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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

(2)

Pension Funding Rules—An

International Comparison

October 27, 2014

3:30 – 4:45

(3)

Agenda:

United States

United Kingdom

Netherlands

Switzerland

Germany

India

Hong Kong

Japan

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(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 2021. • 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)

(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 (2008‐2010) • PRA 2010 to use up to 15 year amortization unfunded (2008‐2011) • 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)

ERISA OBRA RPA EGTRRA PPA

MAP21 HATFA PRA 

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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.   2006 2012 2013 2014 2015 2016 Flat Rate $19 $35 $42 $49 $57 $64 Variable  Rate per  $9 $9 $9 $14 $24 or  more $29 or  more

PBGC Premium Increases

Accounting/  Funding  Liability 100% Estimated  Termination Liability 115%‐ 120% Termination  “Premium”

Traditional Cost to Terminate

Revised Cost to Terminate

Economic  Liability 110%‐ 115%+ Estimated  Termination Liability 115%‐ 120% Termination  “Premium” 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.

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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.

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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.

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Pension Scheme Funding

Different measures of liabilities

• 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. Buy‐Out • 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. Section 179 liability/  PPF liability • 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. Technical Provisions • The value of the liabilities on an accounting basis (i.e. to go into the scheme’s sponsor’s  corporate accounts). Projected Benefit  Obligation • This is the value assigned to the liability relating to an individual or group of individuals  Transfer value

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Funding Valuation

Valuation strategy

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

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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 • Best estimate long‐term return on assets: gilts + c. 2%

Assets Liabilities Deficit

Financial position under agreed technical 

provisions basis 100 125 (25)

Assets Liabilities Deficit

Financial position under best estimate basis

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Funding Valuation

What is the employer covenant?

• 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. 

“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

(15)

Funding Valuation

Illustrative impact of employer covenant on funding assumptions

0 20 40 60 80 100 120 140 160 180

None Weak Tending to weak Tending to strong Strong

£m Discount rate: gilts plus 0.5% Discount rate: gilts plus 1.0% Discount rate: gilts Discount rate: gilts plus 1.5% Discount rate: gilts plus 2.0% Illustrative affect of covenant strength on discount rate assumption and funding position

Employer Covenant

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Funding Valuation

Asset out‐performance in recovery plans

Assets Liabilities - No outperformance

0.5% out - performance 1.0% out - performance 1.5% out - performance 2.0% out -performance 20 40 60 80 100 120 140 160 £m

Effect of outperformance on example contribution requirements

(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. Source: Pension Protection Fund 0 100 200 300 400 500 600 700 800 900 1000 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Number  of  contingent  assets  in  place Levy Year Type A  (Group/Parent guarantees) Type B  (Security over assets) Type C  (Bank guarantees)

(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

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(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.

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Comparison of Funding Patterns

80 85 90 95 100 105 2014 2015 2016 2017 2018 2019 2020

Employer Bears Full Risk

Assets Liabilities • 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 80 85 90 95 100 105 2014 2015 2016 2017 2018 2019 2020

Risk Sharing Approach

Assets 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

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Some facts about Switzerland

Population : 8.2 mio (24% of foreign residents)

Superficies : 41’000 km

2

(about 30% of Florida)

GDP (2013) : USD 650 bn

per capita: > USD 80’000

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

(25)

Overview of Swiss social security

The three‐pillar system Protection in  case of  occupational and  non‐occupational  illnesses and  accidents Income  compensation  allowances in case of  military service and  maternity Unemployment insurance Family allowances

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The three-pillar system

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 )

Swiss occupational

insurance is based on the 

so‐called

three‐pillar

system

, a threefold

system of public, 

occupational and 

private insurance.

(27)

The three-pillar system

Types of benefits

Retirement 

Retirement 

pension and/or 

lump sum

Retiree’s child

pension

Disability

Disability

pension

Disabled 

person’s child 

pension

Death

Surviving spouse 

pension and/or 

lump sum

Orphan pension

(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.

Swiss laws

• Established by the Swiss Parliament

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

(29)
(30)
(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 842’400

Maximum total contribution of 

25% of the salary (employer and 

employee)

Measures to limit tax 

optimization

(32)

Benefits

Statutory 

minimum 

benefits

Retirement 

Retirement pension  calculated with the  legal retirement credits  and conversion rate  Retiree’s child pension  = 20% of the  retirement pension  until 18/25

Disability

Disability pension =  projected retirement  pension Disabled person’s child  pension = 20% of the  disability pension until  18/25 

Death

Surviving spouse  pension = 60% of the  beneficiary’s pension Orphan pension = 20%  of the beneficiary’s  pension

(33)

Statutory minimum benefits

• 18 – 24      0% • 25 – 34      7% • 35 – 44      10% • 45 – 54      15% • 55 – 64/65        18% • Employer pays at least 50%  of the total contributions. Retirement credits are  accrued on a retirement  savings account. • Defined every year by the  Swiss Federal Council. • Equal to 1.75% for 2014.  The minimum interest  rate is credited every year  on the retirement savings  account. • 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.

The law on occupational pension funds (BVG/LPP) defines the 

statutory minimum benefits to be fulfilled by all pensions funds.

