basis Discount rate used for technical provisions: gilts + 1% Asset allocation: 50% growth assets/ 50% matching assets Assets Liabilities Deficit Financial position under agreed technical provisions basis (25) Best estimate long term return on assets: gilts + c. 2% Assets Liabilities Deficit Financial position under best estimate basis (5) 12

14 Funding Valuation What is the employer covenant? an employer s legal obligation and its ability to fund the scheme now and in the future Pensions Regulator s guidance on monitoring employer support issued in November 2010 Focus on which entities are Scheme employers cannot assume it is appropriate to take into account the strength of the wider group Future more important than the past Link to investment risk Trustees often commission an external covenant review. The employer may find that: providing information for the review takes up management time; and the initial results are not necessarily in line with the employer s view. tpr is consulting a new code of practice. Therefore the definition above may be revised. 13

15 Funding Valuation Illustrative impact of employer covenant on funding assumptions Illustrative affect of covenant strength on discount rate assumption and funding position Discount rate: gilts Discount rate: gilts plus 0.5% Discount rate: gilts plus 1.0% Employer Covenant Discount rate: gilts plus 1.5% Discount rate: gilts plus 2.0% m None Weak Tending to weak Tending to strong Strong Assets Liabilities 14

16 Funding Valuation Asset out performance in recovery plans Effect of outperformance on example contribution requirements m Assets Liabilities - No outperformance Funded by recovery plan 0.5% out - performance 1.0% out - performance 1.5% out - performance 2.0% out -performance Funded by outperformance 15

17 Funding Valuation Contingent Assets Alternative funding tools are now more common. Employers are looking to protect against overfunding and be more cash efficient. Almost 1,000 schemes now have some form of contingent asset Number of contingent assets in place / / / / / / / /2014 Source: Pension Protection Fund Levy Year Type A (Group/Parent guarantees) Type B (Security over assets) Type C (Bank guarantees) 16

18 UK Funding Summary Advantages Negotiation can provide flexibility Non cash contributions can provide additional flexibility around contributions Reflects the financial strength of the plan sponsor Prudence standards work to protect participant benefits. Disadvantages Negotiation is a long process. Can be viewed as burdensome. Prudence standards can result in overly conservative measure of liability Negotiation process can produce a wide range of liabilities as assumptions can vary significantly Valuations not completed annually, experience may not be reflected quickly 17

19 18 Netherlands Funding Overview

20 Structure of Netherlands DB Pension Plans Netherlands has 3 types of pension funds Industry (mandatory for all companies in a given industry) Company (optional if a company wants to provide benefits above the industry plan) Occupational (organized for specific groups of professionals, like physicians) Over 90% of employees participate in a plan By law, they must hold sufficient assets to cover 105 per cent of promised benefits In addition, they have no leeway in setting the parameters that determine estimates of liabilities, such as expected investment returns or mortality Benefits are paid as an inflation indexed annuity. Lump sums are generally not allowed. Benefit indexation is contingent upon plan solvency (not purely DB) Active participants have their career average indexation at risk Inactive participants have their annual COLA indexation at risk The pension funds are independent financial institutions, completely separate from the employer. Surveys show most Dutch prefer collective risk sharing plans over individual DC arrangements. 19

21 Comparison of Funding Patterns Under the risk sharing approach, as the assets incur a loss and funded status deteriorates, the liabilities can be slowly decreased As a result, the plan returns to fully funded (100% funded) quicker, with less cash contributions necessary from the sponsor The participant however bears some of the risk The participant can earn back some of their lost benefits, but it will take longer to return to a fully restored and fully funded plan due to lower cash requirements from the plan sponsor Employer Bears Full Risk Risk Sharing Approach Assets 95 Assets 90 Liabilities 90 Liabilities

22 Netherlands Funding Summary Advantages A shared risk approach that provides flexibility for the employer Lump sums are generally not allowed, providing for greater income security during retirement The industry pension fund approach along with the government s preference for employer provided plans gives over 90% of employees access to a Tier II benefit. Hybrid approach produces a lower probability of underfunding than either a pure DB or collective DC approach, as underfunding can be reclaimed through employer contributions or lower benefit indexing. Participants can reclaim lost benefit indexing if future asset returns cause the plan to be overfunded. Disadvantages The participant s benefits are at risk There is still volatility in employer contributions Communications and legal concerns can make lowering benefit indexing difficult Many participants have received little or no indexation for years 21

