Some misguided employers may view Bermuda's mandatory employee pension scheme as a drain on cash flow, but there are clear benefits to be gained by an employer who sponsors an employee benefit scheme or contributes to a retirement scheme.

One obvious benefit to maintaining a pension scheme is to be in compliance with the law.

The National Pension Scheme (Occupational Pensions) Act 1998 (the Act) requires every employer of a Bermudian to maintain a pension plan that is registered with and regulated by the Pension Commission in accordance with the Act. The statutory minimum employer contribution per employee is currently five percent of pensionable earnings. An equal amount is payable by the employee as a deduction from salary.

The statutory minimum employer contribution is not subject to payroll tax. However, any employer contribution in excess of the statutory minimum will be taxed. On the other hand, any amount paid by the employee in excess of the statutory minimum is not taxed.

An employer may set up an employee benefit trust (EBT) in addition to its registered pension scheme. Typically, an EBT is established as a discretionary trust that provides for non-contractual benefits to employees, their spouses and dependants. An EBT may provide for lump sum death benefit for in-service employees, disability insurance, medical insurance, discretionary bonuses and even employee loans either interest free or interest bearing repayable out of salary.

An EBT is normally funded by an initial contribution plus a series of periodic contributions. EBT assets may include shares or other securities and cash. Contributions are usually made at the discretion of the employing company. The assets are transferred from the sponsoring employer to a trustee who is separate and independent of the employing company and who holds the assets for the benefit of the employees and other trust beneficiaries. This segregation of assets is fundamental to the asset protection feature discussed later.

The trustee should be provided sufficient information by the employing company and its employees to enable it to exercise its discretion in awarding benefits. The trust may provide for the establishment of a committee constituted by the employing company who will consult with the trustee on matters pertinent to the trust.

In Bermuda, employer contribution to an approved pension scheme, retirement, life insurance or health plan is not subject to payroll tax.

Funds held in a pension or EBT provide asset-protection benefits to both the employer and the employee since they are generally protected from creditors should the employing company become insolvent or declare bankruptcy.

Where property of an employer is sold pursuant to a court order, the Act protects employees. It provides that the proceeds of sale will not be distributed to a secured creditor until the court has made provisions for the payment into a pension fund of any amounts due in respect of contributions payable by the employer. This means that employer contributions due and unpaid are also protected.

This asset protection feature may seem a somewhat distant consideration to a cash-strapped employer. However, an EBT may provide an employer and employee with a mutually acceptable alternative compensation arrangement by which employee remuneration may be deferred thereby making cash available to the employer for current business expenses.

For instance, an employee benefit plan may warehouse company shares to be awarded under a share incentive scheme linked to individual performance and company profits. In order to encourage employee retention, the scheme may be designed so that the benefits will be lost if the employee leaves prior to a designated vesting period. Alternatively, the benefit may take the form of a share appreciation right, with the award values related to the movement in the value of the company shares from the date of the grant to the date the award vests.

The benefits to the employee of pension trusts or other EBTs cannot be overstated. Under the Act, subject to the rights of a spouse pursuant to a property settlement or a court order, money payable under a pension plan is exempt from execution, seizure and other process taken by a creditor. The asset protection feature attaches to a retirement product or annuity which is purchased with money from a pension plan.

The Act makes no distinction between the statutorily mandated portion and other voluntary contributions (by employer or employee) to the plan for the purpose of asset protection. Therefore to the average employee whose financial net worth would not be significant enough to warrant the establishment of a private trust, a pension plan provides the asset protection and saving feature of a private trust without the administration costs.

Under a Bermuda registered pension plan, the employee is entitled to designate a beneficiary with respect to the assets held in the plan thereby having the benefit of freedom of disposition of his pension benefit without the necessity of a will. This may have the effect of reducing stamp duty due and payable on probate.

Attorney Gwyneth Taitt Carey is an Associate at Appleby Spurling Hunter, and a member of the firm's Trusts Practice Group. A copy of Ms Taitt Carey's column can be found on the Appleby Spurling Hunter website at Appleby Global This column should not be used as a substitute for professional legal advice. Before proceeding with any matters described herein, persons are advised to consult with a lawyer.