With its enviable reputation in offshore trusts, pensions and insurance, Bermuda is an ideal jurisdiction for employers to establish international pension and employee benefit plans (IPPs).
Global organisations may consider establishing Bermuda IPPs for employees who work outside their home country or the home country of both the employees and employer. Advice should be obtained in the relevant home country jurisdictions prior to establishing an IPP.
The IPP’s trust instrument and rules (sometimes called the pension plan or scheme) set out the IPP’s terms including the requirements for contributions, vesting and benefits. The terms of the pension plan to a large extent determines the level of flexibility of benefits and investments offered by Bermuda IPP.
The advantages of Bermuda IPPs can include:
Less regulation when compared to pension plans subject to home country regulations (for example, the Employee Retirement Income Security Act of 1974 in the United States and the Pension Act 1995 and Occupational Pension Schemes (Investment) Regulations 2005 in the United Kingdom).
Investment freedom as Bermuda IPPs may invest in a wider range of permissible investments compared to most home country pension plans. Bermuda IPPs may be established to provide for self-directed investment options.
Flexibility in the design of benefits. Bermuda IPP’s may pay lump sums and may offer a range of benefits under insurance linked contracts including death benefits and annuities. Bermuda is one of the largest centres in the word for insurance business and there are many providers who offer a variety of products.
The trustee of a Bermuda IPP may delegate the investment of the trust fund to an investment manager and the day to day administrative tasks to a specialist administrator. The trustee may also invest the IPP’s assets and facilitate provision of benefits by entering into an insurance linked securities contract with an insurer. Bermuda IPPs may be established as self-directed plans whereby the member may select his or her own investments. Often the pension plan or investment manager may make a number of funds and investments available which the member may select based on his or her risk tolerance.
Lower administration costs overall compared to home country plans as a consequence of less complex regulation and lower administrative burden.
Bermuda does not impose income tax, capital gains tax or withholding tax.
No Exchange Controls. Payments can be made from a Bermuda IPP in any currency free from exchange controls.
Single Plans may be used by employers to cover employees who move from one country to another. This may avoid employees who move from jurisdiction to jurisdiction having to join separate pension plans in each jurisdiction and experiencing a fragmentation of pension benefits as a result.
Umbrella Plans may be established for a group of different and, on occasion, unrelated employers sharing similar needs, thereby reducing the administrative costs to each employer and allowing the IPPs’ investments to be pooled.
Unlimited duration - Bermuda trust law does not impose a perpetuity period over trusts except on trusts holding Bermuda land. This means that IPPs established in Bermuda can operate for as long as necessary without being forced to be wound up at an inconvenient time.
Access to Bermuda’s strong insurance market to provide benefits and solutions as required by IPPs.
Stable political and legal environment - Bermuda has a strong legal system with appeals from its Supreme Court determined by the Privy Council in the United Kingdom.
FATCA Compliant Plans - Pension Plans (including prescribed retirement products, see further below) registered under Bermuda’s National Pension Scheme (Occupational Pensions) Act 1998 (NPSA) are exempted from reporting requirements under US Foreign Account Tax Compliance Act (FATCA).
Regulated Trustee Option - Trustees who provide trustee and administration services to trusts (including IPPs) as a business are required to be licensed under the Trusts (Regulation of Trust Business) Act 2001 (TRTBA) and comply with its requirements including the code of practice and statement of principles issued under that Act. Licensed Bermuda trustees, such as Appleby Services (Bermuda) Ltd., have considerable experience acting as trustee for IPPs. There are many advantages to appointing an independent licensed trustee.
Private Trust Companies (PTCs) - PTCs are generally exempt companies formed for the sole purpose of acting as trustee for one or more trusts that are connected in some way. The PTC may not carry on business as a trustee by, for example, offering its services to the public. Employers may find use of PTCs as trustee of an IPP attractive if they wish to have, for example, employee and employer representatives on the board of the trust company, possibly along with trust professionals. Use of PTCs may also be attractive if wealthy families, as part of a family office, wish to run a pension fund for businesses run by the family. The directors and officers need not be Bermuda resident. The PTC may be established as a company limited by guarantee or as a company limited by shares which are owned by a purpose trust if an objective is to keep the PTC off the employer’s balance sheet.
Privacy and Confidentiality - Unregulated IPPs are not required to file any documents with the Pension Commission or any other regulatory authority in Bermuda. For IPPs registered under the PTFA, documents filed with the Minister of Finance, Registrar General or Pension Commission as the case may be, are not available to the public or listed on a public register.
FATCA reporting is carried out directly by the trustee to the Internal Revenue Service under a model 2 intergovernmental agreement with the United States thereby avoiding the requirement, which applies for jurisdictions who have adopted a model 1 FATCA intergovernmental agreement, to report information to the Bermuda Government as a first step.
