Standing Committee Defined Benefit (DB)

Standing Committee Defined Benefit (DB)

Subject: Summary of the meeting of 12 May 2014

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Present: Benne van Popta (PMT), Sibylle Reichert (Pensioenfederatie), Hagen Hügelschäffer (AKA on behalf of aba), Frank Downey (Invesco Limited), Mark Austin (Nothern Trust-via conference call), Stefan Lundberg (Cardano), Sonia Maffei (Assogestioni), Paul Kelly (Towers Watson – via conference call) Julian Arevalo, Corianne van de Ligt (PensionsEurope). Speakers: Stéphanie Payet and Pablo Antolin (OECD).

1.  Introduction

Benne van Popta welcomed all the participants, and especially the guests from the OECD: Pablo Antolin and Stéphanie Payet.

2.  Possible revision of the OECD taxonomy on pensions and the relevance thereof on the national level

Pablo Antolin and Stéphanie Payet from the OECD gave a presentation on the possible revision of the OECD taxonomy on pensions, as the OECD wants to discuss the need to revise the current taxonomy on funded pension plans. They want to move away from the pillars, as there is no clear-cut world anymore in which pension pillars can be divided.

Current OECD taxonomy:

-  Occupational pension plans: access to such plans is linked to an employment or professional relationship between the plan member and the entity that establishes the plan (the plan sponsor). Occupational plans may be established by employers or groups thereof (e.g. industry associations) and labour or professional associations, jointly or separately. The plan may be administered directly by the plan sponsor or by an independent entity (a pension fund or a financial institution acting as pension provider). In the latter case, the plan sponsor may still have oversight responsibilities over the operation of the plan.

-  Personal pension plans: access to these plans does not have to be linked to an employment relationship. The plans are established and administered directly by a pension fund or a financial institution acting as pension provider without any intervention of employers. Individuals independently purchase and select material aspects of the arrangements. The employer may nonetheless make contributions to personal pension plans. Some personal plans may have restricted membership.

Thus: distinction mainly based on 2 criteria: access to plan linked to an employment relationship and entity establishing the plan is the employer.

Possible options

-  Classification based on the access point (option 1)

o  Broad definition occupational pension plans: all pension plans for which the access is linked to an employment relationship.

-  Classification based on the role of the employer

o  Occupational pension plans: a plan in which the employer can or has to contribute, independently from the access point. (option 2)

o  Occupational pension plans: a plan that can be accessed only through the employer and in which the employer can/has to contribute. Riester plans would still be excluded from this definition. (option 3)

o  Occupational pension plans: a pension plan is occupational when the employer is the access point and establishes the plan. (option 4)

Some participants mentioned to come up with 6-8 criteria to define occupational or personal pensions. Tax law and social law are important criteria in this regard. The OECD also mentioned this, but it would be very data intense.

Taxonomy with regard to DC and DB

-  DC occupational pension plan: occupational pension plans under which the plan sponsor pays fixed contributions and has no legal or constructive obligation to pay further contributions to an on-going plan in the event of unfavorable plan experience.

-  DB occupational pension plan: occupational plans other than defined contributions plans. DB plans generally can be classified into one of three main types: ‘traditional’, ‘mixed’ and ‘hybrid’ plans:

o  Traditional DB: where benefits are linked through a formula to the members’ wages or salaries, length of employment or other factors.

o  Hybrid DB: where benefits depend on a rate of return credited to contributions, where this rate of return is either specified in the plan rules, independently of the actual return on assets, or is calculated with reference to the actual return of any assets and a minimum return guarantee.

o  Mixed DB: has to separate DB and DC components but which are treated as part of the same plan.

Limitations according to OECD

-  OECD sees a potential limitation of the current OECD taxonomy as it may lead to discrepancies with classifications used in some countries and international organisations that are using the members’ perspective, whereas the OECD focuses on the role of the sponsoring employer.

-  Moreover, it does not allow differentiating occupational DB plans in which the investment risk is shared between the employer and the member like in The Netherlands from other DB plans in which the employer is the only one bearing the risk.

