Bermuda’s pension scheme: quirks and perks

In the 1600s the average life expectancy of an Englishman was 40 years. Everything considered, Somers did well to live to age 56. Provision of pensions was not an issue of his day.

Even in the 1880s, when Chancellor Otto von Bismarck introduced the world’s first state pension in Germany, few would reach the qualifying age of 70.

People now live longer and many governments struggle to maintain sufficient funds for pensions. Increasingly, governments have legislated to require private sector employers to provide employees with pension benefits, thus partly relieving the government burden.

Bermuda is no exception. Bermuda’s National Pension Scheme (Occupational Pensions) Act 1998 and its regulations are known as Bermuda’s local pension regime. The 1998 Act requires Bermuda private sector employers to establish or participate in pension plans for employees who are Bermudians and spouses of Bermudians.

Prior to the 1998 Act, there were no statutory obligations on Bermuda’s private sector employers to provide employees with pensions. However, pension funds established in Bermuda were required to comply with the Pension Trust Funds Act 1966 unless the employer benefitted from an exemption.

Registration of pension funds under the 1966 Act does not exempt private sector employers in Bermuda from their obligations under the 1998 Act. However, plans registerable under the 1998 Act are not required to be registered under the 1966 Act. The 1966 Act is now largely utilised by international employers wishing to provide non-Bermudians regulated plans that may facilitate members’ receipt of tax effective retirement benefits in their home jurisdictions.

Pension administrators

A quirk of the local pension regime is that it focuses on the obligations of employers and administrators and not on duties of plan trustees. The 1998 Act defines “administrator” as the persons that administer the pension plan.

“Administrators” of local plans have statutory duties to exercise the best standards of management to protect and promote members’ interests in the administration and investment of the plan fund, provide information to members and file annual reports and financial statements with the Pension Commission. However, in practice, many regard administrators as delegates of trustees, owing contractual obligations to the trustees but not owing fiduciary duties to members. Local plan service providers should be mindful of the distinction.

Several entities may provide services to one plan and all have obligations under the 1998 Act when providing their services. Investment managers may establish financial institution pension plans and manage plan investments, maintain records and report to the Commission. The intention may not be to impose duties on trustees to exercise ultimate discretion over plan investments or for the trustees to fulfil the reporting obligations of an “administrator” under the 1998 Act. The trustees intended role may essentially be to perform their fundamental duty to safeguard plan assets and, secondly, to implement investment managers’ directions. Trustees should ensure that the plan documents do not impose duties on them that they did not expect to perform.

Administrators must register amendments to local plans with the Commission within 90 days in order for them to be effective. The Pension Commissioner may properly consider that amendments to investment and other delegation agreements must be registered.

Many employers have decided to close plans offering pensions based on final salary and years of service. There have been numerous English court cases where employers believed they amended or closed such defined benefit plans only to find that they failed to comply with the trust deed or secure members’ agreement. Consequently, years later, employers have been ordered to make significant contributions to, and facilitate payments from, such plans based on the plan rules in place prior to the purported amendment. These issues also apply to Bermudian defined benefit plans.

Bermuda’s employers are not required to enrol non-Bermudian employees, who are not spouses of Bermudians, in local plans. However, most employment contracts with such employees require employers to make contributions to savings plans. These savings plans often entitle employees to receive lump sum payments from the plan upon cessation of employment.

Non-Bermudian employees have occasionally been registered as local plan members. These members benefit from the Commissioner’s oversight but their benefits are largely locked in the plan until retirement. However, it is understood that the Commissioner has in certain circumstances authorised such members’ accrued entitlements to be released upon such members permanently leaving Bermuda.

The Commissioner has facilitated the introduction of local plans that are compliant with United States’ “section 401(k) plans”. This has assisted local plan members, who are US citizens, to defer US tax on their interests in local plans as they would under section 401(k) plans.

The local regime provides the Commissioner discretion to approve “prescribed retirement products”. Subject to factors including the employer’s connection with Bermuda and the investment sophistication of members, applebyglobal.com 3 prescribed retirement products may not be subject to all of the investment and other restrictions imposed by the local regime. The extent of the Commissioner’s discretion may be tested further.

Pensions registered under the local regime, including prescribed retirement products, are exempt from reporting under certain international agreements that require financial institutions to report information on accounts holders.

The quirks and perks of Bermuda’s local pension regime should be considered by service providers and those wishing to establish a presence in Bermuda.

Article first published in the Royal Gazette, April 2016