Pension Trust Funds Act 1966 (PTFA)
In Bermuda, there is no requirement for IPPs to be registered and consequently Bermuda IPPs may be unregulated. Global organisations that qualify for registration may consider it attractive to voluntarily register IPPs under Bermuda’s PTFA. It is understood that in some home country jurisdictions, voluntary registration under the PTFA may assist the IPPs (and the benefits provided to members) to qualify for a favourable designation for tax purposes in their home country jurisdictions.
The PTFA provides minimum standards with which IPPs are required to comply. Importantly, the PTFA does not preclude the availability of the benefits listed above; orimpose restrictive or onerous administration requirements
The schedule to the PTFA requires the following matters to be covered in the IPP’s rules in order for the IPP to qualify for registration:
The whole of the objects for which the IPP is established;
The appointment and removal of trustees;
The vesting in the trustees of all property belonging to the IPP;
The types of investments permitted by the IPP;
The making of contributions to the IPP by the employers of persons employed in the undertakings in connection with which the IPP is established;
The contributions payable to the IPP and the rates of benefits payable or the method of calculating the benefits payable;
The conditions upon which persons may become or may cease to be respectively, contributors to and entitled to benefits from, the IPP;
The circumstances in which the IPP may be wound up and the manner in which the IPP’s assets are applied in that event
The method by which the IPP’s rules may be amended;
The preparation of all statements of accounts, balance-sheets and reports for the IPP required by the PTFA; and
The supply on demand to every person who is or has been employed in an undertaking with which the IPP is established, of a copy of the rules of the IPP and of the latest statement of accounts, balance-sheet and report prepared in accordance with the requirements of the PTFA.
The trustees of an IPP registered under the PTFA are required to annually, prepare an audited statement of accounts and balance sheet of the IPP; at least once every five years, cause an investigation and report to be made by an actuary regarding the financial condition of the IPP; and provide a copy of the abovementioned documents to the Registrar-General within 12 months after the close of the period to which it relates
The PTFA provides that the abovementioned documents submitted to the Registrar-General are not available for inspection by any member of the public.
An IPP registered under the PTFA may apply to Bermuda’s Minister of Finance for an assurance that the IPP will not be subject to income or capital gains taxes for a specified period if Bermuda introduces such taxes.
NATIONAL Pension SCHEME (OCCUPATIONAL PENSIONS) ACT 1998 (NPSA)
Pension plans and prescribed retirement products registered under the National Pension Scheme (Occupational Pensions) Act 1998. While such plans may be subject to greater regulation are exempt from reporting details of accounts held by US persons pursuant to the intergovernmental agreement between Bermuda and the US (IGA) in respect of the implementation of FATCA.
NPSA was introduced primarily to ensure that Bermuda resident employers provided pensions to Bermudian employees and husbands and wives of Bermudians. However, a number of pension plans registered under the Act include members who do not fall within this category and some include persons who are US citizens.
In certain instances, where, for example, an international employer or pension plan has a sufficient nexus with Bermuda, it may be possible to explore registration of such plans under the NPSA as prescribed retirement products with the intention of qualifying for exemptions under international reporting obligations under FATCA.
It is also possible in certain cases for a prescribed retirement product to receive exemptions from a number of requirements of the NPSA which are ordinarily imposed on pension plans (otherwise registered under the NPSA) thus preserving the ability of the prescribed retirement product to offer flexible benefits such as lump sums. Each application for registration of a prescribed retirement product is considered on its merits by the Pension Commissioner in accordance with the NPSA.
All jurisdictions promoting FATCA compliant pensions or exemptions from FATCA reporting should acknowledge the wider context of development of international reporting standards. In early 2014, the Organization for Economic Co-operation and Development (OECD) released a framework document for the Automatic Exchange of Information, frequently referred to as the Common Reporting Standard (CRS). The CRS is ultimately expected to become the global standard for automatic exchange of tax related financial information.
There are a number of areas where the CRS differs from FATCA and consequent international governmental agreements. Significantly, the CRS does not have exemptions from reporting for low risk non-financial entities such as regulated pensions (not just in Bermuda but in all jurisdictions). Fortunately, the first exchange of information is not anticipated until September 2017.
There are a number of factors impacting upon provision of international pensions plans at the present time. Bermuda IPPs are able to provide and facilitate innovative solutions for global organisations considering provision of pension funds to benefit their employees.
Ashley is a senior associate and member of Appleby’s Bermuda Private Client and Trusts practice group. His work primarily consists of providing advice and drafting key documents regarding the creation, management, re-structuring and termination of private and commercial trusts with a particular emphasis on pension trusts.