Copyright 2014 Aon plc 1

Global Retirement Update July 2014 This Update summarizes recent legislative developments and trends related to retirement and financial management and highlights recently passed and pending legislation that may require employers to take action to comply with new rules or review existing plans.

Due to the summer holiday in the United States, we will not be publishing the Global Retirement Update in August 2014. The next Update will be emailed to you in September 2014.

Action May Be Required Nigeria—The Pension Reform Act 2014, effective July 1, 2014, repeals the Pension Reform Act No. 2 2004. The contributory pension system now applies to public- and private-sector employers with 15 or more employees. Under the Act, the participation of employees in private-sector workplaces with less than 3 employees will be governed by guidelines issued by the National Pension Commission. The Act does not address the participation of employees in private-sector workplaces with 3 to 15 employees. Additional guidance is expected.

The total contribution rate increased from 15% to 18% of monthly pay; employees continue to contribute 8% and employers now contribute 10%. Employers also must maintain a group life insurance policy for each employee, with coverage equalling three times total pay.

Employers are required to open a temporary retirement savings account for employees who failed to open one within three months of the beginning of service. Employees who lose their jobs may access funds in their account after a four-month waiting period instead of a six-month waiting period. The Act also expands investment instruments to include national development initiatives and increases penalties and sanctions for noncompliance.

Copyright 2014 Aon plc 2

Recent Developments

Americas The U.S. Department of the Treasury and Internal Revenue Service (IRS) released final regulations on longevity annuities. A longevity annuity is a type of deferred income annuity that starts at an advanced age and continues throughout the rest of the individual’s life. The final regulations make longevity annuities accessible to 401(k)s, other employer-sponsored individual account plans, and individual retirement arrangements (IRAs) by amending the required minimum distribution regulations to allow for payments starting in later years. Plan participants could use up to 25% of their account balance or, if less, USD 125,000 (adjusted in the future for cost-of-living increases) to purchase a qualifying longevity annuity.

In Canada, tax-sheltering relief for individuals transferring benefit entitlements from underfunded defined benefit pension plans has been extended in the following circumstances:

■ Benefits promised under the registered pension plan (RPP) have been reduced due to plan underfunding;

■ Where the plan is an RPP other than an individual pension plan, a permanent benefit reduction is approved pursuant to the applicable pension benefits standards legislation;

■ Where the plan is an individual pension plan, the transfer of the commuted value of the member’s benefit entitlements is the last payment made from the individual pension plan; and

■ Use of the special rule for a particular pension plan as approved by the Minister of National Revenue.

As a result of the changes, if the commuted value of an individual’s reduced annual pension is less than or equal to the transfer limit that applies to the unreduced pension amount, the individual is entitled to a tax-free transfer of that commuted value. If the commuted value of the reduced annual pension exceeds the transfer limit that applies to the unreduced pension, only the excess portion of the commuted value above that limit is paid to the individual and included in his or her income. The measures apply to transfer payments made after 2012.

Bill C-31, An Act to Implement Certain Provisions of the Budget Tabled in Parliament on February 11, 2014 and Other Measures (Economic Action Plan 2014 Act, No. 1) received Royal Assent on June 19, 2014.

In Quebec (Canada), the Regulation Respecting Voluntary Retirement Savings Plans and the Regulation Respecting Supplemental Pension Plans are effective July 1, 2014. The two regulations implement measures applicable to the administrator of a voluntary retirement savings plan; set the rules applicable to plan members; and amend the Regulation Respecting Supplemental Pension Plans.

The Ontario (Canada) government has announced its plans to move forward with implementing the Ontario Retirement Pension Plan (ORPP), following consultations with its Technical Advisory Group on Retirement Security. The ORPP was unveiled in the pre-election Ontario 2014 Budget, and would be the first of its kind in Canada. As a mandatory, independently managed, provincial pension plan, and operating as an enhancement to the current Canada Pension Plan, it would offer pension coverage to over three million employees without

Copyright 2014 Aon plc 3

workplace pension plans. It is anticipated that enrollment would begin in stages as of 2017 with the largest employers, and contribution rates phased in over two years.