23 22 Swiss Pension System An Overview

24 Some facts about Switzerland Population : 8.2 mio (24% of foreign residents) Superficies : km 2 (about 30% of Florida) GDP (2013) : USD 650 bn per capita: > USD Pension assets / GDP : about 130% 140% Inflation : none Unemployment : 3% (09/2014) 4 official languages (70% German, 20% French, 5% Italian) Bi cameral parliament with a strong direct democracy 23

25 Overview of Swiss social security Family allowances The three pillar system Unemployment insurance Protection in case of occupational and non occupational illnesses and accidents Income compensation allowances in case of military service and maternity 24

26 The three-pillar system Swiss occupational insurance is based on the so called three pillar system, a threefold system of public, occupational and private insurance. The third pillar consists of voluntary private individual insurance. The second pillar is the occupational benefit plan. It is compulsory for all the employees and aims to cover 60% of the previous earnings with the 1 st pillar (Art. 113 FCSC) The first pillar old age, survivors and invalidity insurance is a public compulsory PAYGO insurance for everyone. Its aim is to cover basic living costs. (art. 111 and 112 of the Federal Constitution of the Swiss Confederation FCSC ) 25

27 The three-pillar system Types of benefits Retirement Disability Death Retirement pension and/or lump sum Disability pension Surviving spouse pension and/or lump sum Retiree s child pension Disabled person s child pension Orphan pension 26

28 Swiss legal system Federal Constitution Establishes the Swiss Confederation as a federal republic of 26 cantons (states) Contains a catalogue of individual and popular rights (including the right to call for popular referenda on federal laws and constitutional amendments) Delineates the responsibilities of the cantons and the Confederation and establishes the federal authorities of government. Established by the Swiss Parliament Swiss laws Swiss ordinances Established by the Swiss Federal Council Established when the Parliament delegates the competence to the Swiss Federal Council to precise certain aspect of a Law 27

29 28 Swiss legal system

30 29 Occupational pension funds

31 Occupational pension funds Mandatory benefits defined by the law on occupational pension funds Pension funds are free to offer supplementary benefits Maximum salary of CHF Maximum total contribution of 25% of the salary (employer and employee) Measures to limit tax optimization 30

32 Benefits Statutory minimum benefits Retirement Disability Death Retirement pension calculated with the legal retirement credits and conversion rate Disability pension = projected retirement pension Surviving spouse pension = 60% of the beneficiary s pension Retiree s child pension = 20% of the retirement pension until 18/25 Disabled person s child pension = 20% of the disability pension until 18/25 Orphan pension = 20% of the beneficiary s pension 31

33 Statutory minimum benefits The law on occupational pension funds (BVG/LPP) defines the statutory minimum benefits to be fulfilled by all pensions funds % % % % 55 64/65 18% Employer pays at least 50% of the total contributions. Retirement credits are accrued on a retirement savings account. The minimum interest rate is credited every year on the retirement savings account. Defined every year by the Swiss Federal Council. Equal to 1.75% for Defined by the law. Equal to 6.8% at legal retirement ages 65 (men) and 64 (women). 25% (at least) of the retirement savings can be taken in lump sum. Total retirement savings are converted into an annuity using the conversion rate. 32

34 Governance 33 The pension fund (a foundation in the sense of the Swiss Civil Code) is legally separated from the employer. The fund and the company are legally two different entities. All contributions are tax deductible. However, when the money is poured into the fund, it could never flow back to the employer! The fund managing body is a Board of trustees (half of employees and employer s representatives). Representatives are not professionals (milice system) and the level of remuneration usually is very low! The trustees, the auditor and the pension actuary are called organs of the fund and have therefore a special responsibility towards the law in case of wrongdoings.

