Global Retirement Update
May 2014
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
Australia—The Australian government announced that the timetable for increasing the superannuation guarantee will be delayed. The superannuation guarantee rate will increase from 9.25% to 9.5% as of July 1, 2014, as currently scheduled, to give certainty to employers and employees. The rate will remain at 9.5% for four years until June 30, 2018. It will then increase by 0.5% points each year until it reaches 12% in 2022-23, rather than July 1, 2019, as previously scheduled.
In other news, employers with 20 or more employees may begin using SuperStream standard when making superannuation contributions on behalf of employees, effective July 1, 2014. With SuperStream, employee contributions are paid and processed electronically in a standardized and simplified format.
Recent Developments
Americas
The U.S. Internal Revenue Service (IRS) released final regulations clarifying the rules regarding the tax treatment of payments by qualified retirement plans for accident or health insurance. The final regulations set forth the general rule under Internal Revenue Code (Code) Section 402(a) that amounts held in a qualified plan that are used to pay accident or health insurance premiums are taxable distributions unless described in certain statutory exceptions. The final regulations do not extend this result to arrangements under which amounts are used to pay premiums for disability insurance that replace retirement plan contributions in the event of a participant’s disability. These regulations affect sponsors, administrators, participants, and beneficiaries of qualified retirement plans. The regulations apply for years beginning on or after January 1, 2015. However, taxpayers may elect to apply the regulations to earlier taxable years.
The U.S. Pension Benefit Guaranty Corporation (PBGC) released final regulations on benefits payable in terminated single-employer plans. The regulations set forth rules on the PBGC’s guarantee of pension plan benefits, including rules on the phase-in of the guarantee. The amendments implement the Pension Protection
occurrence of an “unpredictable contingent event,” such as a plant shutdown, starts no earlier than the date of the shutdown or other unpredictable contingent event. The final regulations become effective June 4, 2014.
Amendments are proposed to Regulation 909 under the Pension Benefits Act (Ontario, Canada) that would allow retirees to keep their savings in a variable benefit account held by the plan, and receive income directly from this account. Bill 120, Securing Pension Benefits Now and for the Future Act, 2010, includes provisions to allow pension plans that provide defined contribution benefits to make payments of pensions and pension benefits directly from the plan, rather than transfer assets to a financial institution in order to receive retirement income. The payments permitted from a variable benefit account would be the same as those permitted from a life incomefund. Pension plans would be permitted, but not be required, to provide this option. Comments may be submitted before June 10, 2014.
Asia Pacific
Individuals in Australia will be permitted to withdraw superannuation contributions in excess of the
nonconcessional contribution cap made from July 1, 2013 and any associated earnings, with those earnings subject to the individual’s marginal tax rate. The nonconcessional contributions cap is currently AUD 150,000 per year, increasing to AUD 180,000 from 2014-15, or a one-off nonconcessional contribution up to AUD 450,000 over three years (AUD 540,000 over three years from 2014-15).
The Australian government’s 2014 budget includes measures that would affect retirees. The qualifying age for the age pension would gradually increase from age 67 to age 70 between 2023 and 2035. Currently, the qualifying age is scheduled to increase from age 65 to age 67 between 2017 and 2023. Beginning in 2017, the age pension would be indexed to changes in the Consumer Price Index; it is currently indexed to increases in average male wages. Also beginning in 2017, income and asset tests would be frozen for three years, and the deeming threshold for the income test would be reset to AUD 30,000 for single pensioners and AUD 50,000 for couples.
Other proposed changes affecting seniors include the elimination of the senior supplement and the dependent spouse tax offset. For individuals first applying for the Senior Health Card, untaxed superannuation would be included in the income test.
A new program, “Restart,” would be introduced to encourage employers to hire individuals age 50 or over who have been unemployed for at least six months. Employers would initially receive AUD 3,000 for the hire. An additional AUD 3,000 would be paid if the individual were employed for 12 months, followed by another AUD 2,000 for 18 months’ employment, and AUD 2,000 after 24 months’ employment.
The rollout of the “product dashboard” for Australian superannuation funds has been delayed. Superannuation funds would be required to disclose details about their portfolio holdings, thereby facilitating the comparison of MySuper products by consumers. The dashboard was originally scheduled to be rolled out in January 2014; the date was later postponed to July 2014. The rollout is now expected to be in July 2015 at the earliest.
