Double life of O’Reilly
The Irish Airlines pension scheme has long experience of working across borders. Fennell Betson reports
If ever Europe had a working model of how pension schemes could operate cross-border, it was encapsulated in the ability employers in Ireland and the UK had to include employees from both countries within their domestic schemes. As Bob O’Reilly, who runs the Ir£1.1bn (e1.4bn) Irish Airlines Superannuation Scheme in Dublin, points out: “We are a dually-approved scheme with members both in the UK and Ireland.” But the UK and the Irish revenues no longer permit this for new arrangements.
Until recently, the plan, which includes not just the state-owned airline Aer Lingus but also Aer Rianta, which runs the country’s airports, had around 10% of its membership based in the UK. “When we set up our arrangements originally, the question of dual approval was not an issue. Pensions both in Ireland and the UK were far less regulated than they are now and there were no great problems for the two revenue and pension authorities give their approval to a scheme that spanned both jurisdictions.” But, by the 1990s, the revenues in both countries, and particularly in the UK, had come to the decision that they would not give dual approval to any new schemes.
“Our basic problem is that it is becoming increasingly difficult to cope with diverging regulatory regimes in both countries for the one scheme. While you can bring in rules to cover just UK employees, some issues affect all employees, such as the disclosure regulations or the minimum funding requirements,” he says. The recent UK pensions legislation brought in substantial tightening of controls, but Irish dual-approved schemes are being given derogation from these under a significant number of headings. “This was because the Irish regulations, though slightly different are still adequate to protect the members. We had the benefit that in 1990 a modern Irish pensions act was brought in, which the UK authorities looked at when bringing in their own legislation.”
At day-to-day level, the authorities work quite well between the two jurisdictions, he says. For example, there is a minimum funding standard formula in Ireland and a different one in the UK, but the British authorities will accept the Irish one as it gives an adequate level of protection. “There is a whole list of areas that they are prepared to run with the Irish approach,” he says.
Aer Lingus staff make up 5,600 of the scheme membership of 8,800, with Aer Rianta accounting for 1,800 and the Irish employees of FLS, a Danish group that bought the airline’s aircraft maintenance business recently, for another 1,400. There is in addition a separate pilots’ scheme, which covers a few hundred of the airline's pilots, and is run on much the same lines as general scheme . Aer Lingus sold off recently its traffic-handling operations at Heathrow, which means that around 650 people are to leave the scheme by the middle of next year to join a new one being set up by Swissport, a subsidiary of Swissair, says O’Reilly. This will reduce the staff coming under the dual approved aspects to a couple of hundred. And should the company set any new subsidiaries in the UK, their employees could no longer be included within the dual approved arrangements.
As the scheme dates back to the 1950s, it has around 3,300 pensioners. “But even though we are a relatively old scheme, we are still immature, as income from contributions and investments would substantially exceed the outgoings on pensions, so we have no liquidity problems,” he points out.
Growth has been fairly dramatic in fund assets, from around Ir£600m in 1995. “There has been a number of factors at work. Membership and contributions have grown, but our stock market investments and our property portfolio have performed strongly,” says O’Reilly.
The fund has outsourced all its investment management apart from the Irish equity portfolio and though it has directly held properties these are managed externally. “Our approach can be described as specialist, in that AIB Investment Managers and Ulster Bank Investment Management look after our gilts, international equities are split between Phillips & Drew in London and Irish Life in Dublin.” Jones Lang Lasalle runs the scheme's directly held properties, but in addition there are some unitised property investments with Irish Life and the Irish Pension Fund Property Unit Trust, as well as a small holding in Irish Forestry Unit Trusts. “In line with other institutions in Ireland, we are increasing our exposure to the Euro-zone in the case of both equities and bonds on a gradual basis and reducing our exposure to Ireland.”
At the last fund year end in March, funds assets were Ir£1.14bn, comprising Irish gilts of Ir£183m (16% of total), Irish equities Ir£225m (20%), international equities Ir£464m (40%) and property £147m (13%). In addition there was cash at £124m, which has since been reduced. “Since then we have seen some very substantial growth in our property assets, as the market has gone through the roof,” he says.
On the bond portfolio, the longstanding stipulation on managers was that they had to hold at least 70% Irish gilts, with 30% overseas at their discretion on an unhedged basis. “What we have done since Emu is to say for ‘Irish’ read ‘euro’, so they must hold 60% in government debt or highly rated issues. They can go 100% euro, if they wish.” On the property side, the fund is unlikely to acquire any new properties directly, due to the very high property specific risk, despite being very pleased with those it holds. “So any new money is going the unitised route. But we are very pleased with the quality of the portfolio.” Overall, property has served the fund very well, he adds.
The fund is able to move to 5% either side of the benchmark. “Overall, we have had very satisfactory performance, when we compare ourselves with other funds of comparable size and we have tended to outperform our benchmark as well.” It is the Irish equities and property that has provided the outperformance, with foreign equities and gilts generally in line with the peers over the longer term.
The fund is considering having its own global custodian arrangement some time in the future, but currently and foreseeably, it lets the managers choose their custodians. “But we do vet the custodians, the fees they charge and so on, and we are happy with their quality. But best practice would suggest that you look hard at having your own global custodian. We are exploring the issue, but have come to no decisions as yet.”
Inevitably, Aer Lingus has employees based around the world. In the US, for example, around 200 employees are in a plan set up there. Of the people working throughout Europe, these fall into two categories, those who are Irish people on assignment usually stay in the home scheme. “Where we have recruited local people in Zurich, Milan or wherever, we have small local arrangements for them, basically insured plans following local practice. Or in some countries, such as France, people may just join the state scheme, as it is so comprehensive.” These arrangements are normally handled locally, with Dublin keeping a watching brief.
With Aer Lingus being groomed for flotation, perhaps later this year, a new set of items emerges on to the agenda. “This is certainly a new ingredient that will have an effect on the pensions front,” says O’Reilly, bracing himself and his team for what could be involved.