Guernsey: Keeping it simple
Guernsey’s straightforward approach to pensions does not make it immune from reform, says the GAPF
Guernsey’s First Pillar pensions system is simple but effective. The Old Age Pension is payable from age 65 for men and women, at a uniform rate of £98 per week for a single person and £157.75 for a married couple. Benefits at the full rate are payable to all participants with a full contribution record (approximately 42 years’ contributions) with proportionately re-duced benefits for participants who have paid fewer contributions.
The minimum number of contributions needed for receipt of any benefits is 156, ie three years’ contributions. The benefits can thus be said to vest after three years.
A widow’s pension is payable at approximately the same rate as a single person’s old age pension. To qualify, the widow must have dependent children or be over the age of 40 when widowed or when she ceases to have dependent children.
A higher level of benefit known as ‘widow’s allowance’ is payable for the first 26 weeks of widowhood only.
The Social Insurance Scheme, which is partially funded, provides other benefits as well as pensions, including invalidity benefit, sickness benefit and unemployment benefit (for 26 weeks only) and lump sum maternity grants and death grants.
Contributions are payable by employees at the rate of 4.5% of qualifying earnings and by employers at the rate of 5.4% of these earnings. Qualifying earnings are all those above the earnings threshold of £151.67 per month up to the higher earnings limit of £2,093 per month.
The figures quoted above relate to the year 1999, and are revised each year. Since contributions are linked to earnings, this normally allows benefits to be increased each year by more than the increase in the cost of living. For example, over the last 10 years, the level of benefits has increased by 72% while over the same period the cost of living has increased by only 57%.
Two changes will take effect next year:
1. The widow’s pension will be widened to include a widowed parent’s allowance. A widower with dependent children will be able to qualify for this benefit on the basis of his wife’s contribution record.
2. The Widow’s Allowance will be replaced by a lump sum payment to all widows and widowed fathers, of £1,000.
The Second Pillar
Second Pillar pension schemes are widespread in Guernsey. There are no published statistics, but we believe that there are about 400 pension schemes in existence (for an employed population of around 30,000) although many of these schemes would be very small, some having only one member. The two largest of these schemes are for employees in the public sector, having nearly 5,000 active members between them. Unlike the position in the UK, all public sector pensions in Guernsey are fully funded.
The Income Tax Authority controls the level of benefits which can be provided. The maximum rate of pension accrual is 1/60th of final remuneration for each year of service, with a maximum pension of 2/3rd of final remuneration. However, a member who cannot complete 40 years of service up to pension age may receive a pension of up to 1/30th of final remuneration for reach year of service, subject to the same maximum. Normal retirement age can be any age between 60 and 75, as specified in each scheme.
Commutation of part of the pension for a lump sum on retirement is permitted, up to a maximum lump sum of 3/80th of final remuneration for each year of service, subject to an overall maximum of 1.5 times final remuneration. Late entrants may receive a lump sum of up to 6/80th of final remuneration for each year of service, subject to the same maximum.
Lump sums in excess of a specified limit are subject to income tax (at the standard rate of 20%). The current limit is £106,000.
On death in service, a lump sum of up to four times final remuneration can be paid, together with a refund of the member’s contributions to the pension scheme (if any) with interest. In addition, a spouse’s pension can be paid not exceeding 2/3rd of the member’s expected pension if he had remained in service until normal retirement date with no charge in his final remuneration. Pensions may also be provided (in addition to or on cessation of the spouse’s pension) to children or dependants of the member. The pension provided to any child or dependant must not exceed the limit specified above, and the total of all pensions payable to the spouse, children and dependants must not exceed 100% of the member’s expected pension as above.
On death after retirement, pensions may be provided for the member’s spouse, children or dependants as specified above, but relating to the member’s actual pension before any commutation. When a member dies having received his pension for less than five years, a tax free lump sum may be provided in addition, equal to the value of the member’s pension for the balance of the five year period.
On withdrawal from the scheme, a member with at least five years of membership may choose between a preserved pension, a return of his own contributions with interest less 10% tax or a transfer payment to the pension scheme of a new employer or a
Preserved pensions and pensions in payment may be increased by the greater of 5% per annum or the increase in the Guernsey Index of Retail Prices over the appropriate period. However, such increases are not compulsory, except that after a deferred pension comes into payment it must be increased to the same extent as other pensions from the scheme.
Member contributions are limited to 15% of earnings. There is no limit on employer contributions (except indirectly, by way of the limit on benefits).
Members and employers get tax relief on their contributions, and members are not taxed on the employer’s contributions paid on their behalf. No Guernsey tax is payable on the investment income of the funds.
At present, most pension schemes in Guernsey are defined benefit schemes, providing pensions at the rate on 1/60th or 1/80th of final remuneration per year of service. Some schemes set up in recent years are on a defined contribution (DC) basis. A number of employers have recently introduced (DC) schemes for future entrants, or are considering doing this, but this type of scheme is not widespread here.
Most of the larger pension schemes in Guernsey are self-administered, while most of the smaller schemes, and some of the larger ones, are insured.
The great majority of Guernsey pension schemes are set up as trusts, with individual or corporate trustees. Members are usually represented on the trustee body, but there are no legal requirements on this.
Looking to the future, the States (the Island’s parliament) has agreed in principle that there should be equal treatment for men and women, and for part-timers, but the legislation to give effect to this is still in course of preparation. Some of our pension schemes may have to be amended as a result.
A further expected change is the introduction of a system of regulation of pension schemes. At present, apart from the control exercised by the Income Tax Authority, the only other control is through trust legislation, which requires the trustees of any trust to behave prudently and responsibly.
Guernsey Association of Pension Funds
Contact Name: Miss P E Merriman
Address: Albert House, South Esplanade
St Peter Port, Guernsey, GY1 1AW
Telephone: +44 1481 728432
Facsimile: +44 1481 724082
The Guernsey Association of Pension Funds was formed more than 10 years ago, at the time when compulsory vesting of pensions was first being discussed. We provide a forum for the exchange of views between members, and a channel for communication with government representatives when legislative proposals relating to pension schemes are under discussion. We were consulted by the Income Tax Authority when they reviewed the taxation of pension schemes recently, and have also been consulted by the Department of Trade and Industry with regard to the pensions aspects of ‘equal treatment’ legislation.
We have stressed the importance of avoiding any element of retrospection in this. We also expect to play a full part in any forthcoming discussion on the regulation of pension schemes.
We issue newsletters to members and have also produced leaflets for early leavers, and for members of pension schemes generally. We will have a stand at the EFRP Annual Conference in Monaco, and hope to see readers there.
Meetings are held from time to time on subjects of interest to our members. A workshop on pensions administration in Guernsey is planned for later this year.
The association has a category of overseas membership which is available to any non-Guernsey resident who