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 £107.25 (e175) a week for a single person and £172.75 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 reduced 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 lump sum of £1,060 is payable to all widows and widowed fathers on the death of the spouse.
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 widower with dependent children can qualify for similar benefits on the basis of his wife’s contribution record.
The Social Insurance Scheme, which now has reserves equal to more than seven times the current annual expenditure, provides other benefits as well as pensions, including invalidity benefit, sickness benefit and unemployment benefit (for 26 weeks only) and lump sum maternity and death grants.
Contributions are payable by all employees whose earnings are at least equal to the lower earnings limit of £329.33 a month 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 earnings below the upper earnings limit of £2,301 a month.
The figures quoted above relate to 2001, and are revised each year. For example, over the past 10 years, the level of benefits has increased by 53% while over the same period the cost of living has increased by only 38%.
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 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 two thirds 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 pay 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, up to an overall maximum of 1.5 times final pay. 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 £114,000.
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 two thirds 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 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 personal pension.
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 still defined benefit schemes, providing pensions at the rate of 1/60th or 1/80th of final remuneration per year of service. However, most schemes set up in recent years are on a defined contribution (DC) basis. Also, a number of employers have recently introduced DC schemes for future entrants, giving existing members the opportunity to transfer to the new arrangements.
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, there is some control through trust legislation, which requires the trustees of any trust to behave prudently and responsibly. Moreover, professional trustees are now regulated through the Regulation of Fiduciaries (Bailiwick of Guernsey) Law, 2001. However, lay pension scheme trustees are not required to register under this law.