Sweeping changes to Bermuda's pensions regime are underway that could result in private-sector employers and their employees seeing significant alterations to their existing pension arrangements.
Royal Assent was given at the end of last year to the National Pension Scheme (Occupational Pensions) Amendment Act 2019 and the National Pension Scheme (Occupational Pensions) Temporary Amendment Act 2019.
The new laws have attracted much interest during their passage through the legislative process.
Among the most eye-catching changes is the requirement that, from March 2, 2020, employers will need to provide pensions for all employees over the age of 23 who have not reached retirement age, regardless of immigration status, save for American work permit holders who already contribute to a 401(k) pension plan and work permit holders who permit is for a period of 12 months or less.
Previously, the obligation to make occupational pension arrangements applied only to Bermudians and the spouses of Bermudians. Government has indicated that this is a response to concerns that the current situation has affected employment opportunities for Bermudians by making it cheaper to employ overseas workers.
While this move will level the playing field in relation to pension provision, some commentators have pointed out that there are already additional costs associated with hiring ex-pats, such as work permit fees, repatriation costs and housing and relocation allowances, which ex-pats often expect to receive.
Further, many employers already enrol non-Bermudians in their occupational pension schemes. For any companies that do not already enrol their ex-pat staff, this change will add to the cost of doing business. However, employers who already have non-registered plans in place for their non-Bermudian staff will be able, once they join their registered plan, to receive payroll tax relief on their contributions. Previously payroll tax had to be paid on their contributions, so this amendment will allow employers in this position to reduce their operational expenses.
Another significant change is that employees will be able to take out a lump sum of 25 per cent of their private pension on retirement. Currently, withdrawals from accrued balances can only be made in cases of financial hardship, with the consent of the Pension Commission. The date on which this change is to become effective will be confirmed in due course.
This change will bring Bermuda into line with many other jurisdictions that permit early draw-downs. In the United Kingdom, for example, employees have for many years been permitted to withdraw 25 per cent of their funds and this has recently increased to 100 per cent.
It also introduces parity between the private sector and the public sector, as civil servants have been allowed to take out lump sums of up to 25 per cent for more than 20 years. Lump sum payments give employees more autonomy over how they use their pension funds and could be used, for example, to pay off mortgages, invest in property or pay school fees.
Other changes due to come into force on March 2:
- The statutory vesting period – the period for which an employee must be enrolled in a pension plan before they are entitled to accrued benefits – will be reduced from two years to one year, which will benefit employees who frequently move between employers;
- Employers will be required to pay interest on any unpaid contributions;
- Employers will be subject to new comprehensive record-keeping obligations in relation to pension plans; and
- Stronger powers for the Pension Commission, including the ability to refuse the appointment of a pension scheme trustee who is not deemed to be fit and proper or lacks the integrity and appropriate skill for the role.
Each of these measures could impose additional financial and administrative burdens on employers but are likely to be welcomed by plan members.
One change that has already come into effect is the ability to temporarily suspend pension contributions until the end of 2021. It is now possible for both employers and employees to suspend 2 per cent of their pension contributions, based on pensionable earning of the member (currently, standard mandatory contributions are 5 per cent each), provided the employer is not in arrears with its contributions. Where pension provision is dealt with as part of a collective bargaining agreement, an employer can only suspend its contributions with the agreement of the relevant trade union.
This measure is designed to temporarily increase take-home pay for employees and give a boost to the economy. It will also reduce business expenses for employers who take advantage of temporary suspension. The Bill was initially withdrawn at the end of November 2019, following complaints by the One Bermuda Alliance, before being reintroduced after it was made clear that employee contributions can only be suspended with the employee's consent.
Overall, these changes represent a significant shift in the existing private pensions landscape in Bermuda. Employers will need to familiarise themselves with their new obligations and pension scheme members should consider their new rights as part of their financial planning for retirement.
First published in The Royal Gazette, Legally Speaking, January 2020
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