On January 1, 2007, a law overhauling Dutch private pension funding requirements took effect. The legislation, known as the Pension Act, passed parliament on December 5, 2006, and replaces the Pension and Savings Funds Act of 1952. Proponents of the Pension Act argued that the 50-year-old Pension and Savings Funds Act, which had been amended numerous times, was out-of-date and difficult to understand.
One of the goals of the Pension Act is to create clear communication channels among employers, private pension plan providers, and participants. Specifically, the act:
The new law establishes a framework for financial assessment of private pension funds. It requires that private pension funds be tested annually to ascertain if they meet the minimum solvency and contribution requirements. Within a given year, funding shortfalls must be less than 2.5 percent. At the end of the second quarter of 2006, Dutch pension fund assets were approximately €640 billion (US$813.2 billion).
The Netherlands' social insurance system, which includes a universal old-age and survivors pension as well as disability benefits, covers all residents who meet earnings and contribution requirements. Workers contribute 17.9 percent of annual earnings between €13,160 (US$17,056) and €29,543 (US$38,290) for the old-age pension and 1.25 percent for the survivors pension. Employers contribute 5.4 percent of wages within the same annual earnings range for disability pensions. In some cases, the government provides a subsidy to retirees whose pensions fall below the minimum monthly pension amount of €784 (US$1,016) for single persons and €1,088 (US$1,410) for couples (whether married or not).
A new social security law implemented in January requires major changes to Portugal's pay-as-you-go public pension system to maintain the program's solvency. The law incorporates the provisions of the agreement on social security reform between the government and its social partners signed in October 2006. (See the July 2006 issue of International Update.)
The reforms will be phased in and include:
By 2020, without reform, the social security deficit is projected to reach 3.5 percent of the country's GDP. The government predicts that the percentage of the population aged 65 or older will rise from 17 percent in 2005 to 32 percent by 2050. Also, the fertility rate has decreased from 2.6 children per woman in 1976 to 1.5 today.
Effective January 1, 2007, Spain's new income tax law reduces occupational pension tax incentives for both employers and employees. The changes to the tax rules for pension plans include:
The new law introduced another type of pension plan called an occupational provident plan that provides a guaranteed interest rate and has no pension plan control committee. Also, banks will begin to offer individual systematic savings plans known as planes individuales de ahorro sistemático (PIAS) to supplement pension savings. Contributions to PIAS may not exceed €8,000 (US$10,364) per year and may be invested in stocks, life insurance, and mutual funds. PIAS will have no tax incentives.
On December 13, 2006, the provincial government of Quebec overhauled its funding rules for private defined benefit pension plans. The new legislation, Bill 30, An Act to Amend the Supplemental Pension Plans Act, is intended to protect private pension benefits by improving plan funding, governance, and services offered by pension committees and pension plan providers. The bill completely revises the 1990 private defined benefit plan funding rules after lengthy discussions and public consultation.
The new pension funding measures included in Bill 30 apply to all private defined benefit plans except those associated with universities, municipalities, and childcare centers. The changes, which go into effect in 2010, include:
Although Bill 30 indemnifies individual pension committee members in certain situations and under certain conditions, it also imposes stricter guidelines for plan operation and governance. By the end of 2007, committees must adopt ethics bylaws and publish the duties and obligations of committee members.
Bill 30 will affect approximately 1.4 million people, or 26 percent of Quebec workers, who are members of at least one of the more than 1,700 defined benefit pension plans. Pension plan member protections incorporated in Bill 30 include a requirement that service providers notify the pension committee of any situation that might adversely affect the fund's financial interests. Beginning in 2010, plans must ensure that active members, nonactive members, and beneficiaries are treated equitably whenever any fund surpluses are used.
Private pension plans supplement the Canadian public pension system. Generally, Canadian workers are covered by a noncontributory flat-rate universal old-age pension. The government of Quebec opted out of participating in the earnings-related Canada Pension Plan. Quebec's workers are covered by a similar public earnings-based pension plan called the Quebec Pension Plan.
Bahrain reported that its public pension system faces bankruptcy in about 20 years. A 2005 actuarial study by the Financial Audit Bureau, an office within the Audit Directorate of the Ministry of Finance, concluded that Bahrain's pension system would be unable to meet its obligations to government workers by 2026 and to military personnel by 2035 without immediate corrective measures. (See also the November 2005 issue of International Update.)
The 2005 deficit of 3.1 billion dinars (US$8.2 billion) includes shortfalls in both the Pension Fund Commission (PFC), which covers government employees and military personnel, and the General Organization for Social Insurance (GOSI), which covers private-sector workers. PFC has a deficit of 2.4 billion dinars (US$6.4 billion) and GOSI has a deficit of 740 million dinars (US$1.96 billion).
According to a September 2006 actuarial report, the imbalance between benefits and contributions began in 1986 when the government reduced the contribution rate from 21 percent to 15 percent for both pension funds. Also in 1986, the government increased the replacement rate from 75 percent to 88 percent. The report noted that an average employee receives a return of 12.1 percent on contributions.
Currently, government employees and military personnel contribute 7 percent of their wages to PFC and the government contributes 14 percent of wages, up from 5 percent and 12 percent, respectively, before 2005. The PFC provides a monthly pension at age 60 to public employees with 25 years of service. The fund covers approximately 78,000 government employees and currently pays benefits to 2,230 retirees. (Bahrain does not release information on military personnel.)
Private-sector employees contribute 5 percent of their wages to GOSI and employers contribute 7 percent, subject to a salary cap of 4,000 dinars (US$10,610) per year. GOSI currently pays benefits to 4,616 retirees.
On January 8, the Securities and Exchange Commission of Pakistan (SECP) formally launched its new Voluntary Pension System (VPS) by certifying four asset management companies to operate as pension fund managers. The government introduced the VPS to increase long-term savings and promote the growth of the country's financial markets. The VPS was designed especially for self-employed individuals and workers without occupational pension plans.
The SECP, which regulates Pakistan's corporate sector and capital markets (including insurance companies and private pensions), began developing the VPS framework in June 2003 with the formation of a study committee consisting of representatives from the private sector, the Ministry of Finance, and the SECP itself. Draft regulations and guidelines for a tax-deferred VPS system were issued in January 2005. (See also the April 2005 issue of International Update.) Later that year, Finance Bill 2005 amended the income tax laws, which paved the way for the VPS to begin operation in 2007.
Under the VPS:
Pakistan is a relatively young country with few of its workers participating in the social security system or occupational retirement plans. According to the 2002 Pakistan Labour Survey, less than 2 million of Pakistan's 43 million workers were covered by social security in that year. The private-sector pension industry estimates that perhaps as few as 1 million workers are covered by private-sector retirement plans. Pakistan's 1 million military personnel and public employees are covered by a noncontributory defined benefit pension plan.