(34)

Governance

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 

(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.  

(36)

Evolution of the (past) technical

interest rate of reference

Discount rate

2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(37)

Evolution of the future technical interest rate of reference 

between 2015 and 2024

(38)

Average discount rate

Private 

pension 

funds

2012: 

3,22%

2013: 

3,05%

Public 

pension 

funds

2012: 

3,56%

2013: 

3,34%

(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 126’000, 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.

(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

(41)

Private pension funds

Private pension  plans must be  fully‐funded  because private  employers are  not perennial. Pension funds  in Switzerland  are a separate  entity from the  company. Life expectancy  at 65 years‐old  of 18.93 for  men. Discount rate  = 3% (real rate) Average degree  of coverage of  private pension  funds : 110.8% (end of 2013) Actuarial tables  elaborated on  statistics of  both private  and public  sector. Consolidation  measures to   raise the  funding ratio to  100% in the  case of under‐ funding. Savings  amounts are  thus preserved  in case of  bankruptcy of  the employer. Life expectancy  at 65 years‐old  of 21.42 for  women. 93% of all private  pension funds  have a degree of  coverage > 100%. (end of 2013)

(42)

Private pension funds

85.00% 90.00% 95.00% 100.00% 105.00% 110.00% 115.00% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Evolution of the (averge) legal funding ratio between 2004 

and 2013

(43)

Public pension funds

Role: Insure the 

personnel of the 

Cantons (State 

equivalent) and 

municipalities.

The perennity of 

the Cantons and 

municipalities 

implies the non‐

necessity 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).

(44)
(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

Taxation of Contributions (up front taxation)

After 2005

Taxation of Benefits (downstream taxation)

Tax advantages limited to pension plans that offer a

life-long annuity

(46)

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)

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

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).

Salary Conversion

Since 2001 it is mandatory due to the

German pension law to offer the

(48)

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)

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)

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

(51)

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)

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)
(54)

The Benefits Structure

India Retirement Benefit Plans Statutorily Mandatory Gratuity(DB) Employee’s Provident Fund (DC) Voluntary Leave Encashment(DB) Post Retirement Medical New Pension System(DC)

(55)

Benefits – The historical context

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)

(56)

Gratuity (DB)

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 Payment under the Gratuity Act, 1972  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

(57)

Employees Provident Fund (DC)

#

Type

Description

1 Coverage Organizations employing 20 or more employees with basic salary INR 15,000 (USD 250 approx) per month or less

2 Benefit type 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, 1976 7 Employee Taxation Benefit is fully tax exempt

(58)

Other Voluntary Benefits

• Convert unutilized leave into cash

• Quite often employers permit encashment upto 60-90 days

Leave Encashment 

Benefit

Post Retirement 

Medical Benefit

New Pension 

System

• 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

• 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.

(59)

Establishing and Funding

Retirement Benefit

• 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

Gratuity Benefit 

Scheme

Employees’ 

Provident Fund 

Scheme (PF)

• 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

(60)
(61)

The Benefits Structure

2 sections Hong Kong Retirement Benefit Plans Long Service Payment (DB) Mandatory Provident Fund (DC)

Employer Sponsored  

Retirement Benefit

Establishing and Funding 

Retirement Benefit

(62)

Employer Sponsored Retirement

Benefit

• Super Annuation

• Early retirement or resignation

• Death or disability due to accident or disease Benefit Payable Occasions 

Form of payment: Lump Sum | Benefit: Multiple times scheme salary time’s service, schemes

Retirement Age 60 years (Male and Female)

Payable By Employer to

permanent full time employees

Long Service Payment

• 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

(63)

Establishing and Funding

Retirement Benefit

• Typically trust arrangements which

are master trust funds.

• Valuation (every three years ) if the

scheme is solvent on a voluntary

• Leaving service benefit basis • Else Annual valuations are

required

Long Service 

Payment

Mandatory 

Provident Fund

Typically trust arrangements are made, majority of which are master trust funds

(64)
(65)

The Benefits Structure

2 sections

Employer Sponsored  

Retirement Benefit

Establishing and Funding 

Retirement Benefit

Japan Retirement Benefit Plans National Pension (DB) Employees’ Pension Insurance(DB).

(66)

Employer Sponsored Retirement

Benefit

• Super Annuation

• Early retirement or resignation

• Death or disability due to accident or disease Benefit Payable Occasions 

Form of payment: Lump Sum, Annuity or combination of both 

Vesting Condition: Voluntary retirement 3 years, Involuntary retirement 1 year

Retirement Age 60 years (Male and Female)

Payable By

Employer to regular employees

National Pension & Employees Pension Insurance

• 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

(67)
(68)

Contact

Mr David Pittet

Chief Executive Officer

Pittet Associates Ltd

PO Box 6227

1211 Geneva 6

Switzerland

d.pittet@pittet.net

+41 22 593 0101

Mr Jason Gratson

Senior Manager

Deloitte Consulting

jgratson@deloitte.com

Mr Mahasen Kunapuli

Senior Manager

Deloitte Consulting

jgratson@deloitte.com

References

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