35 Discount rate The following definition is given by a technical guideline by the Swiss Chamber of Pension Actuaries The technical interest rate (=discount rate) of reference is a weighted average, determined by 2/3 using the average performance of the past 20 years of an index (composed of 25% of equities and 75% of bonds) and by 1/3 using the current yield on 10 year Swiss government bonds. 34

36 Discount rate Evolution of the (past) technical interest rate of reference 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0%

37 Discount rate Evolution of the future technical interest rate of reference between 2015 and 2024 Source: PPCmetric 36

38 Average discount rate Private pension funds Public pension funds 2012: 3,22% 2012: 3,56% 2013: 3,05% 2013: 3,34% 37

39 Structure of Swiss Pension Funds The pension funds are independent financial institutions, completely separate from the employer. By law, they must hold sufficient assets to cover 100% of promised benefits. Benefits are normally paid as an annuity. Inflation indexation is not compulsory. Lump sums are generally allowed (but usually, somehow restricted) and becoming always more popular. Usually both the employer and the employee contribute. The contribution rate is determined in the plan regulation. Private Pension Funds are mainly «cash balance plans», as traditional DB plans remain popular by Public Pension Funds (mainly in French speaking area). For the salary part over CHF , possibility of so called 1e plans, that are individual saving accounts with individual asset allocation, that are considered as pure DC. About 15% 20% of insured population covered by direct insurance. 38

40 Funding main differences Swiss funding Considered in a pension fund distinct from the employer Estimated with a flat discount rate (not risk free) No salary raises taken into account for active participants No COLA taken into account for pension beneficiaries FAS 157 funding Considered in the balance sheet of the employer Estimated with a risk free discount rate or with the interest rate swap curve Salary raises taken into account for active participants COLA taken into account for pension beneficiaries 39

41 Private pension funds Pension funds in Switzerland are a separate entity from the company. Private pension plans must be fully funded because private employers are not perennial. Savings amounts are thus preserved in case of bankruptcy of the employer. Consolidation measures to raise the funding ratio to 100% in the case of underfunding. Discount rate = 3% (real rate) Actuarial tables elaborated on statistics of both private and public sector. Life expectancy at 65 years old of for men. Life expectancy at 65 years old of for women. 93% of all private pension funds have a degree of coverage > 100%. (end of 2013) Average degree of coverage of private pension funds : 110.8% (end of 2013) 40

42 Private pension funds Evolution of the (averge) legal funding ratio between 2004 and % % % % 95.00% 90.00% 85.00%

43 Public pension funds Role: Insure the personnel of the Cantons (State equivalent) and municipalities. The perennity of the Cantons and municipalities implies the nonnecessity of a full funding. Public funds must reach a degree of coverage of at least 80% in 2052 (new legal regulations). Use of actuarial tables elaborated on statistics of the public sector (higher life expectancy). 42

44 43 Germany Funding Overview

45 Occupational Employee Benefits Labor Law Major modifications of the Betriebsrentengesetz (Pension Law) from 1974 were made 2001 by the so-called Altersvermögensgesetz (Retirement Property Act) and in 2005 by the Alterseinkünftegesetz (Retirement Income Act). The pension reforms of 2001 and 2005 introduced a transition from up front to downstream taxation of social security and employee benefits. Until 2005 After 2005 Taxation of Contributions (up front taxation) Taxation of Benefits (downstream taxation) Tax advantages limited to pension plans that offer a life-long annuity

46 Occupational Employee Benefits Most important features of the Betriebsrentengesetz Vesting Employer financed plans Employees aged 25 and older have a legal vesting after 5 years of pension promise. Salary conversion plans Salary conversion plans are immediately vested. The vested amount equals the entitlement reached until the date of leaving service based on the contributions paid up so far. Pension Guarantee Fund Compulsory coverage of vested benefits against employer s insolvency.

47 Occupational Employee Benefits Flexible Retirement Age If an employee draws the early retirement pension available under the State pension program as a full pension, the employee benefit plan must also provide an early retirement pension. COLA Salary Conversion The law requires a regular review and an adjustment of the amount of pensions in payment. Every three years, the employer must review the amount of the current pensions and decide how to adjust them (usually according price inflation). Since 2001 it is mandatory due to the German pension law to offer the opportunity for salary conversion, if the employee asks for it.

48 Funding Methods The Direct Pension Promise is a formal and legally binding promise to his employees. The amount of benefits is not limited by tax regulations. The funding is internal by book reserve. The Direct Pension Promise is liable for contributions to the Pension Guarantee Fund. The Direct Insurance is an outside funding tool. The main features of Direct Insurance are that the employer as policyholder is only obliged to pay the premiums and the employee has a direct claim towards the insurer. Contributions to Direct Insurance are free of income tax for the employee up to 4% of the social security contribution ceiling (EUR 66,000 in 2010). The Retirement Fund (Pensionskasse) is an institution set up by the employer but legally independent. In the last years, many insurance companies have set up a Retirement Fund to offer an additional outside funding tool for company pension schemes. In most aspects especially tax regulations - the Retirement Fund is treated like a Direct Insurance.

