Offences and Penalties

In order to discourage non-compliance and offences against the legislation, a schedule of penalties shall be included in the regulations. The FSC shall have the authority to take, inter alia, the following actions in the event of non-compliance:

• cancel the registration of Trustees;
• require the sponsoring company to have new Trustees appointed, within the guidelines set by the Trust Deed;
• appoint a temporary manager to manage the fund's assets;
• fines to be applied to the Sponsoring Company and/or the Administrator and/or the Trustee(s) for breaches under the Act in their capacity, as deemed appropriate by Court Order; and
• imprisonment of the Director(s) of the Sponsoring Company and/or the Director(s) of the Administrator, and/or the Trustee(s) for breaches under the Act in their capacity, as deemed appropriate by Court Order.

Apart from the regulation of Pension and Superannuation schemes, there are also a number of other issues which will be addressed in the National Pensions Act. These are as follows:

There is currently an express need for creating a vehicle to facilitate the provision of pensions by persons for their parent(s) who has/have no or inadequate pension entitlement. It is therefore necessary to widen the pensions system to allow savings by adults towards parental pensions.

In order to facilitate this, the following provisions will be made:

• The maximum annual contribution to such a scheme by any individual would be 5% of his/her salary.
• The Parental Pension Plan must be administered by any registered fiduciary institution acting as a trustee, operating under a master trust deed with many individual members.
• The level of Parental Pensions must be such that when added to any other pension(s), the total is within the limit for self-employed persons.

Although most employees have been a part of a pension plan at one point or another, several of them upon retiring do not have sufficient resources to sustain them through to the end of their lives. This is because persons on changing jobs tend to opt for contribution refunds, rather than deferred pensions. Therefore, funds which should be accumulating as saving for retirement, are frequently used for consumption purposes during the employee's working lifetime. This then forces persons to work longer than they would normally have to, or to depend on the state or their families for their livelihood.

Statutory provisions will therefore be enacted to ensure that pension rights are automatically transferred or preserved on changes of employment after the attainment of a stipulated minimum period of employment. More specifically, a number of options shall be made available to the contributor, as follows:

1. Upon the termination of the service of an employee in circumstances in which he is not entitled to a pension and in which the period of service as a member of the fund is less than five (5) years, the contributions paid by the employee may be refunded to him together with any interest earned thereon, as recommended by the actuary;
2. On termination of service on completion of more than 5 years' membership, the member may only get a refund of his voluntary contributions, subject to a penal rate of tax. The remaining pension rights must be preserved in the plan, or be transferred to another occupational plan or approved retirement scheme he is joining, in accordance with his wishes; and
3. Notwithstanding (i) the employee may be offered the option to leave his contribution in the Fund and be eligible for a deferred pension.

Revaluation of Deferred Entitlement

If a deferred pension is to be given, the revaluation of deferred entitlement is essential. Revaluation is the process by which the deferred pension, defined at the time of withdrawal from service of the member, is adjusted during the period between withdrawal and eventual retirement, with the aim of preserving some of the real value of the pension to the member.

The deferred entitlement will be revalued by means of an offer of a fixed pension subject to "value for money" conditions. Herein, the fixed benefit payable at retirement will be subject to a minimum guarantee that it will not be less than the pension that could have been bought based on the actuarial transfer value of the deferred pension at the time of withdrawal, increased by interest as earned by the scheme until retirement. This would essentially ensure that the member's investment performs in line with the performance of the scheme.

Transitional Arrangements re: Preservation of Deferred Entitlement/Portability of Pension Rights

Existing schemes on the commencement date of the National Pensions Act will be grandfathered in the following respects:

• (a) entitlement under the Income Tax (Termination of Employment) Order, 1971, will continue tax free; and
• (b) accumulated employees' contributions for all service prior to the commencement date may be returned on death/termination, tax free.

49. Otherwise, the mandatory vesting provisions apply for these as for new schemes.

c. Indexation of Pensions

Under present legislation, a pensioner's annual pension at retirement and thereafter is limited to two-thirds (2/3rd) of the member's salary at retirement. This restricts the amount by which a person's pension can be increased after retirement, and in the long run results in erosion of the real value of the benefit received. In an inflationary environment, maintaining the purchasing power of the pensioner's benefit to some degree should be given due consideration. However, given the extra cost of providing a pension that is linked to inflation and the difficulties involved in finding suitable investments to cover the indexed liability, it is not felt to be appropriate to make indexation compulsory.

The indexation of pensions shall therefore be subject to affordability by the fund and/or the employer. When indexation is applied the following shall be applicable:

• after a minimum of 37 1/2 years employment with the plan sponsor, the total pension payable shall not exceed 75% of the member's highest salary earned by him during any twelve (12) consecutive months of membership of the plan. Post-retirement increases will be allowed even if this ceiling is breached, as long as such increases are granted to the incumbent pensioners in the plan as a class and any individual variations are based on a formula recommended by the actuary.
• the cost of increases shall be met out of the accrued surplus in the fund or out of special contributions by the employer, subject to approval by the Regulatory Authority and the Commissioner of Income Tax.
• the increased pension should not exceed the maximum pension mentioned above, increased by reference to the Consumer Price index (CPI) for the period between the date of retirement and the date of granting the increase.
• the increases should be recommended or have the written approval of an actuary.

The Development of Provisions which Enable Self-Employed Persons and Persons in Non-Pensionable Employment to Effectively Provide for their Retirement.

In addition to the above, an important feature of the reforms is the development of provisions which enable self-employed persons and persons in non-pensionable employment to effectively provide for their retirement. This will require both the inclusion of provisions in the National Pensions Act, and an amendment to the Income Tax Act.

The Income Tax Act currently allows for Approved Retirement Schemes which are operated to provide pensions for self-employed persons, and employees who are not contributors to an approved superannuation fund. These schemes are however, unattractive and impracticable, as under the Income Tax Act, self-employed persons are subject to a ceiling on salary contribution towards pensions, of $6,000 per year. This level of contribution provides benefits which are insufficient to meaningfully supplement the benefits payable under the N.I.S.

Therefore, the first and most important step in enabling self-employed persons and those in non-pensionable employment to effectively provide for their retirement, is to raise this ceiling. A cap of 20% of the chargeable income of the contributor, subject to a maximum is suggested. The proposed maximum chargeable income to which this cap would be applied is $4,999,200 per annum. The ceiling on contributions towards pensions for self-employed persons would therefore be increased to $999,840 per annum.

The Approved Retirement Schemes will be governed by the same legislation as the occupational pension plans and as such, will have to satisfy similar registration requirements.

The following provisions will also be made:

• the total of all contributions paid in each calendar year to the individual plan and to any other registered retirement plan may not exceed the maximum allowable under a registered occupational plan. This makes the treatment of individual plans consistent with that for occupational plans.
• the member must contribute regularly (at least annually) to an Approved Retirement Scheme.
• the maximum lump sum on retirement or death for individual plans should also be consistent with the provisions for occupational plans.
• individual pension plans may be administered by any registered fiduciary institution acting as a trustee, operating under a master trust deed with many individual members.
• provisions should be made for the transfer of pension rights from an existing approved occupational plan into an individual retirement plan, without tax liability, upon the termination of the member from employment that is covered by an approved plan.

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May 2001

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