Building up the benefits
What is done co-operatively often produces better results than doing the same thing individually – particularly in pensions. This simple idea underpins the Construction Federation Executive Pension Scheme (CFEPS) in Ireland.
This pension plan was set up in 1971 to give access to high quality, low cost pension arrangements for construction administrative and executive staff by the Construction Industry Federation, the employers’ body, who administer it on a not for profit basis.
When a group of 320 employers approach investment managers and insurance companies as one, they have muscle they do not have individually and can negotiate “very significantly enhanced terms for the members”, points out Phelim O’Reilly, who is general manager of the scheme, based in Dublin. “At the heart of CFEPS is the passing on of these benefits to the scheme members.”
The scheme has been very successful in doing just that, he maintains. “We are very confident that there is not another such competitive scheme in the country, with the possible exception of the scheme for the building operatives - across the way.” He is referring here to the separate arrangement for the rest of construction industry employees, which is run on an industry-wide basis from offices just next door.
In these days of increasing emphasis on proper pensions governance he points to the concept of central trusteeship embodied in CFEPS, which he regards as a highly attractive feature. Trusteeship is of growing importance in pensions, but also increasingly onerous, he says, adding: “It is even harder going if it is done employer by employer.”
The scheme currently has 10 trustees drawn from across the industry. “They act for the scheme in a voluntary capacity and we have attracted some of the best brains in the business, I believe.” As an actuary, with a legal qualification and a degree in philosophy, O’Reilly should be a fair judge on that score.
“There is considerable experience within this group of trustees, since they have been dealing not just with one employer, but with over 300 employers. Also, they are in a very strong position to act independently, since they are not concerned with their own arrangement,” he says. “We believe that we are obtaining top-class trusteeship, but without having to pay the costs of professional trustees.”
The trustees meet about eight times a year, but thanks to a range of sub-committees, the different areas can be delegated, thus easing the burden. “These committees help keep things from becoming too onerous. So we have an investment sub-committee, which meets with the active manager quarterly and the passive manager yearly. It also does a root and branch review of the investment process every three years and brings recommendations before the main group of trustees.”
The claims sub-committee looks at the processing of death and ill-health benefits. “The experience these trustees have in understanding the often very significant issues involved for beneficiaries means they are considered by people who are familiar with the area.”
The regulation and legislation sub-committee keeps the scheme abreast of the changes here so that it is ready to address any changes required. “The planning and marketing sub-committee looks after the medium term strategy for the scheme,” says O’Reilly, who believes this delegated approach proves to be a very efficient way of operating. “It means that the job gets done properly, which would probably happen only rarely among 320 firms doing it individually.”
With some 2,100 active members across the 320 or so firms, O’Reilly points to the terms that can be obtained for the life and other insured benefits. “We broke this business every two years in the insurance market as a group and can obviously obtain much better terms than if each employer went into the market with just a few employees each.” With a total annual income inflow of E30m, there is considerable interest from the asset management community.
“The proof of the pudding in our view is what we deliver to members, particularly in terms of costs,” says O’Reilly. He likes to contrast what the CFEPS offers with the new Personal Retirement Savings Accounts (PRSAs), which has restrictions on charges. “Though PRSAs do not provide much by way of consultancy, advice or documentation, they are perhaps the only other comparable scheme, which is fully up-front about its charging structure.” The standard PRSA structure is a 5% bid-offer spread and a 1% annual management charge. “Our charges for all employers for a full service level of support is 0.3%pa management charge and 5% bid offer spread in the funds.” There are no surrender penalties, no special fees, no initial units charges, he points out. “We could not be more transparent.”
All advisers are reviewed annually by the trustees, and that includes O’Reilly and his team at the CIF, which is in the middle of a five-year administration contract to run CFEPS. As a former partner with Mercer, who joined the scheme in 1999, he knows what level of services to expect from the different providers.
The structure of the scheme enables each employer to decide whether they want a defined benefit or contribution arrangement for their executives. “About 80 of our schemes are DB, but we are not seeing any new DB plans being set up.” There is flexibility as to what benefits are included or not, such as life assurance.
The administration is handled by the CIF team. “Our system has to be able to cope with everything on an employer by employer basis.” About half the active members by number are on a DB basis and the balance on DC, O’Reilly reckons. “We have a cash fund, a fixed income fund, and a ‘balanced managed’ fund.”
The philosophy of the scheme has always been that the pension is ‘bought out’ at the point of retirement, for both DB and DC plans. “Therefore the DB arrangements have no pensioner liabilities. As a consequence, our liability profile is not as mature as for other schemes, with a similar age profile.” So the decision was taken to tilt the equity and property exposure of the managed fund above the average for such funds in the Irish market by an additional 10 percentage points.
“These funds usually have a
75% exposure to real assets, and we took the decision to up this to 85%,” he says. And with immaculate
timing, the scheme made this shift in February 2003 the week before the Iraq conflict. “We have what we call ‘an aggressive balanced fund’, which also acts as the default fund. The trustees are currently considering whether this is to be a permanent stance, or to be reviewed more tactically if markets become overheated.”
These three choices enable members to adjust their risk profiles as they wish or in response to the scheme actuary’s recommendation when reviewing the DB plans. “With anything up to 80% of Irish funds below the funding standard currently, only 30% of our DB schemes are below this requirement, thanks to our approach on pensioner liabilities.”
What happens on retirement is that the pensioner is transferred into a ‘pensioners fund’ within the scheme, with matched assets to the liabilities. Currently this fund stands at over E100m. “The aim is that the actuary matches the cash flow. This fund is in surplus and there is no reason to think it will go otherwise.”
While employers are urged at retirement to check the market for better annuity rates, the CFEPS approach is to offer rates generally 5% more competitive than the
market, as it strips out commission and any profit elements insurers build in.
As index linked pensions are provided by some employers, the fund holds index linked government bonds. “We are told we hold 25% of the total index linked bonds issued in Ireland! We are among others lobbying for more issue here as these issues will mature in due course.”
He is concerned that matching could become more difficult in time, but the scheme is considering how these problems would be best addressed. “We could look at French index linked stock, but then there is no absolute parallels between Irish and French inflation rates.”
As retirement age comes closer, members can switch to the fixed income fund, but currently there is a move to the cash fund as people want to avoid the negative impact of interest rate rises and be ready to take advantage of higher annuity rates.
The managed fund is 55% on an active basis, managed by Bank of Ireland Asset Management, and 45% passively managed by Irish Life, which also runs the fixed interest fund passively.
“Returns have been well ahead of our peers, in the Mercer managed fund survey we came in 2.3 percentage points above the average in the 12 months to end of May 2003, and 2.1% over the three-year period.” He expects this year’s returns to be again well ahead of the market.
One of the main tasks of CFEPS is to bring the message to more in the construction industry. “We have just taken on an additional person to help develop this.” The potential for new business is there as there are around 5,000 employers all told in the industry. “We have a great product and message and so we hope to grow the scheme significantly. Up to now we have been looking after what we have, now we want to grow the benefits of the economies of scale, while keeping our standards of quality in place.”