The Australian-Indian social security totalization agreement will be effective July 1, 2015. Under the agreement, employees seconded to either country will not be required to contribute to the retirement systems of both
The maximum monthly contribution salary for Mandatory Provident Funds (MPFs) will increase in Hong Kong, effective June 1, 2014. The maximum monthly contribution salary will increase from HKD 25,000 to HKD 30,000. The maximum annual limit for the self-employed will increase from HKD 300,000 to HKD 360,000. In related news, proposed amendments to the MPF Ordinance would permit retirees to withdraw funds from their MPF account four times a year without fees. The minimum withdrawal would be HKD 5,000. Also, individuals with a terminal illness would be permitted to withdraw their funds if their doctor certified that life expectancy was less than 12 months. The Legislative Council is expected to review the proposed amendments in July 2014. If approved, they would be effective in 2015.
South Korea’s National Assembly recently passed legislation that increases the basic old age pension for some retirees. The poorest 70% of retirees will receive a monthly allowance of KRW 100,000 to KRW 200,000 to supplement their pension, effective July 25, 2014. The amount of the allowance will vary according to other supplemental income received. Retirees with dual citizenship who live outside the country will not receive an allowance.
In Japan, individuals would be permitted to defer receipt of public pension benefits until age 75 under a pending reform measure. Currently, the normal retirement age is age 65. Individuals can voluntarily defer the receipt of public pension benefits until age 70.
Europe
In the United Kingdom, amendments to the definition of money purchase benefits will come into effect July 2014. In the Imperial Home Decor case in 2011, the Court of Appeal ruled that some benefits that the U.K. government previously regarded as nonmoney purchases were in fact money purchase benefits. This meant that (on that interpretation) a money purchase scheme may have a deficit (or surplus) on winding up, but is not covered by legislation governing, for example, planfunding, employer debt, and the Pension Protection Fund. The
Department for Work and Pensions (DWP) promised legislation to redress this anomaly, and as a result, Section 29 of the Pensions Act 2011 was inserted to change the definition of money purchase benefits to exclude any benefits where a funding deficit could arise. The change has not been implemented but following lengthy consultation, regulations have now been released which will put Section 29 into effect in early July 2014, and contain provisions which aim to ensure that plans can comply with the clarified definition with minimum disruption and cost. In most cases this transitional protection will be provided with respect to events occurring between January 1, 1997 and July 2014. Hence, plans will not need to revisit past decisions in almost all cases.
The U.K. Pensions Bill 2013-14 received Royal Assent on May 14, 2014. Provisions of the Pensions Act 2014
affect National Insurance and private pensions:
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For individuals who reach State Pension Age (SPA) on or after April 6, 2016, the single-tier pension will replace the basic State Pension and additional State Pension with a flat-rate benefit that will be set above the basic level of means-tested support. This will mean the end of “contracting-out” of the additional State Pension;■
The SPA will gradually increase from age 66 to age 67 between 2026 and 2028. SPA will be subject to a■
A new voluntary National Insurance contribution (Class 3A) will allow individuals who reach SPA before April 6, 2016 to top-up their additional State Pension.Private pension measures include:
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Implementation of system for automatic transfer of small pension pots;■
Clarification of clarify technical issues related to automatic enrollment in workplace pension plans through amendments to Pension Act 2008;■
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bolition of short service refunds for individuals who leave a money purchase occupational plan after 30 days but before two years;■
Introduction of a new objective for the Pensions Regulator in relation to funding “to minimize any adverse impact on the sustainable growth of an employer;” and■
Restructuring of the PPF compensation cap to better protect plan members with long service.Most of the private pension provisions require enabling regulations to put them into effect, so there is not yet any timetable for their implementation. The Regulator’s objective will apply from July 14, 2014.
A new draft standard for pension plan accounts has been published for consultation in the United Kingdom. The Pensions Research Accountants Group has published an exposure draft of a revised Statement of
Recommended Practice (SORP) which covers the financial reports of pension plans. This is intended to replace the current SORP, which was published in 2007.
