The Isle of Man, less than 100km from the UK coast, has always followed pension developments in the UK closely. This is in contrast to the other two British offshore centres, Jersey and Guernsey, which have taken a more independent approach.
The island adopted most of the provisions of the Pensions Act 1995 – with the important exception of the minimum funding requirement. It also placed itself within the jurisdiction of the UK’s Pensions Ombudsman.
So it is no surprise that domestic pensions legislation operating in the Isle of Man is similar to that of the UK. People who move from the UK to in the island can therefore transfer their UK occupational or personal pension rights into equivalent Isle of Man based arrangements. There are similar restrictions on the payment of contributions, and the payment of benefits at retirement.
As with the UK, people who do not have access to an occupational scheme through their employer can a set up their own personal pension arrangement.
The development of defined contribution (DC) pension plans in the Isle of Man has therefore followed a similar pattern to that in the UK, with a gradual shift from defined benefit (DB) to DC type plans.
Problems of funding have pressed down on employers with DB schemes and persuaded them to make adjustments, says Gary Boal, managing director of pension fund consultants Boal & Co in Castletown. “Schemes that are DB clearly have the same issues that the UK and we’ve been involved in DB schemes that have restructured in the face of deficits, moving from non-contributory to contributory schemes.”
If anything, the process started earlier in the Isle of Man than in the UK, he says, although for fiscal rather than financial reasons. “More schemes on the island were already DC. In many cases these were set up for subsidiaries of UK companies and there may have been tax or other issues in that prevented them joining the DB scheme operating in the UK.”
This was particularly true of UK companies in the insurance sector that opened offices on the island, he says. “Even if they wanted their employees to be members of the final salary scheme in the UK there were tax barriers in the way.”
Some UK based companies with employees based on the Isle of Man have tried to replicate their UK pension arrangements. This has happened at Manx Telecom, a wholly owned subsidiary of mmO2, formerly BT Wireless. It has set up a scheme for its Manx employees which effectively mirrors the mmO2 pension plan.
As with the mm02 plan, the Manx Telecom plan is divided into DB and DC sections. The existing DB scheme was closed to new members in July last year, and all new entrants are eligible to join the DC scheme.
John McChesney, human resources director of Manx Telecom, says: “We have a entirely separate pension scheme from mm02. The majority of our employees are Manx based and are likely to remain in the island, so it made sense to maintain it as a separate scheme.”
Although it is a separate scheme, it is structured like the mm02 scheme, with its own trustees. “The aim was to have a pension scheme that mirrored the arrangements in the group. We remain fairly closely aligned with the group approach and it would not have been made sense to have had a completely different approach from the rest of the group.”
Manx Telecom matches employee contributions up to 10%. The scheme is administered externally by the Manx office of the US pension fund administrators, Marsh Financial Services, which provides advice on investment choice to plan members.
Another leading scheme which has switched from DB to DC is the pension scheme operated by Shoprite, a Manx retail chain employing more than 500 people on the island. The scheme currently has 166 members.
Paul Storrar, retirement planning specialist at John E Davies, a Cheshire based independent financial adviser, says: “The Shoprite scheme operating today was set up in 1994 as a contracted in money purchase arrangement insured with Norwich Union. This replaced a final salary scheme which was wound up. Members who want to contract out can do so through a contracted out personal pension plan which we set up for them. This is also insured with Norwich Union.”
Employees become eligible to join the scheme after 12 months service. Both employer and employee contribute 5% of salary, and there is an AVC scheme for employees who wish to contribute more. All contributions are invested in a with-profits plan.
One or two insurers dominate the DC market on the Isle of Man, with Norwich Union effectively the only insurer providing annuities. The lack of choice was exacerbated by tax rules that prohibited the 15 offshore life companies that have established operations on the island from writing domestic business. This prohibition has now been lifted as a result of the OECD-inspired drive to end discriminatory tax legislation in jurisdictions like the Isle of Man. One possibility is that the international insurers may want to add the domestic market to their international business.
Whether insurers would be interested in adding domestic business to their international business is questionable, however. The basic problem of the Isle of Man pensions and insurance market is that it is too small to interest the large providers. On top of this, it has distinctive features – principally related to low rates of tax – that mean that providers must design a specifically Isle of Man pension.
David Vick, chief executive of the Insurance and Pensions Authority (IPA) says that it has always been difficult to persuade UK providers to enter this market.
“What we have found is that not many UK companies are interested in developing targeted products specifically for the Isle of Man market because of the cost of doing that in the different tax regimes. So it’s already quite a difficult area convincing providers that, on a domestic level, it’s a market that is worth targeting.”
One imponderable is the impact of the Retirement Benefits Schemes Act 2000, the new regulatory framework for international and domestic pension schemes on the island. The regulations affecting the local market come into force early next year and there are fears that they could discourage employers from offering occupational pension plans in the future.
Pension consultants Bacon & Woodrow Channel Islands have spelled this out in a briefing note to its clients. “There is a danger that the proposed requirements may be seen as onerous and costly to administer by some employers, and thus act as a disincentive to the establishment of domestic schemes on the Isle of Man or even an encouragement to wind up existing schemes.”
Vick says he recognises the dangers of making compliance with the new regulations too costly: “Because the provision of pension schemes is not compulsory, we have to be careful that we are not being counter-productive by increasing the cost of compliance to such an extent that people quite legitimately decide to use other structures in other places because life is too complicated. So we have to get the balance right.”
Another set of imponderables is the new proposed tax framework for pensions. Changes to the rules covering contributions and benefits are likely to be far reaching. However, the biggest drag on the development of the domestic pensions market – particularly third pillar personal pensions – is the current low tax environment.
“The low tax environment which acts as disincentive to save for retirement through a personal pension,” says Boal. “Tax rates of 15% to 18% compared with an upper rate of 40% in the UK, means that the propensity for people to save for retirement though pensions is significantly reduced compared with the UK. An added disincentive is the annuity tie in, because at the moment with personal pensions there’s no income drawdown framework.”
The solution to this from wealthier Isle of Man residents is to set up small self-administered schemes (SSAS) where there is no requirement to buy an annuity, so funds can continue to be invested in equity and other assets for long-term growth. The residual fund can also be passed down to the next generation on death.
Manx residents have other inducements to save for retirement outside the pension system. There is no capital gains tax on the island.
So the real challenge on the Isle of Man for providers of DC plans is that the tax breaks that make such schemes attractive in high tax jurisdictions lose much of their effect on an island which has only recently shaken off the label of ‘tax haven’.