IPE’s overview of regulatory and legislative changes in the pensions landscape in key European countries
In terms of new legislation on tax and pensions, 2015 was a quiet year, possibly because the imminent general election discouraged politicians from pursuing new initiatives. The election saw a centre-right government taking over from the social democrats.
The new government has until now been focusing on other issues, but it is possible that an initiative on tax, pensions or a combination of both will be announced during 2016.
What activity there is has centred on implementing Solvency II, and the transposition of the directive itself is now largely in place.
However, the consequential updating of existing legislation still lags behind.
New legislation on financial reporting was passed in July 2015. The aim is to bring insurance company valuations for financial reporting into line with Solvency II valuations, to make them less ambiguous.
Several revised laws were passed late in 2015. They included a law transposing Solvency II’s rules on governance; a law on the valuation of assets, liabilities and technical provisions; and a law on the so-called principle of contribution.
The supervisor (Finanstilsynet) is considered to be leading the way within Europe in terms of setting standards for the prudent person principle (PPP) contained in the investment rules introduced by Solvency II. One key feature is that multi-employer pension funds and life insurance companies are obliged to produce specific reports on how they manage their investments in line with the PPP.
The supervisor is working to establish good practice on how to comply with these standards, which may not prove popular with the industry because of the amount of detail.
In terms of reporting requirements under Solvency II – particularly quantitative reporting templates – up until recently a vast number of issues remained unresolved. This was probably anticipated to some extent.
However, as companies are struggling to prepare for the requirement, the industry in the latter part of 2015 intensified the dialogue with the supervisor to get clear messages on the various issues.
Outstanding issues still include pre-Solvency II reporting requirements, and how much of these will be abolished.
“So far, not much, it seems,” says Henrik Munck, senior consultant at the Danish Insurance Association. “Danish companies – like most European insurers – are struggling to keep costs down. So preserving pre-Solvency II reporting requirements is not the industry’s cup of tea.”
He adds: “Furthermore, Solvency II requires debt ratings. So the scope which external credit assessment institutions (ECAIs) have to raise their fees for delivering these ratings is something we, and insurance organisations throughout Europe, are working against.”
The third and final phase of the solvency regulation reform – extending the solvency requirement to take all types of risk in investment activities into account – was passed by Parliament in spring 2015.
Previously, the solvency rules were largely based on asset classes, designed for allocations using fewer types of financial instrument. To the relief of many investment professionals, the new model does not replicate Solvency II, although it is risk-based.
There is a phasing-in period up to 1 January 2017, which should enable pension insurance providers to accommodate changes in asset allocation. The Financial Supervisory Authority is preparing regulations.
An important reform, applying to all statutory pensions, was passed by Parliament in autumn 2015. This is designed to strengthen the sustainability and stability of the public pensions system and includes gradually raising the minimum statutory pension age from 63 to 65, changing the part-time pension to an actuarially defined partial and early old age pension, and changing the accrual method for individual pension rights.
The new rules take effect in 2017.
The government has incorporated the EU directive on financial statements into Finnish legislation. The related amendments to the financial statements rules came into force in January 2016.
One of the issues has been how the fair value of financial instruments is shown in the balance sheet. Until now, this has been problematic for the mutual pension insurance companies.
Finnish law prevents pension insurance companies from showing fair value in the balance sheet; they can only show book value. This is because the law stipulates that fair value must be shown using the IFRS standard. But true liabilities cannot be shown, because they are determined by national pension laws, and not by the IFRS standard.
Fair value is reported in the notes to the financial statements, as well as in the solvency reports.
The Financial Supervisory Authority is preparing regulations on the services that pension funds are allowed to offer to lower the disability risk of the employees of funds’ clients, which could make them more competitive. The issue falls within the scope of the competition rules for multi-employer pension funds.
The contribution rate to finance disability pensions (part of the total contribution rate) is equal all over the country. However, if a pension fund takes successful measures (such as offering advice) to lower the risk among its clients, it can deliver the difference between the average contribution rate and the disability pension expense level of its own clients as bonuses to those clients who have low disability risk.
The government and social partners have just started to negotiate on measures to boost the Finnish economy back to growth. Real growth rates have been negative or zero for a couple of years.
One of the issues under discussion is to reduce the employers’ pension contribution rate, and possibly also the rate paid by employees.
