Divided by more than water
Jersey and Guernsey, the two main islands of the Channel Islands group, are home to two quite separate types of pension arrangement. On the one hand there are domestic plans, which can be either occupational pension schemes set up by local employers for local employees or personal pensions taken out by local people on their own account. On the other hand there are the international schemes for non-residents – typically employees of multinational companies – which are administered in the islands. These can be either group plans or individual plans.
Defined contribution (DC) plans occur in both types of pension arrangement to an increasing extent. On the international front, most new offshore pension plans are set up as DC plans and some existing DB arrangements are being converted to DC. On the domestic front, employers in the Channel Islands are facing the same pressures as their counterparts in the UK to reduce the cost of pension provision and are switching to from defined benefit (DB) type plans to DC schemes.
Steven Jones, a senior partner at Bacon & Woodrow Channel Islands Guernsey office, says the trend mirrors what has happened in the UK and elsewhere. “One can see the same sort of moves from DB to DC here as in the UK , but probably a bit behind what is happening in the UK. By and large it is driven by much the same issues. The cost of pension provision is changing as a result of lower interest rates and increasing longevity.” Some statistical evidence of this shift from DB to DC plans is provided by Bacon & Woodrow’s survey of occupational pension funds on the islands, published earlier this year. The survey covered some 61 companies employing more than 6,500 people in Guernsey and Jersey, with pension arrangements worth a total of £220m (E313m).
The survey found that the percentage of occupational DC schemes on the islands has almost doubled from 20% when the last survey was carried out in 1999 to 39% at the beginning of 2003. Furthermore, half of the employers with defined benefit (DB) schemes said they planned to change to a DC type plan within the next five years.
Employers contributions to DC plans range from a minimum of 5% to a maximum of 15%. Most plans (72%) had a qualification period for deferred benefits of two years or less, and most (78%) had a qualification period for transfer values of two years or less.
A majority of DC plans (78%) provide a lump sum of four times salary on death in service and most (86%) provide a surviving spouse’s pension as a matter of course. All but 6% of DC schemes provide an additional voluntary contribution (AVC) facility.
One company that moved to a DC plan relatively early is the Le Riche Group, a retail group based in St Saviour, Jersey. The Le Riche Group Money Purchase Pension Scheme has 327 members and a capital value of E5m. It was set up in 1995 and replaced a more limited DB scheme. Jan McCarthy, scheme secretary, says: “The current pension scheme replaced a very small final salary scheme, which had only been open to a very small section of the workforce.”
Employees contribute 5% while the employer contribution depends on length of service, rising from 5% for employees’ with up to five years’ service, 7.5% for employees with between five and 10 years’ service to 10% for employees with more than 10 years’ service.
Members of the scheme can transfer their pensions pot to other schemes if they have worked for the group for five years and been in the scheme for two years. This also varies between Jersey and Guernsey, according to local tax laws. In Jersey members of the scheme must have to have left Le Riche’s employment if they want to transfer their accrued fund. In Guernsey this is not necessary.
The options at retirement are a lump sum of 25% of the fund and the remainder must be used to buy an annuity. The scheme has a death in service benefit of three times salary and after five years in the group there is a permanent health benefit.
Member protection and supervision of both DC and DB type pension schemes on both islands historically has been fragmented. Currently neither Jersey nor Guernsey has a law dealing specifically with pensions. Instead there are a number of laws that affect pension schemes.
Pension funds must be approved by the islands’ tax authorities if they want tax favourable status. Approval ensures that employer and employee contributions attract income tax relief and that the income derived from the investments and deposits forming the pension scheme is not liable to income tax.
In addition, pension arrangements set up under trust are subject to the islands’ trust statutes and general trust law, and pension schemes run by insurance companies are subject to the islands’ insurance legislation. The respective financial services commissions in Jersey and Guernsey also regulate fund managers or custodians dealing with pension fund assets.
Guernsey is now reviewing the need for a single pensions regulator and a for a comprehensive system of regulation. A pensions advisory panel has reported its recommendations to the government’s finance committee and a decision is expected later in the year.
The review has focused on domestic rather than international pensions. Mike Poulding, actuary at the Guernsey Financial Services Commission and a member of the Pensions Advisory Panel explains: “Domestic and international pension schemes are seen as two entirely separate things. Domestic schemes are seen almost in terms of social need on the island of Guernsey, and therefore it’s necessary to make sure that members are treated fairly and that schemes are solvent. There’s only a basic state pension in Guernsey and there’s no earnings related component as there in the UK. So the need for provision if anything is greater.
“The international schemes on the other hand are seen very much as a social need for international employees. They need to be flexible to cater for mobile international employees who do not have the opportunity to build up a fund in any one country. The thinking was that the position on international schemes would be reviewed separately at some later stage.”
The panel did not take a view on the relative merits of DB or DC pension plans, or the desirability of preserving the DB option, says Poulding. The aim was to strike a balance between the benefits of pension scheme supervision and the costs of compliance.
“There was very much a feeling from the panel, borne out in the consultation, that they should avoid measures that would specifically impact the cost of pensions and would cause employers to actually withdraw from pension schemes,” he says.
The aim has been to draft regulation on an appropriate scale, says Steven Jones at Bacon & Woodrow: “It is very important that that the regulation is proportionate to the size of occupational pension schemes in the island, because there’s only a finite pot of money which can be used either for providing pension benefits or meeting the costs of regulation.
“One wants a safe structure but it must ensure that as much of the available budget as possible will go towards providing benefits rather than meeting the costs of regulation.”
The panel’s report proposes a light hand on the tiller. For example, it recommends that DC type pension plans should not be subject to three yearly actuarial valuations.
Whether this kind of exemption will encourage more employers to move to DC type plans remains to be seen. However, one suggestion the panel has floated for discussion would dramatically increase the number of DC plans on Guernsey. This would compel employers who do not offer either an occupational or a group personal pension type arrangement to give their employees access to a pension scheme along the lines of the UK’s stakeholder pension.