Pension Update April 2018 - LIA · 2018. 4. 12. · insurance contributions paid ... – 2,220 in 1996 to 667 in 2016 – However, 102,000 pensioners, 111,000 actives & 415,000 deferred

Pension UpdateApril 2018

Presented by George Nolan, New Ireland Assurance

Agenda

• Introduction

• Roadmap for Pensions Reform 2018-2023

• Sectoral Employment Order (CIF)

• ARF for non-residents

Step back in time….

GREEN PAPER ON PENSIONS

October 2007

COMMISSION ON TAXATION REPORT

September 2009

NATIONAL PENSIONS FRAMEWORK

March 2010

OECD review of Irish Pension System

April 2013

“We are living considerably longer than previous generations”

“There are significant anomalies in the design of the contributory state pension”

“Personal and occupational pension coverage in Ireland lags behind other countries”

What are the issues….

Agenda

• Introduction




Six Strands

Strand 1Reform of the State Pension

Strand 2A New Auto

Enrolment System

Strand 4Support Operation

of DB schemes

Strand 5Public Service

Pensions Reform

Strand 3Improved

Governance & Regulation

Strand 6Supporting Fuller

Working Lives

Strand 1Reform of the State Pension

What are the issues?

• State Pension is unsustainable

– Indexation is discretionary

– Political decision in annual budget

• The calculation of entitlements is complex and unfair to some

– Started before a certain age

– Total number of contributions

– Average number of contributions

– Different payments to people not justified by contribution history

Reform of the State Pension

Benchmarking

• Formal benchmark target of 34% of “average earnings”– Current rate of €243.30 per week is in line with this

• Future changes in pension rates explicitly linked to changes in CPI & average earnings– Future changes transparent & decided on an objective basis

– Provides some level of certainty to workers/pensioners

– “Locking in” increases may limit future Government policy changes


“Total Contributions Approach” (TCA)

• New method for calculating entitlement from 2020

• Pension entitlement in direct proportion to number of social insurance contributions paid– Full State Pension with full record of 40 years contributions

– Pro rata for people with less than 40 years

• Credits granted to people who perform caring duties (up to 20 years credits)

• Credits for unemployed people provided they have a minimum number contributions paid


Future changes to State Pension age

• No further increase prior to 2035– Other than already legislated for in 2021 & 2028

• Changes after 2035 directly linked to life expectancy– Assessment of life expectancy in 2022

– Notice period of 13 years

• Regular assessment of life expectancy thereafter– Every 5 years i.e. 2027, 2032…..

– Notice period of 13 years


Setting Social Insurance Rates

• Rates currently set as part of annual budget

• Rates will now need to be adjusted to ensure that sufficient funds are available– Taking into account future benchmarking

– Annual actuarial review of contribution rates and classes

• Considering options for amalgamation of USC and PRSI

Other• Post 2012 pensioners on reduced pension have the option of

pension review based on TCA model


Timeline

• Benchmarking process by end of 2018

• Detailed TCA proposal to be drafted

• Public consultation on TCA Q2 2018

• Implement TCA Q3 2020

• Working group to consider amalgamation of USC and PRSI in Q2 2018


Strand 2A New Auto

Enrolment System


• Voluntary approach to retirement saving in Ireland– At odds with other EU/OECD countries

• Certain sectors have no private pensions

• PRSA hasn’t increased coverage as expected– Opt in vs. Opt out

• Over reliance on State Pension for many people

• Current pension system is viewed as too complex

A New Auto Enrolment System

Auto Enrolment considerations

• Target membership

• Contribution rates

• Financial incentives

• Opt out policy

• Re-enrolment policy

• Contribution holiday policy


Proposed design for public consultation

• Auto enrolment system by 2022

• Auto enrolment for all employees in the private sector– Over age 23

– Earning €20,000 or more per annum

– No existing pension provision in place

• Option to Opt in– Under 23s

– Earning less than €20,000

– Self employed



• Option to opt out from participation after a minimum period– After 9 months of participation

– “Employee” contributions will be refunded

• Rate of contributions to start at “modest” base

• Automatic escalation process over agreed timeframes

• Employer to match employee contributions– To a maximum of 6% of salary


UK experience

• Aged between 22 and State Pension

• Earning more than £9,940 (€11,395)

• Opt out after 1 month

• Initial contribution rate: 1% employer & 1% employee

• 1 October 2017: 2% employer & 3% employee

• 1 October 2018: 3% employer & 5% employee

• Quality tests on existing private pensions



• State to match employee contributions– On 1:3 basis

• Contribution by the State to “replace not augment” existing tax relief system

• MAXIMUM total contribution 14%– Employee 6%

– State 2% (1/3 of employee)

– Employer 6% (matching employee)


“Replace not augment”

• €100 total contribution including tax relief

• Unlikely that Government will operate two methods of tax relief on pensions– 25% tax relief for all pension products regardless of tax paid?


