International Pensions Guide
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1 International Pensions Guide
2 Introduction How to provide pensions for the elderly has been a problem for businesses and governments for a millennia, and the solutions offered have varied widely between countries. As a result, the provision for the retirement of employees is organised and regulated across different jurisdictions in a wide variety of ways, which are often not particularly consistent with each other. The importance of caring for the elderly means that this is a highly regulated issue in many countries and legal requirements must always be considered on a national basis. In addition, the cost of an ageing population can render this an expensive area for any business, easily dwarfing other employee costs and at times threatening the cash flow of the business. Pension provision is a complex matter and the issues that arise for each country are numerous and varied. This guide draws out some general themes, comparing and contrasting issues between countries on the funding of pensions and benefit structures, employee rights and benefits, and the effect of events such as transactions and employer insolvency. Any business that wishes to adopt a reward strategy covering retirement provision across different jurisdictions should be aware of these issues, and of the need to understand the different impacts this will have on businesses across the globe. Rosalind Connor Partner, Pensions
3 Contents Pension provision Pension funding Employer obligations to provide pensions Adjustment for cost of living increases Employer right to change the pension Pensions and discrimination Employee influence on pension provision Pension of a departing employee Pension rights on employer insolvency Pensions on a corporate sale About us Key contacts
4 Pension provision Pension provision Pensions are provided by a wide range of institutions using a number of different methods. Classifying pensions so that it is clear what is being discussed is difficult, but the European Union ( EU ) describes three types of pension provision under three pillars to support old age: First Pillar: State-run pension systems which provide a basic income. Second Pillar: Private pension schemes plans by the employer, often also partially funded by the employee. Third Pillar: Private individual pensions which are operated entirely by the individual. For the purpose of this guide, we focus on the second pillar; the private pension plans funded, at least in part, by the employer. Most countries also have at least some first pillar provision, but it is the second pillar that most affects businesses and their reward policies. The second pillar pensions are highly regulated and are longstanding and particularly well developed in countries such as Germany, Austria and the UK. Similar provision is developing in countries such as Hungary, the Czech Republic and the Ukraine, with take up of such benefits slowly progressing. In Poland, for instance, as of 30 August 2012, only 1107 companies offered benefits to their employees. Provision is slowly developing in China as well, in the form of enterprise annuities, which have only been formally and legally established since << Contents 03
5 Pension provision Exactly what is provided varies greatly between countries. In the United Arab Emirates ( UAE ), second pillar pensions are provided by way of a lump sum payment on leaving service, intended to provide for retirement or the move to a new role. In most other countries, the provision is by way of a pension that is paid out from retirement until death, providing some guaranteed income in old age. Where the benefit is provided as an ongoing pension, it will be in one of two forms: defined contribution, in which the pension provided depends on the contributions and the returns on investments; defined benefit, where the pension is calculated on a formula (usually related to the individual s salary and length of time in the plan). In certain countries, such as China, Singapore, the Czech Republic, Poland and Slovakia, the pensions provided are on a defined contribution basis only. In others, there is a choice between defined contribution and defined benefit, with the plan design being very much in the hands of the employer. In Slovakia, the only pension available is by way of private insurance arrangements into which individuals and occasionally employers pay, similar to the Singaporean Supplementary Retirement Scheme, which is also operated largely by individuals. In France, there are mandatory pay as you go plans which provide broad benefits, but also smaller top up arrangements that are less ubiquitous, but attempt to provide a pension that complements the larger pay as you go pension and first pillar state pension. 04 << Contents
6 Pension funding Pension funding The funding of pensions is a very significant cost for businesses. Over recent years, particularly with defined benefit plans, the cost and unpredictability of pension funding has led many businesses to look for ways to limit or remove the pension cost, as it can severely damage profitability. Funding of defined contribution plans is simple the money is held in a fund and returns are added from investments. In countries such as Singapore, where the funds are held in a separate defined contribution arrangement, there are no funding complications and the funds are added to as the individual and employee think appropriate. If a pension is provided on a defined benefit basis, it is generally the case that the employer is under an obligation to ensure that there are sufficient funds to provide the pension. It is this cost and obligation that has made pensions so expensive in recent years. << Contents 05