Reducing employers’ contribution rates would lower production costs. so that firms would be more competitive compared with foreign competitors. Lower rates for employees would increase their disposable income, and consequently, domestic demand for goods and services.
Reijo Vanne, leading economist at the Finnish Pension Alliance TELA, says: “At the moment, keeping rates constant, or lowering them, are both possible options.”
But he warns: “While the present levels of contribution rates are sustainable for the long term, lowering them would open up a long-term sustainability gap in pensions financing.”
Any measures would be likely to take effect in 2017.
The law to incorporate the EU Mobility Directive into German legislation has been passed. In particular, the lower vesting requirements – three years (reduced from five), a minimum age for participation of 21 years rather than 25, and the requirement to index vested claims are new to the German pensions environment.
Although the law will not come into effect until 1 January 2018, it may already have accounting implications.
The Insurance Regulation Act (Versicherungsaufsichtsgesetz) has been fundamentally revamped to comply with EU Solvency II rules and took effect in January 2016.
In 2015 it became necessary to modify the Company Pensions Act (Betriebsrentengesetz) to make clear that companies are not usually responsible for pension indexation if the pension is paid and indexed by a Pensionskasse. The modification took effect at the end of 2015.
The former wording of the act was too restrictive, and had led to a ruling by the Federal Labour Court (FLC) which imposed additional legal and financial burdens on employers.
Another ruling, by the Federal Court for Social Law, has also led to changes in legislation.
In 2014, the court ruled that only lawyers at dedicated law firms should be exempt from statutory pension insurance (which pays out lower benefits than pension schemes specifically for lawyers). However, in-house lawyers can now be registered as a so-called ‘Syndikusanwalt’ and enjoy the privilege of exemption as well.
Legislation in other areas, in particular DC (defined contribution) schemes, is also under discussion – so far, without a timetable for enactment.
The coalition parties still have to agree on detailed rules aimed at making the state retirement age more flexible, although there is general agreement that this is necessary.
Among the ideas are greater options for individuals to draw a partial pension while continuing to work and more flexibility to continue working beyond normal retirement age.
There is an ongoing discussion as to whether the domestic accounting rules should be modified in response to the low-interest-rate environment. Currently, the mandatory discount rate is set by the Bundesbank, which looks at the average market interest rate over a seven-year period.
The government has recently resolved to extend this period to 10 years to smooth out volatility in future liabilities as shown on balance sheets. It would also, at present, lower those liabilities.
Subject to approval by the relevant legislative bodies, this change could become effective for all financial years ending after 31 December 2015, and in some cases, even retrospectively, if the financial year ended on 31 December 2015.
Several court judgements influencing pension law have been made.
Some occupational schemes include a clause which denies a widow/widower a survivor’s pension, if the deceased was 60 years or older at the time of the wedding. This, and similar clauses, used to be common. The FLC has now deemed these clauses void.
The same court has also made it easier to make changes to pension schemes. The company and its works council can now agree on changes, even if the original pension scheme was not established by works council agreement. An employee’s consent is only required if the original pension scheme arrangements had been agreed with him or her individually.
Plans to future-proof the Dutch pensions system are moving ahead slowly. The focus includes intergenerational solidarity, freedom of choice, collectivity and responsibility for risk-sharing.
The secretary of state for social affairs, Jetta Klijnsma, published the main principles for a future-proofed system last summer.
More recently, she has published the working programme. The general principles include four variants: optimising the current pension agreement; personal pensions saving with risk-sharing; mandatory pension accrual with choices; and voluntary individual pensions.
However, it is not clear what the next step will be. Furthermore, the Dutch general election in March 2017 might slow down the process if, as is highly likely, there is a change in government.
Corine van Egmond-Reedijk, senior asset-liability management (ALM) consultant at AonHewitt, says that the election will be about the fiscal limits, as well as the prospects of a less certain retirement income.
“In 2015, the €100,000 cap was introduced, so employees earning more per year would not enjoy tax relief on pension contributions,” she says. “A possible reduction in this cap could feature in the elections. Furthermore, because of the deterioration of the financial situation of pension funds, the debate on the pension system as a whole could form part of election campaigns.”