Contribution Tax relief Net cost

20% tax payer €100 €20 €80

40% tax payer €100 €40 €60

New system €100 €25 €75


• Retirement benefits to be paid at the same age as State Pension becomes payable– No mention of early retirement options (existing or new system)

• Pre existing pensions can remain in place– Will they need to comply with Auto Enrolment rules?

– Will employers change contributions rates in line with Auto Enrolment rules?


Timeline

• “Strawman” system for public consultation Q2 2018

• Final design to be agreed by end Q1 2019

• Legislation by end of Q1 2020

• First auto enrolments to take effect no later than 2022


Strand 3Improved Governance

& Regulation


• Too many private pension schemes in Ireland– Ireland is 1% of EU population

– 160,000 occupational pension schemes in Ireland

– 50% of all pension schemes in the EU!

• Lack of economies of scale based on large numbers

• Need to raise scheme governance standards

• Too many types of pension products doing the same thing

Improved Governance & Regulation

New powers for Pensions Authority

• Currently dealing with breaches “after the fact”

• New powers– Actively oversee compliance

– Enforce minimum standards “fitness and probity”

– Including make up of board of trustees and qualifications of trustees

– Schemes will need to satisfy the Pensions Authority that they are “fit for purpose”

– All new and existing schemes will need “authorised status” from the Pensions Authority in order to carry out activities and get tax relief


Trusteeship and scheme governance

• Persons must be “fit and proper” e.g. no prior judgements or conflicts of interest

• New set of professional standards– Appropriate knowledge and experience

• At least one trustee to have mandatory minimum trustee qualification– Level 7 in National Framework of Qualifications

• One other trustee would have to have at least 2 years experience


Trusteeship and scheme governance

• Trustees will be required to undertake CPD on an annual basis

• Pensions Authority will be granted power to remove trustees who do not meet the new standards

• Corporate trustees– Minimum of two directors

– One of which with a mandatory trustee qualification

• Pensions Authority to publish new codes– Remuneration, outsourcing, internal audit, conflict of interest policy….

– Lead in process for existing schemes 18-24 months


Rationalisation of number of pension schemes

• Approval of multi employer pension structures– Master Trusts

• Move to “contract based” individual occupational pensions

• Pensions simplification– Remove number of different individual pension savings vehicles

aimed at doing the same thing e.g. Personal Pensions & PRBs

– Eliminate anomalies in the treatment of different pension vehicles

• Harmonisation of rules

• Including taxation treatment


Approved Retirement Funds

• Sale of ARFs is not currently regulated as a pension product– Not in the best interest of customers

– Wide variation in the charges under ARFs

– Consideration for regulatory oversight?

• Review of ARF criteria including specified minimum income requirements

• Facility for Group ARF products– Or in scheme drawdown


Timeline

• Process for “authorised status” from Pensions Authority Q2 2018

• Professional standards for trustees Q1 2019

• Pension Reform and Taxation Group to progress measures to improve harmonisation of rules to eliminate anomalies Q4 2018

• Rationalisation of number of individual pension vehicles Q2 2020

• ARF review Q4 2018


Strand 4Support Operation

of DB schemes


• More than a quarter of all DB schemes do not meet the actuarial funding standard– Wind up basis

– Increasing liabilities due to increased life expectancy

– Record low interest rates & stock market volatility

• Pensions Authority involvement “after the fact”

• Increased wind up of DB schemes– 2,220 in 1996 to 667 in 2016

– However, 102,000 pensioners, 111,000 actives & 415,000 deferred

Support Operation of DB schemes

Pensions Authority

• More frequent provision of information to the Pensions Authority– Closer monitoring & scrutiny of funding position

• Early notification of scheme difficulties

• Increased powers to take action– Direct employers to develop proposals to keep scheme in place or

– Put in place well funded alternatives


Timeline

• New controls in relation to funding of DB schemes Q2 2018

• Regulatory measures to improve oversight Q3 2018

• Sustainable funding standard reform options Q4 2018


Strand 5Public Service

Pensions Reform


• Sustainability of the system– Reduce the State’s long term liabilities

• Significant reforms already undertaken but more needed

• Mandatory retirement ages– Where individuals wish to remain in service

• Insufficient employee contributions

Public Service Pensions Reform

Past reforms

• Integration from April 1995

• Increase in minimum retirement age from 60 to 65 for certain employees

• Single Public Sector Pension Scheme for all new entrants– 1 January 2013

– Career average and CPI indexation rather than pay

• Alignment of minimum pension age to State Pension age


Retirement age

• Introduce legislation to increase the compulsory retirement age to 70– Public Servants recruited before 1 April 2004

• Interim arrangements already in place


Interim arrangements

• Certain civil servants currently have compulsory retirement age of 65

• Government agreed to increase this to 70

• Civil servants can apply to retain position until eligible for state pension

• Extra year(s) are non-pensionable– No pension contribution

– No pension benefits accrued


Interim arrangements

• Lump sum is paid at 65

• Pension is deferred until actual retirement

What if you have AVCs?• Can also be taken at 65 or

• Deferred until actual retirement or

• Take lump sum shortfall and defer balance (ARF or annuity)

• Can continue to pay AVCs but only to fund for underfunded position at 65– Future service and salary won’t be counted


Pension Related Deduction (PRD)

• PRD to convert to permanent “Additional Superannuation Contribution” (ASC)– Effective from 1 January 2019

– Estimated €550M annually

– An increase of nearly 80% in the amount Public Servants contribute towards benefits

• Currently PRD does not count towards age related tax relief limits – Will ASC……probably?