7 Pension funding The funding is often effected by an obligation of the employer to pay money into a separate fund. In the UK in order to obtain favourable tax treatment, a separate fund must be established under a trust structure, where legal ownership of the assets is with trustees. In this structure the employer is obliged to provide funding which is reviewed and agreed with the trustees, at least every three years. Similarly, in Hungary pensions must be funded through an institution for the provision of occupational pensions, which must be a public limited company either founded by the employer or a third party such as an insurer or bank. Many countries allow pensions to be funded through insurance to companies, which the employer makes the contributions required by the insurer, and the insurer agrees to pay the pension 06 << Contents
8 Pension funding on retirement. In France, for example, all top up pensions are provided in this way. In Germany, pensions are not required to have separate funding and a direct commitment to pay a pension from the assets of the employer is very common. In this situation, the pension of each individual is paid following their retirement from the assets of the employer itself. However, some German employers use an external vehicle to fund their pension obligation, such as an insurance company, an investment fund, a support fund or a contractual trust arrangement (which mimics the legal position of a UK trust) to which the employer makes contributions. The German model is replicated in many central European countries. In Austria, the pension may be provided by direct commitment or through an insurer. In the Ukraine, direct commitments are permitted, although most employers choose to use a Non-State Pension Fund, which is a non-profit pension vehicle, or alternatively an insurance company or a bank. All businesses wish to understand the level of obligation they may have to fund pension benefits, but it is important to remember that such liabilities are generally difficult to measure accurately, because of the large number of assumptions that must be used in the calculation, such as future investment growth, future salaries and, importantly, life expectancy and thus the length of time for which the pension will be paid. The basis for calculating these varies greatly between countries and valuations of pension liabilities cannot be directly compared without advice. Conversely, because the pensions in the UAE are lump sum payments, the liability for them, which is not pre-funded, is much easier to accurately account for on the balance sheet. << Contents 07
9 Employer obligations to provide pensions Employer obligations to provide pensions Generally, there is no statutory obligation for employers to provide pensions to their employees, except the obligation to make social security contributions that cover state first pillar pensions. However, in many jurisdictions particularly across Europe, there are many collective bargaining arrangements that apply to certain employers which oblige the employer to provide a pension. The termination payment due on leaving service in the UAE for non-uae nationals (who make up about 80% of the UAE s workforce) is compulsory. Discussion on establishing a compulsory full pension system for non-uae nationals has been ongoing for several years, but nothing has, as of yet, been announced. In addition, after many years of discussion the UK has started to phase in a compulsory provision of pension to employees who will be automatically enrolled in the pension plan without their choice and stay in unless they choose to opt out. The employer must at a minimum contribute 1% of earnings for a 1% employee contribution to a money purchase arrangement, rising to a 3% contribution for a 5% employee contribution by The requirements are being phased in from October 2012 to April 2017, depending on the size of the workforce of an employer as of April 2012, with the largest employers first. 08 << Contents
10 Adjustment for cost of living increases Adjustment for cost of living increases Pensions can easily be eroded by inflation in the cost of living. A pension that seemed valuable at 65 may be worth substantially less in real terms at 85, when the individual is usually too old to take any actions to supplement their income. Many countries have sought to legislate to ensure that pensions are increased in line with inflation. In Germany and Austria, the revaluation is triennial and must be put in place (trienially in Germany and annually in Austria) except in extraordinary circumstances such as financial distress, or if a lower increase was agreed when the plan was established. In Hungary, there is an obligation to increase the benefit from the date it is earned until the date of payment in line with certain factors such as price and wage increases. The UK requires increases both to the pension up to payment and to the pension being paid. These only apply to the pension earned after a certain date and are subject to a cap, so that significant inflation would still reduce the real value of benefits being paid. << Contents 09
11 Employer right to change the pension Employer right to change the pension Generally, changes to a pension plan that affect employees require the agreement of employees or their representatives, and may be controlled in any event by a collective bargaining arrangement. Where the pension is provided with the assistance of a third party, the agreement of that third party (such as the trustee and the investment manager in China, the non-state pension fund s founders in the Ukraine or the trustees in the UK) must be obtained, and that agreement is not necessarily forthcoming. Many countries, such as Germany and the UK, have restrictions that ensure that benefits already earned cannot be reduced and in practice it is difficult to amend benefits for existing employees for the future in many jurisdictions, such as Hungary. Amendment of benefits in Austria, where there is a collective agreement, requires that that collective agreement permits the change, there is consultation with the works council and that a compelling economic reason exists. To close the plan down all together requires that the compelling economic reason be that the economic situation has substantially deteriorated so that continuing to provide the promised benefits endangers the continued existence of the employer. The tests in Germany are similar. In France, changes to pensions depend on how the pension provision was first agreed upon with the employees. For example, if it is provided under a collective agreement the changes must be agreed in line with the modification rules of the collective agreement. 10 << Contents
12 Employer right to change the pension Similarly, if it was initially agreed following a referendum of the workforce, the amendment requires the agreement of the majority of the workforce. If the employer had provided the pension unilaterally, it may amend so long as employees and their representatives have been given sufficient information and time to consider the changes. In Poland, there is provision specifically allowing the employer to change pensions in the short term or to deal with economic distress. The employer may reduce or suspend contributions unilaterally for a maximum period of three months in any 12 months (or up to six months in any 12 months if the plan rules provide). Employees consent is required for a longer suspension. << Contents 11
13 Pension and discrimination Pensions and discrimination Laws that apply in a jurisdiction about discrimination will also apply to the provision of pensions. Within the EU, there are requirements to comply with the Equal Treatment Directive 2006/54/EC which prohibits discrimination in the employment sphere on the grounds of age, sex, disability, sexual orientation or race. In France for instance, any reference to such factors in the founding documentation of the plan renders it void. In addition, the case of Test-Achats in 2011 in front of the European Court of Justice held that insurance products (such as pension annuities) must not discriminate on the grounds of sex, and so may not provide a better annuity rate to men who have, on average, a slightly lower life expectancy than women. Discrimination on the grounds of age is a particularly difficult issue for pensions, which provide benefits on the basis of age. In the UK, the government has allowed for a number of permitted exceptions to age discrimination requirements particularly for pensions. In Germany, the issue is still one of significant debate. Historically, most UK plans have had different retirement ages for men and women, mirroring the then differing state pension ages. Following a case in 1990 of the Court of Justice of the EU, where it was decided that pensions were pay and that these different retirement ages were therefore contrary to the equal pay article of the Treaty of Rome, UK pension plans have had to provide the same retirement age for pensions earned since 1990, and many are still struggling to ensure compliance. In some countries, discrimination is more prescriptive. For instance, in the Ukraine, a pension may either provide the same contribution 12 << Contents
14 Pension and discrimination rate for all employees, or may be based on age or length of service. In Austria, differentials in provision between employees must be objectively justified. << Contents 13
15 Employee influence on pension provision Employee influence on pension provision The degree to which employees can influence pension provision varies significantly. In countries such as Singapore where the provision is under the employee s control they are, subject to legislation, able to direct their pension entirely. In many countries, control is through the collective bargaining arrangement or other union agreement. Control is often weakest where there is a third party holding the pension, such as the trustees that operate in China and in the UK. However, in the UK, legislation requires that at least one third of trustees (or, if the trustee is a company, a third of its directors) are nominated and voted for by the employees who are earning benefits in the plan and those receiving pensions. The process may also include ex-employees who have benefits in the plan, if the trustees and employer choose to include them. This allows significant employee influence. However, in practice it can be difficult to find volunteers to be trustees amongst employees, and it is therefore quite common for the places not to be taken or to be taken by management who are the only candidates. 14 << Contents
16 Pension of a departing employee Pension of a departing employee What happens to a pension when an employee leaves service can vary significantly. Whereas in some countries the employee has an absolute right to control their benefit once they leave, in others the benefit may be lost as a result of the departure. The first issue is whether the pension vests in the employee, that is, whether they retain a right to receive it. Pensions vest immediately in a number of jurisdictions, such as China, Singapore, the UAE, the Czech Republic, Poland, Slovakia and the Ukraine. In the UK, pensions vest after six months, and in Hungary, after an agreed period of up to five years. In Germany and Austria, the vesting period is five years (although it may not vest at all for a direct pension) and in Germany the employee must be at least 30. In France, vesting depends on the arrangement, with some arrangements vesting immediately and some (such as defined benefit arrangements) not vesting at all and being lost when the employee departs. The treatment of the vested pension also varies. In the UAE, it becomes immediately payable to the individual, but in most jurisdictions it will stay in the plan or transfer to the new employer. In the UK, the Ukraine, Austria, Hungary, Poland and France the employee can choose whether or not to transfer their pension to a new scheme, but in countries where the benefit is largely held with insurers, such as the Czech Republic and Slovakia, the pension stays in its existing arrangement. In Germany, the agreement of the old and new employers is required for the transfer. In China, where pension provision is a new phenomenon, this is one area that is still to be more fully regulated. << Contents 15
