Conversion to hybrid scheme prompts investment rev
The face of Irish pensions has seen considerable change since the Construction Federation Operatives Pension Scheme (CFOPS) was set up nearly 40 years ago to provide pensions provisions for many of Ireland’s construction workers. Traditionally, as a DB scheme, it has provided a fixed level of pension and lump sum benefit for every contribution made. However, following recommendations made by an industry sub-committee review in 2001, which looked at the traditional DB scheme and its operations, a process was set in motion to establish a new hybrid DB/DC scheme to replace the existing structure.
In 2002 and 2003, following this review, discussions were held between union and employer representatives in order to take the project forward. As part of the next stage, an implementation sub-committee was established at the end of 2003.
The aim of the new scheme, which includes individual accounts for each member, is that the level of contributions should produce a pension, inclusive of the state pension, comparable to two-thirds of the average member’s salary. CFOPS expects to fund this through significantly increased contribution levels from employers and employees alike.
Generally in Ireland, DC schemes secure pensions through the purchase of annuity insurance contracts. However, a significant feature of the new scheme is the inclusion of a facility for the conversion of members’ accumulated pension assets into annual pension on retirement with the use of a separate annuity fund.
The fund will invest member contributions across a range of investment funds, depending on the age of each member. There will also be specific sub funds for the fund’s other commitments. These include pensions in payment, death in service benefits, scheme expenses and the provision of a contingency reserve fund. The new scheme will employ a smoothing mechanism to allocate investment returns to scheme members depending on the performance of the underlying funds.
The switch from a DB to a new hybrid DB/DC scheme has been a formidable task, involving a number of critical decisions on the structure and detail of the new scheme before it can be successfully established. Issues that the committee has had to consider have ranged from the amendment and replacement of the existing scheme’s legal framework, the structure and management of the investment funds provided to members and the design of benefit options available to members on retirement, death in service and sickness. For overall administration, the committee also took decisions on the specification, design and implementation of a new IT system to ensure the effective day-to-day running of the scheme and to provide essential management information.
The scheme administrator and chairman of trustees, who lead the implementation sub-committee, have had overall responsibility for overseeing the project’s implementation and management. Although review of specific implementation issues has been carried out with the trustee board, the committee has also sought advice from external consultants.
Since January 2004, the implementation committee has met frequently with the scheme’s legal, actuarial, IT and investment advisers to consider the options available in each of these areas. With revised legal documentation now being finalised to establish the new hybrid scheme, a number of tasks have already been completed.
One essential task has been the conclusion of a review of the scheme’s investment management strategy. The existing DB scheme followed a balanced managed mandate with two main investment managers. However, the establishment of a distinct annuity sub fund to match the liabilities for pensions in payment, necessitated the appointment of specialist investment managers to manage a €135m fixed interest portfolio, a €250m global equity portfolios, along with the scheme’s real estate investments. After an initial request for proposal, a short-list of fixed interest managers from both Ireland and abroad was drawn up and in-depth interviews carried out alongside due diligence assessments and site visits.
With regard to the design of benefit options available to members on retirement, and death in service and sickness, a number of actuarial and benefits design items have been investigated, modelled and reviewed by the committee and its advisors. These have included: the range of pension options available to members at retirement, the method of converting members’ accumulated funds into annual pension, the reserving for pensioner liabilities, the smoothing of investment reserves and the structure of the death in service benefits payable under the scheme.
Furthermore, the new IT system’s specification and design was concluded in spring 2004. The system will be integral to the efficient management and running of the new scheme.
Highlights and achievements
By restructuring its traditional DB scheme, the Construction Federation Operatives Pension Scheme has sought to keep abreast of the shifting Irish pensions landscape. The ongoing implementation of a hybrid DB/DC scheme from the existing DB structure for its 63,477 active members, 6,859 retirees and 183,836 deferred members may be proving a significant challenge for the implementation sub-committee, but it has not stopped it moving swiftly. Since 2001, it has remained focused on fulfilling its commitment, carving a decisive path through the formidable range of options, to complete many key tasks prior to implementation.
A notable facet of the new scheme is the use of a separate annuity fund. CFOPS believes this to be a unique approach in the Irish pensions industry in respect to the common practice of DC schemes to obtain pensions through insurance contracts. Another significant feature of the new scheme is a marked increase in the levels of benefit payable on death in service. With many major tasks completed on the new scheme’s benefits design and investment management arrangements, CFOPS is well on track to achieve what it set out to do.