-  Furthermore, current taxonomy may not be clear enough when the responsibility to resorb deficits does not lie directly with the employer but rather with the pension fund. Currently those plans are classified as traditional DB plans.

Possible options

-  Classification following the member’s perspective

-  Classification based on multiple criteria: benefit calculation, benefit certainty, employer’s responsibility, type of guarantee, guarantor, risk sharing

The reason why the taxonomy is important is that a new language is needed according to some participants, so as to better understand the pension landscape. This is also important for the members of a pension scheme. Currently there is no agreement within the OECD on changing the taxonomy. The regulators will decide on this.

3.  Code of good Practice

There were two presentations in relation to the Code of good practice on occupational pensions, which is an initiative of the European Commission. The first presentation is about a project on tax incentives. The OECD is working on this project, carried out at the request of the EC.

End of 2013 The EC and the OECD signed a contract on efficiency and cost-effectiveness of tax and other incentives for occupational pension schemes. The OECD will do research on this and come up with a set of policy recommendations and best-practices on how to design tax or fiscal incentives to promote retirement saving, especially for groups with low coverage and low retirement savings. This would feed into the work of the code of good practice.

Most OECD countries provide tax advantages and other fiscal incentives to encourage savings for retirement in occupational pension. OECD argues that these incentives are costly and they have come under close scrutiny in an era of budget stringency. The project will therefore review the cost effectiveness of tax and other financial incentives, as well as assess what is the more efficient way of using public money to increase savings for retirement, retirement income and replacement rates. The analysis will cover both occupational as personal pension schemes.

Three key policy questions are to be addressed:

1.  What are those tax and fiscal incentives, how do they work and what requirements need to be met to be eligible for those incentives?

2.  Are those tax and fiscal incentives cost efficient in terms of increasing contributions into private pensions and, ultimately, contributing to adequate overall retirement incomes? Would it be better instead to withhold those tax incentives and increase public pensions instead?

3.  Are there other alternative approaches to encourage saving in private pensions that may be more efficient?

PensionsEurope was asked to provide input on this issue.

The second presentation was really about the Code of good practice. Following the White Paper on Pensions, the EC set up a Working Group on a code of good practice for occupational pension schemes. The OECD is involved is this project.

The European Commission presented a draft list of elements for a code of good practice. The main elements are:

-  Consistency

-  Adequacy

-  Safety

-  Cost-Effectiveness

-  Flexibility

-  Transparency

-  Governance

The EC wants to create a code that goes beyond existing schemes. The roadmap of the OECD might be an example for this Code. The Code is not prescriptive.

4.  Tour de table

As the developments in many Member States already have been discussed in the previous meeting, the participants were asked to give a short update.

Ireland

In common with most countries, the majority of DB schemes in Ireland are in deficit. The Statutory Funding Standard was suspended in 2009 but re-introduced in 2013. Most schemes have now agreed recovery plans and/or have restructured but a significant number have also been wound up. The number of DB schemes has fallen from around 1,400 five years ago to around 800 now. Most schemes (other than unfunded public sector arrangements) are closed to new members and many to future accrual of benefits. There is no Statutory obligation in Ireland to fund deficits on wind up other than under the terms of the pension scheme itself or in contract law. A limited Statutory protection in cases of “double insolvency” of both the pension scheme and the employer was introduced in 2013, to be funded by way of a levy on all pension schemes. This is following a recent ruling of the ECJ.

A maximum tax allowable pension fund limit was introduced in 2005. This was initially set at €5m, reduced to €2.3m in 2010 and has now been further reduced to €2m. The Government is considering introducing either mandatory pension saving or auto enrolment and is currently engaged in a consultation process.

Italy

There is no news on the 2nd pillar regulation. In 1993 the government decided that no new DB plans could be established.

The Netherlands

There is not much difference compared to the previous meeting. The new prudential framework (FTK) is still under discussion. The Code of Governance of pension funds will be translated into English.

Sweden

There are no DB funds left, all NDC even the 1st pillar.

5.  Future meetings

A new meeting will be scheduled somewhere between September and December. Benne van Popta will work on a work programme.