49 Funding Methods The Support Fund (Unterstützungskasse) is an institution established by one or more employers. Restrictions imposed upon a classical support fund are tax-related, limiting the amount of employers contributions and total fund accrual. The Reinsured Support Fund, often set up by insurance companies, can be set up in a way that no further obligation beyond the defined contribution will remain to the employer. Tax-exempt contributions to a reinsured support fund are not limited like they are to Direct Insurance or Retirement Fund. No impact on the employer s balance sheet if the support fund is reinsured. The Support Fund is liable for contributions to the Pension Guarantee Fund. The Pension Fund (Pensionsfonds) started in 2002 as a new funding method in Germany. Pensionsfonds act like life insurance companies with more liberal investment regulations. Tax regulations are similar to Direct Insurance. The Pension Fund is liable for contributions to the Pension Guarantee Fund.

50 Customary Practice It is common in Germany to offer a company financed occupational pension scheme besides the statutory social insurance plan. A company sponsored occupational pension scheme is an essential element of a competitive total reward package. Government programs are challenged to meet their obligations due to aging population trends. About 46% of the employees of German private industry are provided with an occupational pension scheme (Source: Survey TNS Infratest Sozialforschung 2004). 29% with contribution only from the employee 41% with contribution from employer and employee 38% with contribution only from the employer ASINTA May 23-25, Kleylein & Cie. Actuarial Services GmbH

51 Structure of German Pension Plans Pension promises in Germany are historically defined benefit plans. With the pension reform in 2001, the renewed German pension law introduced the contribution oriented defined benefit plan, working like a defined contribution plan with the employer guaranteeing a minimum benefit of the sum of contributions. Defined benefit plans are usually related to salary and years of service, with higher accrual rates on salary above the social security contribution ceiling. Besides retirement pension a spouse s pension of 60% and a disability pension in case of occupational or total disability is usually provided. During the last years, new pension schemes were mostly set up as defined contribution based plans and many existing defined benefit plans were transformed into defined contribution based plans for the future service.

52 Structure of German Pension Plans Pension benefits in form of a life-long annuity, that can be combined with a disability pension, widow s/widower s pension, orphan s pension Endowment policies and term-life insurance loose in significance The average employer contribution amounts to approximately 2-4% of salary External funding methods (direct insurance, retirement- and support fund) are favoured due to limited liability risk and administration tasks for the employer Direct Insurance and Retirement Fund offer a very valuable reduction in vesting regulations, a transfer of policy ownership from the employer to the former employee is possible, leaving the employer without any further obligations.

53 52 India Retirement Benefits

54 The Benefits Structure India Retirement Benefit Plans Statutorily Mandatory Voluntary Gratuity(DB) Employee s Provident Fund (DC) Leave Encashment(DB) Post Retirement Medical New Pension System(DC) 53

55 Benefits The historical context The timeline 1923 : Workmen s Compensation Act 1948 : Employees State Insurance Act for provision of healthcare and cash benefit payments during sickness, maternity and employment injury 1952 : Employees Provident Fund Act introducing mandatory DC 1972 : Gratuity Act introducing mandatory DB provision 1990 : Deregulation of Indian Economy 1995 : Employee Pension Scheme as a DB Social Insurance Scheme 2001 : Supplementary pension plans with opening of Insurance Sector 2003 : Introduction of PFRDA 2005: Introduction of the Fringe Benefit Tax 2009: Launch of the New Pension System (NPS) 2009: Abolishment of the Fringe Benefit Tax 54

56 Gratuity (DB) Payment under the Gratuity Act, 1972 Eligibility Statutory requirement for employers employing 10 or more employees Applicable to all permanent employees irrespective of category or salary Payable in the event of Employee's superannuation Employee's early retirement or resignation Death or disablement due to accident or disease Gratuity 15 / 26 times Service times Monthly Wages; Benefit is capped at INR 1,000,000 Vesting Period: Typically Five Years Gratuity benefits higher than the statutory limit are provided at employer s discretion. Benefits in excess of the limit are taxable 55