Meanwhile, one cog in the wheel of a future-proofing system has been enacted. The new general pension fund (APF) is a pooling vehicle similar to industry-wide schemes, but with ringfencing of assets. It can also include company schemes from different industries. Because of its huge size, the APF will be able to operate at relatively low cost, so will be an important component of enabling savers to get better value from pensions.
The law setting up the framework for this vehicle was passed last December, and it is expected that the first APF will be launched before, or during, this coming summer.
A legislative proposal from the centre-right VVD party aims to change the obligation for DC plan members to purchase an annuity at retirement. The proposal allows pension capital to be converted into units instead. Any units which are not converted to cash can be invested until needed. But the option to purchase an annuity still exists. The proposal is aimed at providing additional choice for participants.
The government has presented its own legislative proposal, the ‘flexible payment’ law.
Both proposals have a lot of support and are now being processed through parliament.
In theory, both laws could be passed, although this would be confusing for both the industry and the public. The final decision will be made by parliament.
The intention is for a new law to take effect from 1 January 2017 for the VVD proposal and 1 July for the government proposal, so it would have to be passed this year.
There is some debate on whether to change the calculation of the ultimate forward rate (UFR), used to discount liabilities within the Financial Assessment Framework (FTK) for DB plans.
In July 2015, the Dutch pensions supervisor De Nederlandsche Bank (DNB), recalculated the UFR downwards, from 4.2% to 3.3%.
“At the time, this cut funding ratios by about 5%,” says van Egmond-Reedijk. “But now funding ratios have fallen further, because of the collapse of equity markets and interest rate cuts. So a political debate is now going on, because pensions could be reduced in 2017.”
One proposal has been to change the DNB’s methodology in calculating the UFR. However, Klijnsma has indicated that she does not see a change in legislation as necessary.
A legislative proposal to increase the rights of works councils over the pension agreement between employer and employee, despite the type of pension provider, has been discussed in Parliament’s upper chamber. Previously this right only existed where the pension provider was an insurer, premium pension institution or IORP (abroad).
Under the new law, the works council would also have to approve any change in the pension scheme administered by a company pension fund. It is not clear yet when the new law will take effect.
Meanwhile, two important laws came into effect on in January 2016.
First, there is a cap on the funding obligations of companies in terms of transfer values for new employees. When an employee changes jobs, the transfer value of accrued pension rights in the previous employer’s scheme might cost more at the new company scheme (or the other way round), because of the calculation rules for the transfer. This can lead to additional payments for either the old or the new employer.
The additional payment is now limited to €15,000. Furthermore, the payment must not be greater than 10% of the transfer value.
Second, changes have been proposed in the rules covering the accrual of pension rights for independent company directors (defined as owners who hold at least 10% of the shares) with their company’s pension scheme.
In summer last year, the secretary of state for finance, Eric Wiebes, proposed three alternative general approaches for these pension accruals.
Legislative proposals are to be discussed with all interested parties (such as pensions associations, actuaries, and so on) via the internet in the first half of 2016. The legislative proposal is intended to take effect on 1 January 2017.
Legislation to incorporate Solvency II into Swedish law, for both life and non-life insurance companies, was enacted by the Riksdag in late November 2015 after a delay.
The hold-up was caused partly by the debate on this implementation as it affects Sweden’s occupational pension business, which is mostly carried out by life insurance companies, both for DB (defined benefit) and DC pension funds.
The DC businesses of life insurance companies are now growing at a steady pace, as employers continue to abandonDB solutions for younger employees, in agreement with trades unions. DC pensions can be sold as traditional life, unit-linked or even deposit-based contracts, with all of these now common.
In 2014, a government committee proposed allowing companies to split their pensions and life insurance business (including private pensions) into two different companies. But there was a mixed reaction to this move.
Instead, at the government’s suggestion, the Riksdag has enacted new legislation that allows life companies to split their current business into two ‘ring-fenced funds’ within the company. Within this model, life business will follow Solvency II rules, whereas occupational pensions will follow the old Solvency I rules. This change came into force in January and will be valid until the end of 2019, while the government awaits the IORP II regulations.
Meanwhile, occupational pension funds – which are set up as friendly societies rather than pension companies or associations – must change their legal status, either to a life insurance association, or an occupational pensions association.
Friendly societies were abolished by a 2011 law and these entities have until the end of 2017 to comply. But none have done this so far, as they are awaiting the outcome of the new solvency legislation (above). However, these funds make up only a small part of the occupational pensions sector in Sweden.
