WILLIS BREAKFAST SEMINAR. Thursday, 21 st November 2013

Transcription

1 WILLIS BREAKFAST SEMINAR Thursday, 21 st November 2013

2 Welcome Housekeeping INTRODUCTION 8.00am Tara Flynn CHANGES TO THE PRIORITY ORDER am Susan Egan NEW SFT LIMITS am Maurice Whyms & Kirstie Flynn WRAP UP & Q&A SESSION TEA & COFFEE am Tara Flynn 9.15am Housekeeping

3 CHANGES TO THE PRIORITY ORDER Susan Egan 21 st November 2013

4 Change to the Priority Order A change to the priority order, where a pension scheme is winding-up or restructuring, was announced by the Minister for Social Protection, Joan Burton, on 19 November. Current Priority Order Pensioners rank above active and deferred members and have their future pension entitlements, excluding future pension increases, discharged first in the event of a wind-up. New Priority Order 1) Attempts to achieve a more equitable distribution of assets across all categories of membership (i.e. actives, deferreds and pensioners) where a pension scheme is winding-up in deficit. 2) In particular for significantly underfunded pension schemes, it provides for a sharing of the shortfall across all categories.

5 Double Insolvency Occurs when the employer and pension scheme are both insolvent. The table below sets out the sequence of priority order steps which will now apply in the case of a Double Insolvency: Distribution on Wind-up Pensions < 12K Pensions 12K-60K Pensions > 60K STEP 1* 100% 50% 50% Active/Deferred Members STEP 2* 50% STEP 3 Up to 100% Up to 100% STEP 4 Benefits topped up with remaining assets *If there are insufficient funds to provide members with 50% of their benefits then the liability falls on the State The State will fund this shortfall using Pension Levy funds. This change addresses the issue highlighted by the European Court of Justice earlier this year, which stated Ireland is in breach of the EU Insolvency Directive which requires members to be provided with at least 49% of their expected benefits.

6 Single Insolvency Occurs when the employer is solvent but the pension scheme is insolvent. The table below sets out the sequence of priority order steps which will now apply in the case of a Single Insolvency: Distribution on Wind-up Pensions < 12K Pensions 12K-60K Pensions > 60K STEP 1 100% 90% 80% Active/Deferred Members STEP 2 50% STEP 3 Up to 100% Up to 100% STEP 4 Benefits topped up with remaining assets (up to 100%)

7 Scheme Restructuring Trustees are now being given the option to restructure a pension scheme to ensure it remains viable. The following table sets out the sequence of steps which will now be available to Trustees where a pension scheme is being restructured: Distribution on Wind-up Pensions < 12K Pensions 12K-60K Pensions > 60K STEP 1 100% 90% 80% STEP 2 Active/Deferred Members Receive improved benefits

8 Other Changes to Regulations The Pensions Board will be introducing more stringent regulation for DB pension schemes which will include the following: The Board will be refusing to accept funding proposals from schemes which are less than 50% funded on a Minimum Funding Standard basis. The Board will be imposing additional obligations on pension schemes to ensure those that are significantly underfunded achieve a minimum level of funding in the short term. The Board will be removing the flexibility options currently open to pension schemes, which have a Funding Proposal in place and which go off track, where the level of funding in that scheme falls below 50% level. (For example, the two year easement currently available.)

9 NEW LIMITS ON TAX RELIEVED PENSION SAVINGS Changes to the Standard Fund Threshold Kirstie Flynn 21 st November 2013

10 STANDARD FUND THRESHOLD The History of the SFT 6m 5m 5.0m 5.17m 5.42m 4m 3m + SFT Credit introduced on Tax paid on Lump Sums 2m 1m 2.3m 2.0m m

11 SFT Main Changes (from 2014) Standard Fund Threshold (SFT) reduced from: 2.3 million to 2 million Higher rate tax payable on lump sums > 500,000 DB Schemes valuation factor increased from 20 to age-related factors (for future service only) 3,000 penalty for non-compliance DB Pension that counts for SFT is now pre-commutation pension plus any lump sum taken! Some changes to payment of tax provisions applying to Public Service: 20% of gratuity initially applied to pay tax (previously 50%) Can pay balance of tax out of pension over 20 years (previously 10 years)

12 When Does a Benefit Crystallisation Event (BCE) Occur? When someone retires from a DB scheme When a lump sum is paid When the proceeds of a pension plan or PRSA are used to buy annuity or transferred to ARF/AMRF When there is a transfer or payment to an overseas arrangement When increases are paid above a permitted margin 30% surrender of AVC Encashment of private sector benefits by public sector employees Death in service

13 Personal Fund Threshold Accrued benefits valued at > 2 million at 1 January 2014? Can apply to Revenue for a PFT up to 2.3 million HOW Will be able to do so electronically WHEN Within 12 months of electronic application becoming available or before next BCE if that tips you over SFT

14 What Benefits Count in Determining a PFT? DB benefit accrued at 1/1/14 The amount of any stand alone lump sum accrued at 1/1/14 DC/AVC assets at 1/1/14 Benefits already crystallised since 07/12/05 A qualifying overseas plan PRSA assets at 1/1/14 Benefits taken before 07/12/05 Death in service benefits Dependants pensions

15 Tax Liability? Benefits taken exceed SFT/PFT income tax 41% Tax payable when? Within 3 months of taking benefit Paid by who? Administrator/Individual Payable on what amount? - the chargeable excess over SFT/PFT Benefits above SFT taxed in the normal way when drawn down so DOUBLE TAXATION!

