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Portugal: New rules for employer pension funds change governance requirements

Retirement|Health and Benefits|Total Rewards
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By Vasco Câmara | September 16, 2020

New rules for employer-provided pension funds bring changes to accrued pension transfers, vesting periods and information sharing, among others.

Employer Action Code: Act

Decree-Law 27/2020 has introduced new rules applicable to employer-provided pension funds, reflecting changes required by the European Union (EU) Institutions for Occupational Retirement Provision (IORP) Directive1 as well as certain further reforms. To implement the changes, effective August 1, 2020, external pension fund managers must modify existing pension fund agreements. For some of the changes, an implementation period of up to 12 months will be permitted.

Key details

The main changes include:

  • New options for employees regarding transfer of accrued pensions:
    • At the end of employment, including upon retirement, members of defined benefit (DB) and defined contribution (DC) pension funds may elect to maintain their pension entitlement in their prior employer’s pension fund. Members who choose to do so will be permitted to transfer their entitlement, and corresponding assets, to another pension fund at any time in the future. Currently, members are typically required to transfer their vested entitlement to another fund or convert it to an individual contract on separation from employment.
    • DB fund members may continue, upon retirement, to receive their pension payments from the company´s pension fund or through a commercial annuity (according to the fund rules). The new law expands DB plan members’ options by allowing them, at the end of employment or any time thereafter, to convert their pension entitlement to a DC amount and transfer it to a pooled pension fund, at no charge. After the transfer, the member can decide to draw down the DC balance (with no DB underpin) in accordance with existing payout regulations.
  • A new requirement to include workers’ representatives on pension fund monitoring committees: Such committees, which oversee fund operation but do not have decision-making powers, must now include a representative from the company’s workers commission (works council) and representatives from the two most significant unions in the industry sector. This is in addition to the existing requirement for elections to appoint members’ and beneficiaries’ representatives to the monitoring committee.
  • Expanded annual information sharing by managers of pension funds with existing fund members and prospective members, during their employment and while they are receiving benefits from the fund, as well as at the start of participation in the fund and at the time of transfer to another fund: Information to be shared includes fund contributions and expenses during the prior 12 months, accumulated pension balance, vested rights, pension fund manager fees, fund investment returns and projections of estimated member benefits at retirement age.
  • A new requirement that each pension fund must have a statement of investment policy principles: The statement must include, at a minimum, the methodology for assessing investment risk, the risk management processes applied and the asset allocation strategy followed, taking into consideration the pension liabilities type and duration, as well as the investment policy’s environmental, social and governance factors. The statement must be published on the pension plan manager’s website and be reviewed at least once every three years.
  • A new limit, for plans that provide for vesting of pension rights (even if partial), on the period of time before vesting begins: The time period before vesting begins may not exceed three years from the employee’s date of participation in the plan. If the plan stipulates a minimum age for vesting, that age may not exceed 21. These changes had been legislated in 2018 to transpose the EU Mobility Directive;2 however, Law 27/2020 clarifies that they also apply to private pension plans.

Employer implications

Among employers surveyed by Willis Towers Watson, 44% offer supplemental retirement benefits, generally in the form of a funded DC arrangement. Most of these companies have their own pension fund, though some use direct insurance. A small number of employers offer a DB plan (5%) or a hybrid DB/DC plan (around 10%). Although the primary direct responsibility for implementing the changes falls on external pension fund managers, employers and their employees will be affected. Employers that provide pension fund arrangements should analyze the reforms and work with their fund managers to ensure that resulting modifications to fund provisions, governance and communication processes are appropriate.

Footnotes

1. Directive (EU) 2016/2341 on the activities and supervision of institutions for occupational retirement provision (recast)
2. Directive 2014/50/EU on minimum requirements for enhancing worker mobility between member states by improving the acquisition and preservations of supplementary pension rights

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