Tax relief on private pension premiums has been abolished, with the exception of the self-employed, and employees without occupational pension rights other from the government system.
It is widely assumed that this has been done because worker mobility within the EU, and also the possibility of Swedish nationals retiring to southern Europe where tax rates could be lower, means that future tax revenues are uncertain. There is also an argument that tax relief mainly benefits high earners, and those over 50.
Life companies have been active in promoting alternative ways of encouraging private savings to improve retirement income. However, it seems that many people will still continue paying further private pension premiums, thus suffering ‘double income tax’ on these investments, both when paying the premium (no tax relief) and then as future pension income.
After initial pressure from the government, a code of practice within the pensions industry has been worked out – under the supervision of Finansinspektionen (FI), the financial regulator – covering certain information sent to policyholders and pension beneficiaries.
The code, which is compulsory except for group occupational pension schemes, aims to improve the content and transparency of information for individual transfers of DC plans and private pension savings between life companies.
The information includes brief product details, current accumulated values and fees, and also transfer charges from both companies involved, to provide proper consumer comparisons.
This information has had to be produced as from January 2016. An evaluation of this new regime will be carried out by FI at some future date.
A government committee recently proposed dealing with the valuation of pension liabilities outside insurance companies and occupational pension funds, with reference to International Accounting Standards (IAS) 19 rules.
These book reserves are held within the profit and loss accounts of ordinary companies in DB form, and secured either by assets in specific ‘pension foundations’, or by purchasing credit insurance from specific insurance companies.
In practical terms, the liabilities fall outside FI jurisdiction, but are monitored by specific legislation, which has been revised by the committee. Specifically, the committee has suggested alterations as to how the technical provisions of these liabilities (that is, discount rates) should be determined.
The proposal is under scrutiny by the government.
By far the most important legislative project dominating Switzerland’s pensions system is the Altersvorsorge AV (AV2020) pensions reform package.
The initiative aims to ensure the financial sustainability of the pensions system while guaranteeing the current level of benefits, and constitutes a comprehensive reform of both first and second pillar systems.
For both pillars, it contains proposals to harmonise normal retirement age to 65 for men and women. First pillar-only reforms include changes to survivor benefits and increasing VAT by up to 1.5%.
Within the second pillar, the proposals would lower the minimum conversion rate (used to calculate pension payouts from accrued assets) and increase both contribution rates and pensionable salary.
Published in November 2014, the draft law was debated by the country’s upper chamber last year and is now in the lower house in preparation for debate.
The government would like AV2020 to take effect as soon as possible, ideally from 2018. However, this means the final law would have to be passed by the start of 2017, as it is likely to be put to a public referendum.
The bill has proved fairly contentious; all sides agree that reform is needed, but certain provisions have provoked opposition.
Since the draft bill was debated by the upper chamber, several significant changes have been made, including increases to first-pillar benefits to compensate for cuts in the conversion rate.
And federal elections last autumn resulted in a shift towards the right in Parliament’s composition, bringing the potential for further changes. For example, it is possible that the retirement age could be raised to 67, while the age at which individuals can start second-pillar savings might be lowered from 25 to 21.
A separate initiative is under way to curb the perceived abuse of statutory benefits by people using their second-pillar savings for luxury expenditure.
At present, an individual who has reached retirement age is generally allowed to withdraw their second-pillar savings as a cash lump sum. Some people have supposedly used this money to splash out on lavish holidays or at the casino, then claim supplementary first-pillar benefits.
“The numbers show that of those individuals entitled to supplementary benefits, around one-third have withdrawn money from their second-pillar savings,” says Simon Heim, head of Swiss Life’s employee benefits legal practice. “However, it would be more conclusive to know whether people opting to withdraw capital are more likely to qualify for supplementary benefits than the rest.”
Last November, the government published a draft bill to restrict lump sum payments from the second pillar, to reduce the cost of supplementary benefit provision. However, this restriction would affect everyone, not just those entitled to supplementary benefits.
At present, there are two main options – to restrict the entire amount, or 50% of pensions savings.
Furthermore, individuals who become self-employed would no longer have the option of using pension assets as seed capital.
But the above-mandatory portion of retirement savings – that is, the portion above the statutory minimum if a more generous plan is provided by the employer – would not be affected by these measures.
