A] Prelude*
* For more general information about pension systems and tax benefits, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-tax
Due to increasing longevity most countries face that retirement funding becomes an increasingly huge problem. Auto-enrollment on the job in an occupational pension plan can be one of the best options to prevent undesired future underfunding. In general we support such a system and therefore gladly go into the details of this system as recently introduced.
On July 1, Guernsey has launched a new auto-enrollment pension program—known as Secondary Pensions (SP)—to supplement the old-age benefits provided by the country's State Pension program.
The SP program will initially apply only to private-sector employers with 26 or more employees and then will gradually extend to all private-sector employers over the next 15 months. (An interesting and practical approach.)
Guernsey's government approved the creation of the SP program in 2022, but delayed its direct active implementation to give employers and pension providers time to establish pension plans and procedures that meet the program's requirements.
The SP program is intended to improve the retirement security by significantly increasing occupational pension participation. According to government estimates 65% of Guernsey's working-age individuals do not currently contribute to an occupational/private pension plan.
B] Key features SP
1] Covered employers: All private-sector employers will be required to provide their employees with qualified occupational plans under the program. (The government already operates special occupational pension plans for civil servants and teachers.)
Program requirements are being phased in gradually based on employer size as of June 30, 2024. The requirements will apply to:
• employers with at least 26 employees on July 1, 2024;
• employers with 11 to 25 employees on October 1, 2024;
• employers with 6 to 10 employees on January 1, 2025;
• employers with 2 to 5 employees on July 1, 2025;
• employers with 1 employee on October 1, 2025.
2] Employee enrollment: Covered employers must automatically enroll their employees in qualified occupational pension plans if:
• the employees are Guernsey residents;
• aged 16 to the State Pension Age (currently 65 and 10 months, but gradually rising to 70 by 2049);
• not full-time students;
• have estimated future annual earnings meeting the minimum for social security contributions (£9,100 in 2024).
Other relevant details:
• Employees who do not meet the conditions for automatic enrollment can voluntarily join pension plans if they are Guernsey residents and aged 16 to 74.
• After being enrolled, employees can opt out of pension plans at any time.
• If employees opt out within 6 weeks of enrollment, they can request a refund.
3] Qualified pension plans: Employers can provide their employees with occupational pension coverage by sponsoring their own approved pension plans or participating in the government-sponsored but privately managed Your Island Pension (YIP) plan.
Most pension plans are expected to operate on an investment Defined Contribution (DC) basis but guaranteed Defined Benefit (DB) pension plans are also allowed if they meet certain conditions. (Taking all funding issues into account, rather special that DB is also accepted.)
If employers sponsor their own pension plans and do not make employee participation compulsory, they must allow their employees to participate in the YIP plan if they choose and provide notices comparing their plans with the YIP plan.
4] Program financing: To finance Defined Contribution (DC) occupational pension plans, employees must contribute at least 1% (gradually rising to 6.5% by 2032) of covered earnings. Employers must contribute at least 1% (gradually rising to 3.5% by 2032) of covered payroll.
Employers can choose to cover part or all the employee share of contributions. The earnings/payroll used to calculate contributions will be the same as those for social security contributions.
5] Old-age benefits: Participating employees can claim old-age benefits under the SP program starting at the State Pension Age unless their employment contracts specify different retirement ages. (Which is a rather typical clause we have not seen before elsewhere.)
Although payment options vary by pension plan, participants can usually withdraw up to 30% of their account balances as lump sums at retirement and receive the remaining funds as periodic payments.
C] Encore
In addition to the SP program, Guernsey's old-age pension system consists of the social insurance State Pension program and the means-tested (!) Income Support program.
Insured individuals qualify for a State Pension if they have reached the State Pension Age and have at least 156 weeks of paid contributions and an annual average of at least 10 weeks of paid or credited contributions over a 45-year period. (Contributions may be credited for periods insured individuals receive other social security benefits.)
The full State Pension is paid to insured individuals who qualify with an annual average of at least 50 weeks of paid or credited contributions over a 45-year period. If retirement-age residents of Guernsey have income and assets below certain limits, they may qualify for benefits under the government-financed Income Support program.
D] Finally
It will be interesting to see if, just as with the introduction of auto-enrollment in The UK, it will work just fine followed by requests to increase the annual contribution substantially.
Maybe there will not be any choice within a few years as funding issues might increase!