Carla Seely Column: Company Pension Plans
[Written by Carla Seely]
Whether you’re moving your existing business to Bermuda or starting up a new organization, you’ll have some corporate responsibilities. One of these requirements will be to establish a pension plan for yourself and your employees.
Effective January 1, 2000, a mandatory pension system was established in Bermuda requiring organizations based in Bermuda, or wishing to set up in Bermuda, to create an organization pension plan for their employees [Bermudians and Spouses of Bermudians]. Although there have been slight changes to the National Pension Scheme over the past 23 years, the same binding principle still exists, providing long-term retirement benefits.
Most organizations will establish a defined contribution pension plan for their organization and develop pensions rules that will be the guiding principles of how the plan will operate. These rules will mirror the Pension Act requirements and will be registered with the Pension Commission, ultimately governing the way the organization’s pension plan operates.
Here are some of the key factors you need to consider when establishing a registered pension plan:
1. Pension Plan Administrators
- a. To create your organization’s pension plan, you’ll need to work with a pension administrator based locally in Bermuda. Make sure to do your research to confirm what options are available for your organization and that it meets the needs of your entire workforce, not just a select few. Below are a few items to consider:
- i. How long has the pension plan administrator been in business and who are their current clients?
- ii. What are the fees being charged?
- iii. What flexibility does the plan offer?
- iv. Can the pension plan be customized for your organization’s needs, or do you have to adapt to the pension plan administrator’s current business model?
- v. Do you have a dedicated pension administrator, or is it simply, client services?
- vi. How are the pension assets segregated? Through a pension trust or segregated accounts?
2. Your Organization’s Structure
- a. Is your organization incorporated?
- b. Is it a sole proprietorship or perhaps a partnership?
The structure of your organization will determine the due diligence and paperwork needed for verification. Your pension administrator will ask for specific AML/KYC documentation, so make sure you have all your paperwork ready and certified.
3. Plan Details
- a. The pension plan name. What will you call your pension plan?
- b. The effective date. This is the date the pension plan is to be established.
4. Eligibility Requirements
- a. Age. At what age can employees enter the plan? Regulatory requirement states 23 years; do you wish to allow this age, or could you staff enrol earlier?
- b. Completion of service. Should they complete up to three months or 720 hours of service before they can enrol?
- c. Who can enrol? Are all employees eligible, or simply Bermudians and Spouse of Bermudians?
5. Contributions
- a. A mandatory deduction of 10% from pensionable earnings will be made and directed in the organization pension plan – 5% contributed by the employee, which in then matched by another 5% made by the employer on the member’s behalf.
- b. Decide whether your employee is allowed to make voluntary contributions into the pension plan.
- c. Decide if you wish to match any voluntary contributions that the member makes.
6. Vesting
- a. Vesting, as per the Pension Act, is one year. This means that if the employee leaves the organization before the end of the vesting period, he or she will only keep the employee contributions – the employer contributions will be returned to the employer and reallocated into a forfeiture account for future use. On the other hand, once the vesting period has been reached, both sources of funds [employer and employee] would be considered vested and are locked-in until retirement.
- b. Decide if your organization will follow the Pension Act’s one year vesting period, or if you will allow immediate vesting, as many organizations do.
7. Forfeiture [i.e., Non-vested Organization Pension Contributions]
- a. How do you intend to handle the non-vested funds? You have two options:
- i. Reduce future employer contributions.
- ii. Pay applicable fees and expenses.
8. In-service Distributions [i.e., Allowing Your Employees to Withdraw Money While Still Working]
- a. Hardship distributions, only allowed upon qualification and approval as per the Pension Act.
- b. 25% lumpsum withdrawal, available once you reach age 65 years or older.
- c. Non-hardship distributions, allowing your employees to withdraw from their voluntary contributions.
9. Reporting Frequency [i.e., How Often Members Receive Their Statements]
- a. Annually
- b. Semi-annually
- c. Quarterly
- d. Monthly
10. Employee Education
- a. Education is essential. Your employees need to be engaged and understand the pension plan; how often do you want the pension administrator to come and educate the employees?
11. Pension Administration Fee [i.e., The Cost of Establishing and Maintaining the Pension Plan]
- a. Does the organization pay the pension administration fee?
- b. Does the employee pay the administration fee?
12. Investment Selection
- a. Determine the type of investments you’re going to make available for your employees:
- i. Fixed interest accounts?
- ii. Mutual funds?
- iii. Risk-based investment models?
13. Retirement Options
- a. What options are available to the member when they retire?
At the end of the day, the most important thing is to understand your corporate responsibilities and requirements when establishing a pension plan. Having an experienced pension administrator to guide you through the process will make all the difference.
- Carla Seely is the Chief Operating Officer at Freisenbruch. If you would like any further details, please contact pensionplans@fmgroup.bm or call +1 441 296-3600