Timeline

• Interim arrangements in place

• Legislation to increase compulsory retirement age Q2 2018

• PRD to ASC Q1 2019


Strand 6Supporting Fuller

Working Lives


• People are living longer and want to work later

• “Normal Retirement Ages”

• Lack of flexibility around working and retirement decisions– Including State Pension

• Different drawdown rules and options based on pension vehicles

Supporting Fuller Working Lives

Normal Retirement Age

• No default age for employees in Ireland, consideration to put one in place

• Irish Human Rights & Equality Commission to publish guidance material– Use of fixed-term contracts beyond traditional NRA

• Inter-departmental group to review mandatory retirement age practices across industries

• Government will consider restricting the capacity to use mandatory NRA if there is no flexibility offered


State Pension

• State Pension deferral scheme

– On an annual basis

• Actuarial adjustment applied to increase the rate received when claiming– Subject to Government approval

– Legislation required


Pension drawdown rules

• Different access ages depending on the pension vehicle:


Pension drawdown rules

• Review differences in access ages between different pension vehicles

– Objective to get greater consistency

• Standardisation of drawdown rules

– Simplify the pensions environment


Financial incentive of continuing to work

• Create awareness for those who may wish to continue working

• Communication campaign for both employer and employees– Range of tax credits and reliefs for over 65s

– Age Tax Credit

– No PRSI for those over age 66

– Employers also pay reduced PRSI of 0.5% (to cover occupational injuries)

– Reduced rates of USC for people over age 70 with total income of €60,000 or less

• Maximum 2%


Timeline

• Paper to consider deferral of State Pension Q4 2018

• Legislation for deferral of State Pension Q2 2019

• Inter-departmental Pensions Reform and Taxation Group review of pension draw down (ages & rules) Q4 2018


In summary

Agenda

• Introduction




• Applies to the Construction Sector (CIF)

• Covers remuneration and pensions/sick pay

Weekly rates:

Sectoral Employment Order (SEO)

Employer Employee Total

Pension €26.63 €17.76 €44.39

Death in service €1.11 €1.11 €2.22

Sick pay €1.27 €0.63 €1.90

Total AP €1,508.52 €1,014 €2,522.52

• The pension scheme to which SEO applies should be:– An Occupational Pension Scheme

– A multi employer scheme open to all employers in the Sector

– Allow successive employers contribute to one member account

– No refund of contributions allowed

– Trustee Board appointed by employers and unions

– Must included sick pay and death in service

• Existing schemes at time SEO comes into force must comply with terms of SEO to qualify


What does in mean in practice?

• PRSAs set up as alternative to CWPS cannot comply

• OPS are highly unlikely to comply unless OPS provider can provide sick pay

• Forcing employers back to the CWPS

• Can have both CWPS and OPS run alongside each other

• Can still have AVC PRSA conversations with employers or employees


Agenda

• Introduction




• Distribution from ARF subject to Income Tax, USC and PRSI (up to age 66)

• QFM deducts and remits taxes

– Even if the ARF holder is non-resident

• Cannot have a PAYE exclusion order on ARF payments

• ARF holder could apply to Revenue for refund

– Where tax paid abroad

– Double Taxation agreement

ARF for non-residents

• 22 December 2017 change in tax rules

• Distribution broken down into income/gain and capital

• Income/gain only may be possible to claim back tax

• No systems in place to deal with split

– Particularly where ARF was set up with another QFM

• Country of residence may determine full payment is income

– Under Double Taxation Agreement

• Could lead to transfers overseas before drawdown

• Watch this space….


• Also applies to

– Distributions from an AMRF

• 4% allowed per annum

– Distributions from Vested PRSAs

• Deemed distributions

• Any other distributions


New Ireland Assurance Company plc is regulated by the Central Bank of Ireland. A member of Bank of Ireland Group.

Slides are based on current legislation and are subject to possible changeTerms and conditions apply. While great care has been taken in its preparation, this presentation is of a general nature

and should not be relied on in relation to a specific issue without taking appropriate financial, insurance, investment or other professional advice. The content of this presentation is for information purposes only and does not constitute an

offer or recommendation to buy or sell any investment, or to subscribe to any investment management or advisory service.

April 2018

Documents

Pension Update April 2018 - LIA · 2018. 4. 12. · insurance contributions paid ... – 2,220 in 1996 to 667 in 2016 – However, 102,000 pensioners, 111,000 actives & 415,000 deferred