57 Employees Provident Fund (DC) # Type Description 1 Coverage 2 Benefit type Organizations employing 20 or more employees with basic salary INR 15,000 (USD 250 approx) per month or less With RPFC - Defined Contribution type Exempted or Excluded Trust Defined Benefit 3 Employer contribution Normally 12% 4 Employee contribution Normally 12% 5 Funding Mandatory 6 Benefit Arranged under three schemes: Employees Provident Fund Scheme,1952 Employees Pension Scheme, 1995 Employees Deposit Linked Insurance Scheme, Employee Taxation Benefit is fully tax exempt 56

58 Other Voluntary Benefits Leave Encashment Benefit Convert unutilized leave into cash Quite often employers permit encashment upto days Post Retirement Medical Benefit Post-retirement medical benefit is given in form of reimbursement of Domiciliary expenses and hospitalization expenses This benefit is very rarely given by the employers New Pension System Pension Fund Regulatory & Development Authority (PFRDA) has extended New Pension System (NPS) to all the citizens on 1 May 2009, with access to following two accounts: Tier-I pension account: The subscriber will contribute his/her savings for retirement into this non-withdrawable account. Tier-II savings account: This is simply a voluntary savings facility. The subscriber will be free to withdraw his/her savings from this account whenever he/she wishes 57

59 Establishing and Funding Retirement Benefit Gratuity Benefit Scheme Employees Provident Fund Scheme (PF) No Statutory obligations to create fund Can setup Trust fund or segregate money or accounting provision Approval of income tax authorities are required for trust fund Employer pays contributions into the Government Fund which is administered and managed by EPFO The Employer seeks exemption from the EPFO from joining EPFO Fund, sets up his own Trust Fund and manages and administers the fund 58

60 59 Hong Kong Retirement Benefits

61 The Benefits Structure Hong Kong Retirement Benefit Plans Employer Sponsored Retirement Benefit Long Service Payment (DB) Mandatory Provident Fund (DC) 2 sections Establishing and Funding Retirement Benefit 60

62 Employer Sponsored Retirement Benefit Long Service Payment Benefit Payable Occasions Payable By Employer to permanent full time employees Retirement Age 60 years (Male and Female) Super Annuation Early retirement or resignation Death or disability due to accident or disease Form of payment: Lump Sum Benefit: Multiple times scheme salary time s service, schemes Mandatory Provident Fund Retirement Age 65 years Employer & Employee 5% contribution mandatory subject to income levels Voluntary contribution possible Vesting is Immediate for mandatory contribution Benefit payable Lump sum Benefit Formula accumulation of contribution with interest 61

63 Establishing and Funding Retirement Benefit Long Service Payment Mandatory Provident Fund Typically trust arrangements which are master trust funds. Valuation (every three years ) if the scheme is solvent on a voluntary Leaving service benefit basis Typically trust arrangements are made, majority of which are master trust funds Else Annual valuations are required 62

64 63 Japan Retirement Benefits

65 The Benefits Structure Japan Retirement Benefit Plans Employer Sponsored Retirement Benefit National Pension (DB) Employees Pension Insurance(DB). 2 sections Establishing and Funding Retirement Benefit 64

66 Employer Sponsored Retirement Benefit National Pension & Employees Pension Insurance Benefit Payable Occasions Payable By Employer to regular employees Retirement Age 60 years (Male and Female) Super Annuation Early retirement or resignation Death or disability due to accident or disease Form of payment: Lump Sum, Annuity or combination of both Vesting Condition: Voluntary retirement 3 years, Involuntary retirement 1 year Funding levels in DB plans continue to remain low by international standards Internal Financing o Book Reserve o Tax-qualified pension plans(tqpp/new DB) o Employees' Pension Funds (EPF) as external financing As per the market practice approximately 49% plans are funded 65

67 66 Q&A?

68 Contact Mr David Pittet Chief Executive Officer Pittet Associates Ltd PO Box Geneva 6 Switzerland d.pittet@pittet.net Mr Jason Gratson Senior Manager Deloitte Consulting jgratson@deloitte.com Mr Mahasen Kunapuli Senior Manager Deloitte Consulting jgratson@deloitte.com 67