changes to the funding standard the impact of legislative changes on defined benefit pension scheme...
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Changes to the Funding Standard
The impact of legislative changes on defined benefit pension scheme funding
David Malone
25 June, 2012
The Pensions BoardEstablished by the Pensions Act, 1990
•Supervision, regulation and enforcement
•Policy, legal and actuarial
•Information and awareness (Delivers NPAC on behalf of the Government)
Numbers in Irish private pensions (as at April 2012)
Company Pension Schemes
532,000 members in 1,098 defined benefit schemes
- 993 schemes with 197,000 members are subject to the Funding Standard
- 335,000 approx are Public Service employees
240,000 members in over 100,000 defined contribution schemes (includes frozen and AVC schemes)
- 50,000 approx are single member schemes
Personal Retirement Savings Accounts (PRSAs)190,000 PRSAs with asset value of €3.03 billion
Personal Pension Plans/Retirement Annuity Contracts (RACs) (200,000 + contracts – Irish Insurance Federation)
Background to Funding Standard changes
• Government announcement October 2011
• Social Welfare and Pensions Act 2012
• Statutory Guidance
• Regulations
What are the key changes?
• Funding Standard Reserve (FSR)
• Funding Proposals (Section 49)
• Benefit Reductions (Section 50)
• Funding Standard calculations where scheme holds sovereign annuities/sovereign bonds (known as S53B basis)
Funding Standard Reserve
Amount:
• 15% of funding standard liabilities less EU sovereign bonds/cash held plus
• Effect on funding standard liabilities of ½% drop in interest rates less the amount by which resources would increase as a result of the same change
Funding Standard Reserve
When interest rates go down - bond asset values rise; however, scheme liabilities also increase as it costs schemes more to purchase annuities. The risk reserve for the impact of a 0.5% drop in interest rates is equal to the difference between the rise in liabilities minus the increase in bond asset values.
Scheme Liabilities
10m
Scheme Assets
Bonds and Cash
5m
Equities
5m
Risk Reserve
calculations
Impact of 0.5% drop in interest rates
= 0.5m
15% of value of
equities = 0.75m
Total Risk Reserve
1.25m
Funding Standard Reserve When does it apply?
• Schemes must check whether they hold FSR from 1 June 2012 and submit certificates from that date.
• Schemes must hold FSR from 1 January 2016 and if they don’t they must file Funding Proposal (FP) but
– If FP end date after 1 January 2016, FP must – anticipate holding FSR
– If Section 50 sought, scheme must satisfy FSR immediately (or at end of FP period)
Funding Standard Reserve
• Unsecured undertakings can be used for FSR in certain cases
• Self-investment/concentration of investment limits don’t apply to FSR
• New Funding Standard Reserve Certificate (FSRC)
• FSRC effective dates follow AFC effective dates
Benefit Reductions (Section 50)
• Board can issue S50 directions where scheme fails FSR
• Clarification around preservation rules
• Board can now specify actual measures (likely to be what’s in application)
• Benefit reductions must be carried out within one month of direction
• Application requirements now in statutory guidance
Statutory Guidance
What is Statutory Guidance?
• Distinct from existing Board guidance
• Binding Legal instrument
• A breach amounts to an offence
• Prescribed by Minister via Funding Standard Regulations
• Can’t be altered without Ministerial consent
Statutory Guidance• Section 42 – FS calculations where scheme holds
sovereign annuities/sovereign bonds (S53B basis)
• Section 47 – Unsecured Undertaking Guidance
• Section 47 – General Contingent Asset Guidance
• Section 49 – Funding Proposal Guidance
• Section 50 – Benefit Reduction Guidance
Deadlines for filing
The later of:• 31 December 2012 or• within 12 months of last scheme year end falling
on or before 31 May 2012
• If funding proposal incorporates reduction under S50, the above deadlines subject to minimum of 9 months from 31 May 2012
What now?
• Trustees assess the current and future position
• Negotiation with the employer
• Decision
• Submit funding proposal
Pensions information
Enquiry [email protected]/
01-6131900
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