Heim points out several potential problems here. “Lower conversion rates as introduced by AV2020 would mean lower pensions, and in that scenario people need even more freedom of choice – for example, withdrawing cash to pay off a mortgage,” he says. “In addition, such a restriction could be seen as severe interference by the state and part of a creeping nationalisation of the second pillar. Further, the projected cost savings in relation to the total costs of supplementary first-pillar benefits seem to be marginal. These measures are a sledgehammer to crack a nut.”
A public consultation on the draft bill ends this month.
Meanwhile, last year, several long-running legislative initiatives finally reached the statute book, although none have yet taken effect.
First of these was a revision of the Swiss Civil Code to allow retirement benefits to be withheld where an individual fails to provide child or spouse support. The authorities must inform pension funds about plan members who neglect these obligations, whereupon the pension funds have a duty to report capital payments to these members in advance to the relevant authority.
The bill was finally approved by Parliament in March 2015, but the measures are not expected to take effect before 2018.
Next came a further Civil Code revision, of the rules on splitting vested pension benefits for divorcing couples, improving the situation of a non-working spouse. Previously, only accruals before retirement were included in the divorce settlement, but the revamped provisions now include the splitting of pensions already in payment.
Parliament gave its approval in June 2015, but the new law is unlikely to come into force before 2017.
Finally, the amendment of the law on vesting in pension plans (FZG/LFLP) was passed last December, and is expected to take effect from 1 January 2017. This transfers the burden of investment risk to plan members by waiving certain guarantees if the member individually chooses the investment strategy.
At present, members are assured a minimum level of benefits even if they opt for a risky strategy that delivers poor returns. The new provisions apply for schemes insuring salaries above CHF126,900 (€116,000).
Heim says: “Now it will be possible to offer pure DC plans for the first time in Switzerland, allowing both pension funds and sponsors to move pension liabilities off their balance sheets. I would expect many employers to consider the introduction of such plans in the near future.”
The UK has seen a torrent of pension changes in the past few years. And on 6 April 2016, the new state pensions regime – possibly the most important legacy of the previous coalition administration – comes into force, paying a simplified, flat-rate individual pension at retirement age.
But the general election in May 2015, which saw the departure of pensions minister Steve Webb, a former academic and an enthusiastic pensions technician, has not marked much of a slowdown in reform.
No new legislation is going through Parliament, but a number of proposals are on the drawing board.
The Conservative government intends to carry out radical reforms of the Local Government Pension Scheme (LGPS) investment regulations to enable LGPS funds to pool their investments, aiming to make these regulations more akin to the ‘prudent person’ approach used in trust-based pension schemes.
It also proposes to give the Secretary of State for Work and Pensions powers to intervene in the investment function of the LGPS fund, if it has not taken into consideration relevant regulations and guidance, such as the guidance on pooling.
Furthermore, it is hoped that pooling will encourage more investment in infrastructure.
The consultation for these proposals was to close in February 2016.
The government is also carrying out a review of pension tax relief. The two main options for change are a move from the current EET system to a TEE basis of taxation; and moving to a single rate of tax relief. One of the reasons behind this is to improve sustainability of the system, although critics say it is an attempt by the government to raise short-term tax revenues.
The Pensions and Lifetime Savings Association (PLSA) is arguing forcefully against these changes, arguing that over the long term, a move to a pensions tax regime of either TEE or a single rate jeopardises both pension saving and the tax revenues of future governments.
The consultation closed last September. The chancellor of the exchequer is to give an update in his Budget on 16 March.
Meanwhile, the pension freedom reforms that took effect in April 2015 have led to a recognition that there is no more ‘normal’ when it comes to deciding what to do with savings at retirement, and that the industry needs to ensure the retirement income market works for all savers.
The reforms abolished the requirement to buy an annuity and increased the flexibility in how people access their pension savings. Nearly £3bn (€3.9bn) had been invested in drawdown products within six months of the restrictions being lifted.
However, the quality of information available to pension savers is crucial. In order to improve this, a retirement quality mark is being developed to assess retirement products against the quality of their governance and communications.
A consultation carried out by Pension Quality Mark, the excellence standard developed by the PLSA, closed in January 2016 and results are being analysed.
Research by Gail Moss