16 How do you calculate BCE value? DC/lump sum/arf transfer cash value DB Pension accrued pre-2014: multiplier of 20 still applies DB Pension accrued post-2014: age related multipliers At age 50 At age 60 At age 65 At age 70 New age-related multipliers Multiplier 37 x 30 x 26 x 22 x

17 Example: Mary retires at age 60 Total pension p.a. Pension value pre 2014 (i.e. 20 x pension) Pension value post 2014 (i.e.30 x pension) Old Basis 105,000 pre m n/a New Basis 55,000 pre-2014 & 50,000 post m 1.5m AVCs 0.1m 0.1m Total pension value 2.2m 2.7m SFT 2.3m 2.0m Chargeable Excess Nil 0.7m Tax Nil 287,000

18 Options for Paying Tax? Options Private Sector Individual pays the tax OR Pay tax from fund and reduce pension to recover amount of tax Public Sector Individual pays the tax OR Use 20% of gratuity to pay tax and reduce annual gross pension over up to 20 years Potential Issues How is pension reduced? How is pension reduced? What happens if member dies before tax is recouped?

19 Potential Issues What does accrued pension rights mean? How is benefit apportioned between pre- and post-2014? Allowance for salary increases and revaluation post-2014? Allowance for added years (e.g. Professional Added Years)? Is lump sum from commutable DB scheme counted twice? Bridging pension can you use reduced multiplier? DB scheme trustees purchase annuity may affect pension value

20 THE NEW SFT LIMITS? What Should Employers & Individuals Do? Maurice Whyms 21 st November 2013

21 Employers Planning for the new SFT PLAN Identify individuals potentially affected DEVELOP POLICY Clarify company policy on SFT cases COMMUNICATE Let people know what it means for them

22 SALARY Identifying Individuals Affected 500k 450k Broadbrush salary level for someone affected by SFT (who retires at 65 on 2/3rds salary DB pension) 400k 350k 300k 250k 200k 150k 100k 50k k '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 '25 '26 '27 '28 '29 '30 More People Being Caught in the Net

23 Considerations for Individuals Affected 1. Those already with PFTs above the old 2.3m 2. Those already above the 2m but below 2.3m Main Considerations Managing benefits to minimise SFT tax Stopping accrual of benefit if possible Managing benefits to minimise SFT tax More pension provision before 31 st Dec. Apply for PFT 3. Those just under 2m Understanding when likely to hit SFT Planning for when SFT reached Managing benefits to minimise SFT tax 4. Those well under 2m but projected to hit the limit Understanding when likely to hit SFT Planning for when SFT reached Managing benefits to minimise SFT tax

24 Developing Company Policy Some companies may already have their policy developed for dealing with SFT At a high level, approach can be: It s a tax for the individual and not the Company s problem OR Company will offer flexibility to allow the individual minimise their SFT liability

25 Full Range Of Options For The Individual Cap Transform Surrender Stop future accrual of benefit Stop revaluation/salary linking of accrued benefits Vest DC benefits from former employment Limit DC investment growth Change DB benefit to escalating benefit Change to having higher attaching spouse s pension Draw DB benefits early with actuarial discount Cash in AVCs Encashment of benefits in Public Sector

26 Stop Future Accrual Of Benefit Clearly the most effective lever to avoid over-shooting SFT Main issues for company are: Whether to allow cessation of accrual? Level of pension allowance paid through payroll in lieu of pension? Adjust pension allowance for Employer PRSI? What happens accrued benefits?

27 Stop Revaluation/Salary Linking of Accrued Benefits Important to understand how pre-retirement increases on the accrued benefit will operate Restricting or stopping such increases altogether can be important Main issues for company are: Whether to allow Determining level of pension allowance (more complicated than stopping accrual) Dealing with preservation issues

28 What Options are Available Some options may exist already in a scheme Some may be dependent on Trustee and/or Company consent e.g. early retirement Important to understand what issues may be associated with each option (e.g. low ranking security of pension increases)

29 Example John is 56 and is due to retire at age 65. He has the following details: Salary 200,000 Current Scheme Existing DC assets 300,000 Existing AVCs 100,000 Contribution of 15% of salary Former DB pension (pre 2014) 65,000 p.a.

30 Willis SFT Modeller

31 In Summary It is important to Plan for the SFT FOR EMPLOYERS Identify individuals affected Clarify policy (what s on the menu of options) Communicate FOR INDIVIDUALS Understand what the SFT means Be clear on big & small ticket options available to manage SFT

32 DISCUSSION

33 Contact Maurice Whyms Consulting Actuary/ Head of Group Pensions T: E: Kirstie Flynn Pensions Lawyer T: E: Susan Egan Actuarial Analyst T: E: Tara Flynn Director, HR Consulting T: E: