Gail Moss highlights key legislative and regulatory developments for pensions across seven European countries
• Following Foraarspakke 2.0 - the Spring Package enacted last year to reduce the marginal taxation of wages and increase labour supply - the legislative proposal to increase tax on pension payouts above DKK284,000 (€38,182) is yet to emerge. However, the government announced it would publish detailed legislation this March.
• A new format for capital yields tax in relation to pension funds came into effect on 1 January 2010. This completed earlier legislation which granted tax deductibility for individual Danish pension contributions made to foreign EU-based suppliers. The purpose was to create parity in response to a 2007 EC ruling.
Under the new legislation, the capital yield tax base has been shifted from an institutional to an individual base, while keeping the tax rate unaltered at 15%. This ensures that individual savers' capital yields from pensions are taxed according to the same set of rules, whether contributions are placed with providers in Denmark or abroad.
• The government is preparing to implement the Solvency II regulation. Legislative proposals are not expected before the end of 2011.
• In February, the Finnish government unveiled a Parliamentary bill extending the emergency regulation to strengthen the solvency position of pension funds for a further two years, until end-2012. The legislation was likely to be enacted this spring.
• The ministry of social affairs and health is preparing permanent solvency regulation rules, probably in two phases. The first, due in 2011, may include using a greater number of risk profiles to classify fixed income investments for the purposes of calculating the solvency capital requirement of pension funds. This will increase the total number of risk categories from the present twenty.
The second phase, including more fundamental amendments, could come into force two or three years later. The target is, however, not to change the risk level allowed.
• A looming headache for the Finnish government is the need to avoid the first public sector deficit period for a generation (the deficit for 2009 - the first deficit since 1997 - was 2.2% of GDP): one step towards this would be to get more people to stay in work, rather than retire. The government has therefore set up two working groups with the social partners to raise the effective retirement age from between 63 and 68.
One group was to propose changes in workplace and healthcare practice to lower the risk of disability in the workforce. The aim of the other group was to generate further measures to accelerate the trend towards later retirement.
There was broad agreement among the disability working group, but the social partners are generally against the government's plans to raise the legal retirement age.
With a general election taking place in April 2011, the government is not likely to propose something that may lose votes. These are unlikely to be published until after that date.
• The law governing pensions settlement on divorce came into force in September 2009 but lacks clarity, for instance, on how to treat pensions granted from a support fund. So additional tax regulations are likely to be passed this year.
• The German Employers' Federation (BDA) is lobbying for a risk-adjusted insolvency protection system for German company pensions. The current system, run by the Pensions Sicherungs Verein aG, is based on flat, rather than risk-adjusted, percentage premiums, and the levy has shot up from around 0.18% of pension fund assets in 2008 to 1.42% last year.
A risk-adjusted system could mean that a pension scheme's external assets would be taken into account for the purposes of calculating risk, therefore reducing the premium. Proposals from the employers are being considered, and legislation could be published and passed this year.
• The collapse of the coalition government in February has left Dutch pensions legislation in limbo.
Parliament has declared any pension reforms, including second pillar reforms, as "controversial". This means the outgoing cabinet is not allowed to make any decisions regarding pensions issues. The proposed legislation to raise the retirement age to 67 and limit the fiscal framework for second pillar pension savings has therefore been shelved, as has any formal government response to the Frijns and Goudswaard reports.
Nothing affecting pensions regulation will happen until after a 9 June election, but as it will take until the end of summer before a new cabinet is appointed, it is unclear when pensions will be back on the agenda."The retirement age will be a political campaign issue for many parties, with some of them promising to keep it at 65," says Tim Burggraaf, principal, Mercer.
However, the social partners have reopened negotiations on reforms to the second pillar pensions in order to create a workable compromise to present to the new government.
• Parliament is pressing ahead with plans to hold hearings this summer to consult the pension industry on the Frijns and Goudswaard reports.
• Meanwhile, API2 was still progressing through parliament, with enactment expected by early April. The fate of API1 is now clear, since that piece of legislation was surprisingly declared "non-controversial", keeping the door for a Dutch pan-European vehicle open. "Wisdom has prevailed in The Hague," according to Burggraaf.
• A new insurance business act (Försäkringsrörelselagen) has been officially issued by the ministry of finance and has been sent as a consultative document to organisations and other concerned stakeholders. It will set up a new structure for friendly societies including tjänstepensionskassor, the Swedish equivalent of IORPs, as well as other older societies, mainly for funeral expense benefits. The changes will bring friendly societies into line with ordinary mutual insurance companies. It is hoped to present a bill to parliament this summer, with legislation taking effect from 1 January 2011.
• The ministry is also gearing up to comply with Solvency II, which will introduce a new risk-advanced calculation of solvency for insurance companies and those occupational pension funds working within a life assurance framework.
A government committee will prepare a proposal for amendments to the insurance business act. One of the committee's tasks is to analyse how the new risk-based calculation of solvency will be implemented for the undertakings covered by the act, including the Swedish IORPs.
The supervisory authority (Finansinspektionen) has already, however, introduced a traffic light system along the lines of the Solvency II proposals for supervisory purposes.
• The emphatic ‘no' vote in March's referendum on lowering the conversion rate for annuitisation of account balances to a mandatory 6.4% has put paid to any legislative changes on this issue in the near future.
"It is a Pyrrhic victory for the Left," says Peter Zanella, senior consulting actuary, Towers Watson in Zurich. "If the future conversion rate bears little relation to actuarial reality, it will force companies and pension funds to look at other ways of mitigating risk. That will result in benefit reduction, with the young having to subsidise those about to retire."
• Another development was the general approval of provisions to transfer the burden of investment risk from pension schemes for higher earners to the members.
Pension funds which insure the portion of salary exceeding CHF123,120 (€84,000) may offer several investment strategies to their members. However, under the current act on vesting in pension plans (FZG/LFLP), a pension fund has to guarantee a minimum amount to the member, which means those schemes bear the investment risk even if they do not pick the strategy. The new amendment will provide that members of such schemes no longer receive a guaranteed amount if they leave the pension fund.
• After years of debate, the structural reform of occupational pension scheme supervision is nearing enactment. Currently, the ultimate supervisory body is the Federal Council, while other federal and cantonal institutions have specific responsibilities.
The purpose of the reform is to streamline financial supervision by installing a federal supreme supervisory commission with extensive powers, while transferring direct supervision of all pension funds to the cantonal authorities. There are also provisions to improve pension funds' transparency and governance. A parliamentary bill was published in 2007 but made slow progress because of objections by some stakeholders.
The Federal Council approved the bill last September, but the upper house still opposed certain provisions. By the beginning of March, only minor differences remained. It is intended to enact the bill in 2012, although the governance provisions may take effect before then.
• The Swiss Civil Code is being revised to correct deficiencies in the assignment of vested pension benefits between divorcing couples.
The current law has been criticised as being unclear, impractical, and disadvantageous to the non-working spouse, as they have no autonomous claim against the pension fund once their former spouse is disabled or retired. The Federal Council has proposed changes which include a proposal that pension assets acquired during marriage must be split, even if the plan member already benefits from a disability or retirement pension.
The Federal Council's draft was open for consultation until 31 March 2010; enactment is likely to take several years.
• Even with a potential change of government after the general election on 6 May, the pensions agenda is unlikely to be altered in the short-term.
Most regulations relating to the present government's new personal pensions vehicle, the National Employment Savings Trust (NEST) have now been enacted.
While the main opposition Conservative party generally supports the pensions reforms due to be introduced from 2012, including auto-enrolment, it has doubts about some aspects of the NEST model. For instance, it is concerned that at retirement, low earners might be equally well off on means-tested benefits than pension savings, making it pointless for them to use NEST.
It is therefore likely that if they form the next government, they would carry out a review of how the system will work in practice.
• The Labour government is still working on its 2009 Budget proposals to restrict tax relief on DC pension contributions for high earners, which are to be enacted in 2011. The Conservatives have suggested that reversing the restrictions on tax relief for high earners would not be a priority for them. "However, whichever party wins the election, it is likely to look at public sector pensions in view of the costs they impose on the public finances," says James Walsh, senior policy adviser, workplace pensions, National Association of Pension Funds.
It is, however, possible that the election could result in a hung parliament, which adds uncertainty to the outlook for pensions legislation.
• The Employer Debt Regulations - which deal with company reorganisations where a subsidiary ceases to participate in the pension scheme - are still waiting for the outcome of the policymaking process. A recent consultation, the Department for Work and Pensions was expected to publish regulations to be enacted before the general election. But the timetable might be optimistic, given some industry concerns about the regulations.
• The Pension Protection Fund is engaged in a major review of the risk-based levy for pension schemes.
For DB schemes this is important, as the levy constitutes a major cost, and can vary substantially. There has been disagreement about how the levy should be calculated, but the aim is to more accurately reflect the risk from individual schemes and to deliver less volatility.
Preliminary proposals were published a year ago, and a senior steering group has been set up to oversee a fresh look at the issue. More concrete proposals are expected in late spring, to be followed by further consultation. The resulting parliamentary regulations will therefore not be enacted until after the general election but should not be affected, as there is cross-party consensus.
• The UK pensions regulator is currently carrying out a review of the regulation of DC plans and will report back later this year. Under review are standards of scheme administration, governance and past record-keeping.