The revised SORP reflects the new accounting requirements (FRS 102) and takes account of new legislation and the increasing complexity of pension investment arrangements. The draft seeks to clarify the source of accounting and disclosure requirements, including referencing other sources, where appropriate, and to clarify where the recommended disclosures are in addition to what is required by standards or law.
Comments on the exposure draft are invited by July 16, 2014. The new SORP will apply for all plan years commencing on or after January 1, 2015 or earlier if a scheme adopts FRS 102 early.
The U.K. DWP published its analysis of what Scottish independence would mean for social security, pensions, and helping people into work.
The overall conclusion is that people and employers in Scotland benefit from being part of the United Kingdom and the United Kingdom benefits from having Scotland as part of it.
With regard to pensions, the analysis highlighted:
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Projected pensioner populations: Pensioners are projected to make up 22.0% of Scotland's population compared with 20.8% in the rest of the United Kingdom by 2032. The United Kingdom’s broad tax base will■
Impact of demographics on pensioner benefit costs: Currently, spending on pensioner benefits in Scotland costs almost GBP 80 more per working-age person per year than in the United Kingdom as a whole. Scotland’s different demographic trends alone mean that over the next 20 years, expenditure on pensioners is projected to rise to almost GBP 200 more in Scotland, compared to the United Kingdom, in today’s terms.■
SPA: Not going ahead with the increase SPA to age 67 could cost Scotland approximately GBP 6 billion between 2026-2027 and 2035-36 in extra pension costs and see around GBP 9 billion lost in terms of Gross Domestic Product, as people leave the labor market earlier than they would otherwise have done.■
Other proposed policy changes: In addition to the above, if the current Scottish government’s proposed policy changes (a start level for the new single-tier pension of GBP 160 per week, retaining the Savings Credit element of Pension Credit and not increasing the SPA increase to age 67) are added in, this would add further costs that would rise to GBP 210 per working-age person per year in Scotland over the next 20 years.■
Regulation of pensions: If Scotland were to leave the United Kingdom, in addition to costs of funding pensions for people in Scotland, there also would be cost implications resulting from the need to protect and regulate pensions, support automatic-enrollment schemes, and disentangle U.K. state pensions from those of an independent Scottish state.■
Infrastructure for state benefit payments: Sharing IT systems and services would mean that an independent Scottish state would not be able to make changes to existing social security policy or processes or to opt out of Great Britain-wide reforms. If Scotland does not use sterling as its currency, it would not be possible to share a benefit system, even for a transitional period.The Belgian government has drafted legislation on the harmonization of occupational pension plans for blue- and white-collar employees. Existing plan provisions would remain in place up to January 1, 2015. Between
January 1, 2015-January 1, 2025, different treatment for blue- and white-collar employees would be permitted if this treatment were included in pension plan provisions that existed prior to January 1, 2015. The difference in treatment could not increase. Employers and unions would be required to negotiate new agreements to eliminate the different treatment of blue- and white-collar employees during this time. Differentiated treatment of blue- and white-collar employees would no longer be permitted as of January 1, 2025. Employers could, however,
differentiate treatment by other employee categories.
The German government has announcement plans to waive the early retirement reduction for some employees. Under a draft law, employees with at least 45 years’ contributions to the social security system since age 18 would be permitted to retire at age 63. Effective January 1, 2012, the normal retirement age is increasing gradually from age 65 to age 67 for individuals born in or after 1947.
The Portuguese government’s budgetary strategy for the next four years includes an adjustment in the solidarity tax paid on pension income and in social security contributions. New progressive tax rates would be assessed on monthly pension income: EUR 0-1,000, 0%; EUR 1,000-2,000, 2%; EUR 2,000-3,500, 5.5%; and EUR 3,501 and over, 3.5%. Employees’ social security contributions would increase from 11.0% to 11.2% of pay.
Hungary has extended the two-year exemption rule for expatriate participation in the social security system. Non-European Economic Area expatriates who are assigned by non-Hungarian firms to work in Hungary and are not considered resident for social security purposes will be subject to the Hungarian social security system no earlier than January 1, 2015. The government extended the two-year exemption rule from January 1, 2014. The start date of the two-year exemption rule is now January 1, 2013.
In related news, the Hungarian-Japanese social security totalization agreement is effective as of January 1, 2014.
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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.
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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.
