Ireland: A vision of the future?
Is the industry-wide Construction Workers Pension Scheme (CWPS) the shape of things to come in Irish pensions? “We think so,” opines Pat Ferguson, head of scheme administration. “The scheme design has weathered this extraordinary recession and works well.” Set up in July 2006, it superseded a 20-year-old hybrid defined benefit (DB) scheme that was becoming too costly to maintain. The new scheme is a hybrid – defined contribution with pooled assets and a trustee structure, combined with an in-house pensioner fund that invests individual accounts wholly into bonds and cash.
The new scheme is governed by trustees, through a corporate trustee structure comprising 11 directors, including a chairman, with five directors from industry employers and five from the scheme membership. The trusteeship appoints eight sub-committees, which can invite external, third-party consultants from a variety of backgrounds and competences. These are responsible for investment choices, benchmarking, strategic planning, portfolio construction and so forth. The scheme is monitored by the Irish Pensions Board.
Scheme administration is provided by a separate entity – Construction Industry Federation Pension Administration Services (CPAS), which also administers three other CIF related schemes. CPAS collects all pension contributions and ensures their appropriate investment. There are no fewer than 8,459 registered employers in the scheme, a substantial number for such a relatively small number of active members. Current scheme assets amounted to €1.2bn as of end-December 2013.
The Irish building industry was worth around 25% of gross national product in 2006 but now accounts for less than 6% of the same. In the same year, it also provided about 13% of jobs in the Republic, a total now reduced by approximately two-thirds. Since 2009, some 2,000 building firms have gone insolvent. This massive decline accounts for the low ratio of active to deferred members in the scheme. The government thinks that the worst has passed and is introducing a range of tax reliefs due to take force from spring 2014, notably exemptions from capital gains tax on various aspects of the property market. “We hope that these will do a lot to stimulate the industry,” Ferguson says.
The CWPS is a defined contribution (DC)scheme. Benefits depend on member-specific contributions but the scheme offers aggregated annuity benefits to individual members from its in-house pensioner fund. Overheads on this are low and it boasts an average 8% uplift on annuity conversion rates against open market rates. Pension annuity options are available; members can choose single life or spouse’s pensions, and also whether benefits should be paid on a level or index-linked basis.
Death benefits are also offered as part of scheme membership. These comprise the accrued fund value, plus a sum of €63,500 and additional benefit for dependant children. Sickness benefits are paid at €187.55 for the first 10 weeks. At vesting, members with a total entitlement of less than €20,000 can take 25% of their fund tax free, with the balance taxed at their marginal rate of income tax. Those with a large entitlement must buy an annuity income from the pensioners’ fund.
Overall costs for the scheme are low; administrative and investment charges are set at 2% of new contributions, with a further annual charge of not more than 50 basis points of the annual value of accrued member funds.
The CWPS’s assets are allocated across the scheme, with 72.6% by asset value apportioned to member accounts, 18.9% to the annuity fund, 7.1% to a general reserve, 1% in the former members’ reserve fund and 0.4% in the expense and death in service benefit fund. The scheme’s statement of investment policy principles specifies that the annuity fund must be 100% invested in bonds, except for cash reserves. Member assets are collectively invested by asset category with 40-60% in equities, 10-20% in property, and 15-40% in alternatives.
Individual member accounts are unitised and split by age band between eight asset sub-funds, with asset allocation ranging from 90% in real assets to 10% monetary assets for under-45s to 10% real assets, 70% monetary assets and 20% cash for those over 64. There are six other stages from age 45 to 63.
Manager and style diversification are also built into the CWPS structure, and it employs 17 asset managers. In the fixed-interest and cash portfolios, six managers run 39% of total assets by value. Of these, Irish Life Investment Managers has the largest share at 16%, followed by Legal & General Investment Managers with 9%. In July 2013, CWPS announced that it would co-invest €40m in domestic SME loans via the BlueBay Ireland Corporate Credit I fund, alongside the Irish National Pension Reserve Fund. CWPS was advised by the consultancy Acuvest.
In the equity and property portfolio, comprising 35% of total assets, Irish Life Investment Management and State Street Global Advisors manage 8% and 10% of total assets, respectively, in passive portfolios; Principal Global Investors actively manages 7%, while Capital International has a 3% active brief in emerging markets, and a further 7% is actively invested for the medium to long term in property.
No less than 26% of the total portfolio value is in alternative investments. Of this, the largest allocation is 17% to the Fusion Asset Allocation fund, a fund of funds investing in currencies, commodities and hedge funds. Standard Life Investments, BNY Mellon Asset Management, and Ruffer each run 2% in GTAA funds. Irish Life Investment Managers actively manages in domestic bonds with 2% of assets, and Post Advisory Group manages 1% in an opportunistic portfolio.
“Overall, we think we have good diversification in terms of style and manager,” says Ferguson, “I doubt our members could find a lower cost alternative offering the same benefits.” Not only other Irish domestic employers but also those in the UK could learn much from the CWPS design and particularly its solution to the costs of providing pension annuity income.