Under Puerto Rico’s Tax System Adjustment Act (Act 77 of 2014), retirement plan participants may prepay a reduced 15% tax on a portion of or the total amount accumulated that is not currently distributable. The window for this prepayment is July 1, 2014 to October 31, 2014. The participant’s tax base will be increased by the amount of the prepayment. Only the taxable amount that was not prepaid will be subject to tax at the time of distribution. However, Act 77 does not address whether an in-service distribution is permitted during this period. Also, it is not clear whether plans have to be amended to provide for the prepayment or allow for an in-service distribution to make the prepayment. Additional guidance is expected from the Puerto Rico Department of Treasury.

Asia Pacific The Malaysian tax authority has issued Public Ruling No. 4 of 2014, clarifying the tax treatment of deferred annuities. To be eligible for tax-favorable treatment, a deferred annuity contracted on or after January 1, 2014 must be issued by an authorized insurer. The annuity payment cannot begin before age 55 or the minimum statutory retirement age at the time of purchase, whichever is later, and there must be a minimum ten-year payment period or until age 70, whichever is later. A partial withdrawal may be made at any time. Benefits will be paid out in the event of death or critical illness. Until assessment year 2021, deferred annuity premiums are deductible up to a maximum of MYR 3,000 per year. Annuity income is tax free. An 8% tax will be assessed on amounts withdrawn before age 55.

The Indian government has reiterated its commitment to improving the Employees’ Provident Fund (EPF) system. It proposes to implement two measures supported by the previous cabinet—increase the EPF contribution threshold from INR 6,500 to INR 15,000 and raise the minimum pension to INR 1,000. Also, the EPF Organization supports an expansion of the number of employers covered by the EPF. It recommends that employers with 10 or more employees be required to participate (currently, employers with 20 or more employees are required to participate).

The social security totalization agreement signed by the Indian and Finnish governments will be effective August 1, 2014. Under the agreement, expatriate employees will not be required to pay social security contributions to the host country for five years. The agreement also addresses provisions on the payment of pensions between the two countries and simplifies the pension application process.

China and Finland have concluded negotiations for a social security totalization agreement. The agreement will cover earnings-related pensions and insurance contributions, including unemployment insurance. The agreement must still be signed and ratified by the respective legislatures. It may be effective sometime in 2015.

Europe In the United Kingdom, the Finance Bill received Royal Assent on July 17, 2014. The Bill confirms the framework for individual protection following the reduction in the lifetime allowance from April 6, 2014, and implements a number of announcements in the March Budget, including the changes that allow additional flexibility for drawdown and extra scope for trivial commutations.

Copyright 2014 Aon plc 4

The U.K. Department for Work and Pensions published a new Pension Schemes Bill, alongside its response to the consultation on the Defined Ambition project. The Bill introduces a new framework for pension, depending on the form of the benefits in the accumulation phase:

■ Defined Benefit (DB)—where benefits are fully guaranteed by an employer;

■ Defined Contributions (DC)—where there is no guarantee. These may consist of individual DC benefits (money purchase) or collective benefits; and

■ Defined Ambition (DA)—where the guarantee is partial, applying only at a point in time during the accumulation phase. The guarantor could be the employer, an insurance company, or the scheme itself.

The definitions apply to benefits, not to schemes. Hence, a single scheme could provide DB, DC, and DA benefits. The DA definition is deliberately wide, with the intention of creating a broad field for innovative structures. Some benefits previously classified as DB may fall under the DA category (e.g., where normal retirement age of the benefits is linked to an external factor such as the State Pension Age).

The Bill also introduces the concept of collective benefits, where risks are shared between members. Collective benefits can appear as part of DA or DC designs, but not as part of individual money purchases.

Under Collective Defined Contribution (CDC), benefits are not guaranteed, only targeted. As a result, if the scheme’s assets perform well, benefits above target are paid. Conversely, if assets perform poorly, benefits are paid below target, with the potential for the level of benefits to be cut in extreme circumstances.

The Bill will be reviewed by parliament during the remainder of 2014, with the aim of completing the legislative process by March 2015. Since significant new regulation will be required to implement collective benefits, the earliest date for such schemes is expected to be April 6, 2016, coinciding with the end of DB contracting out.

The U.K. government has responded to the consultation it commenced in March 2014 on allowing significantly more choice for individuals with defined contribution (DC) pots from 2015. It confirms that the flexibility proposals will proceed. Members will have full access to DC (and cash balance) pots. The option to take up to 25% of the funds as a tax-free pension commencement lump sum will be retained with the remaining payments (as lump sum or unrestricted drawdown) being subject to the individual’s marginal rate of income tax. There will be measures to prevent people diverting salary into their pension with tax relief and then immediately withdrawing this amount with 25% tax free.