17 Pension rights on employer insolvency Pension rights on employer insolvency The effect of the insolvency of the employer on the pension fund can be very dramatic. If an insolvency means that employees lose their jobs, they will of course be concerned that they do not lose their pensions as well. Insolvency is much less of a concern if the pension is funded separately from the employer. In the UK, Singapore, China, the Czech Republic, Poland, Slovakia, the Ukraine and France the pension is held separately and therefore should be protected from the insolvency. In these cases, the creditors of the employer cannot attack the fund. However, if the pension is provided on a defined benefit basis, it may be underfunded and therefore members may receive a reduced pension on insolvency. In the UK, the Pension Protection Fund has been established to secure pensions up to a limit when the employer has become insolvent and the pension is underfunded. The issue becomes more acute with pensions that may not be separately funded. Germany operates a National Pension Assurance Fund funded by employers, that provides pensions up to a limit for employees who have lost their pension in the insolvency of the employer. 24 months worth of pension benefits are guaranteed in Austria under the Insolvency Remuneration Fund. In Hungary, a limited amount is available from the Wage Guarantee Fund. 16 << Contents
18 Pension rights on employer insolvency A number of countries provide some form of preference to pensions and employee rights in the insolvency of the employer. In Austria, 50% or more of an employee s pension rights can be privileged creditors for a direct pension. In France, there is preferential treatment of employee creditors, as there is in the UK. The UK in addition has a Pensions Regulator with the power, in certain circumstances, to impose liability for the pension obligations on other group companies and directors. << Contents 17
19 Pensions on a corporate sale Pensions on a corporate sale In most jurisdictions, a sale of a company transfers the pensions right with the company so that, in fact, there is no change to the pension provided and a purchaser s sole concern is to fully understand the pension obligation. In certain jurisdictions such as Poland where provision of the pension is voluntary, the new owner may choose to end the arrangement. In the UK, the pension arrangement may be connected to a group of companies and the effect of the sale would be that the company leaves the pension arrangement and be liable for an immediate payment of its liabilities. On a business and assets sale, the situation is different. In the UAE, the pension payment would be immediately due as employment will have terminated. In countries within the EU, employment will automatically transfer and pension rights may transfer too, most notably in Germany and Poland. In other EU countries the right may not transfer automatically, but if a collective bargaining arrangement exists that does transfer, the purchaser will be obliged to provide the same pension. In France, the employee s right to the existing pension continues but the right to the new pension with the new employer may also arise, resulting for a short time in the employee having both plans in operation. In countries outside the EU, the employment does not continue on an asset sale and the pension arrangement does not need to be continued. However, in practice arrangements are often continued if the employees are taken on by the new employer, in order to ensure the employees accept their new role. 18 << Contents
20 Taylor Wessing - About us Taylor Wessing About Us Taylor Wessing is a leading international law firm in Europe, Asia and the Middle East. Our clients include leading financial institutions, major corporations, public sector bodies and wealthy individuals and families. What makes us different is our forward-thinking approach to serving clients. We think creatively about business issues and are constantly looking for new and better ways to add value. By doing this, we come up with truly innovative solutions that help to grow our clients businesses. What distinguishes the firm has been its strategically astute, not to say imaginative, growth and its commitment to investing in new economies, thereby differentiating itself from so many of its competitors. The Lawyer << Contents 19
21 Key contacts Key contacts Rosalind Connor Partner, London +44 (0) Sascha R. Grosjean Partner, Düsseldorf +49 (0) Mark Smith Partner, London +44 (0) Michael Johannes Pils Associate, Düsseldorf +49 (0) Markus Asshoff Partner, Paris +33 (0) Wolfgang Kapek Partner, Vienna +43 (0) Kaylee Kwok Partner, Singapore Ralph Koppitz Partner, Shanghai +86 (21) Marize Coetzer Senior Associate, Dubai +971 (0) << Contents
22 AUSTRIA HUNGARY UNITED ARAB EMIRATES Key contacts Rosalind Connor UNITED KINGDOM Sascha Grosjean POLAND GERMANY UKRAINE CZECH REPUBLIC SLOVAKIA Mark Smith FRANCE AUSTRIA HUNGARY Michael Pils Markus Asshoff Wolfgang Kapek UNITED KINGDOM POLAND GERMANY UKRAINE CZECH REPUBLIC SLOVAKIA FRANCE AUSTRIA HUNGARY Kaylee Kwok Marize Coetzer CHINA UNITED ARAB EMIRATES UNITED ARAB EMIRATES SINGAPORE Ralph Koppitz ARA SINGAPORE
23 Europe > Middle East > Asia Taylor Wessing LLP 2013 This publication is intended for general public guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice. Taylor Wessing s international offices operate as one firm but are established as distinct legal entities. For further information about our offices and the regulatory regimes that apply to them, please refer to: NB_001200_07.13
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