Transfers from private-sector defined benefit plans (for those not in receipt of pension) will not be banned, but there will be a new statutory requirement for the transferring plan to ensure individuals with over GBP 30,000 in pension savings take advice from an authorized independent adviser.

The response gives more details on the proposed “guidance guarantee” for DC members at retirement. Pension providers and plans will have to signpost individuals to the guidance service as they approach retirement. The guidance will be free and impartial, provided by independent organizations, and will be funded by a levy on regulated financial services firms. It may be provided face-to-face, by telephone or online; it will not recommend specific products or providers.

Copyright 2014 Aon plc 5

The Dutch government has submitted a new financial assessment framework (FTK) to the parliament for review. Under the proposed FTK, pension plans that did not meet funding requirements would have the ability to implement a “rolling” recovery plan. For each year a fund failed to meet its new capital requirement, a new recovery plan would have to be drawn up, with a ten-year deadline. The fund would have to eliminate at least one-tenth of the shortfall during the first year. The fund could not have a shortfall for more than five consecutive years. If a shortfall continued, a fund would have to make a one-time top-off payment or one-time direct cut to meet the 105% capital minimum.

The new FTK legislation also raises buffer requirements, clarifies the indexation rule, and sets prudent person rules.

If passed, the new FTK would be effective January 1, 2015. Pension funds would have until July 1, 2015 to comply with actuarial rules for financial crisis planning, investment, and indexation. Funds with a shortfall would have three months to submit a recovery plan.

In Slovakia, the government has created rules for the payment of second-pillar pensions. The second-pillar system was opened in 2005. The first payments from the second-pillar will be made in January 2015. If an individual’s combined first- and second-pillar pensions exceed the income received from the first-pillar alone, he or she may opt for a programmed withdrawal. Survivors will be paid the deceased insured’s second-pillar pension over a seven-year period.

Pension indexation reform has been passed by the lower house of the Czech parliament. Currently, pensions are adjusted according to one-third of the consumer price index (CPI) and one-third of the growth in the average real wage. Additional adjustments are made if the CPI exceeds 5%. Under the reform, pensions would once again be indexed to the entire inflation rate and one-third of the increase in the average wage. The bill must now be approved by the upper house.

Third-pillar pension products may soon be more attractive to employers as a retirement savings option under pending legislation in Estonia. Currently, individuals can withdraw their third-pillar savings before age 55 with an income tax penalty. The draft Investment Funds Act would allow funds to create multiple products, including one that would prohibit the withdrawal of funds before the age specified in a pension plan. The draft Act also would relax pension fund investment restrictions in unlisted securities, real estate, and precious metals.

In Romania, President Basescu has postponed signing into law a bill that would reduce social security contributions by five percentage points. The bill was passed by both houses of parliament and supported by Prime Minister Ponta. The President and the independent fiscal council claim that the revenue shortfall created by the cut would endanger medium-term fiscal consolidation targets. According to the independent fiscal council, the government would have to adopt compensatory measures or implement the reduction gradually. The International Monetary Fund opposed the reduction. The prime minister has indicated that the bill would go back to parliament, with a vote likely to be held in September.

The President of Kazakhstan has issued a decree on the modernization of the pension system. Modernization will occur in two phases—2016–2020 and 2020–2030. During the first phase, the following issues will be addressed: improvement of minimum guarantees of pension coverage; introduction of a conditional-savings component; improvement in pension coverage for employees working in hazardous jobs and in the power

Copyright 2014 Aon plc 6

industry; and expansion of the pension system to more individuals. During the second phase, the government will improve the connection between pension payments and funds collected; review the length of the contribution period and retirement age; and transition from a basic pension payment to a minimum guaranteed pension. Lifetime pension benefits will be reserved only for participants in the national pension system. Implementing legislation must now be passed.

* * * *

For more information on the topic and countries in this newsletter, please refer to the Aon Hewitt Country Profiles eGuide. You can learn more about the Country Profiles eGuide here.

Copyright 2014 Aon plc 7

About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit www.aonhewitt.com.

Copyright 2014 Aon plc This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt's preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt reserves all rights to the content of this document.