DB Policy: Work in progress
Legislation to improve DB member protections is under consideration and a bill to implement IORP II is expected by the autumn
At the start of 2017, there were expectations that there would be some significant changes in the pensions framework, driven in part by opposition parties proposing legislation to make if more difficult for companies that sponsor defined benefit (DB) pension schemes to walk away from a deficit, leaving current active and deferred members with reduced benefits.
In the debate on the opposition bill in February 2017, the then minister for social protection, Leo Varadkar, undertook to bring forward a government bill to address the issue. He also accepted the opposition proposal that the Pensions Authority undertake a review of the statutory funding standard, which was criticised by the opposition spokesman as an “actuarial fiction” because of the requirement to set reserves for pensions in payment by reference to the buyout cost, even where the scheme was ongoing and there was no expectation that annuities would be purchased.
The remit given to the Pensions Authority also included a consideration of the feasibility of establishing a pension protection scheme to meet part or all of the deficit in a ‘double insolvency’ situation, where the sponsoring employer also went bankrupt.
In May, Varadkar published the general scheme of the Social Welfare and Pensions Bill 2017 which set out the heads of the bill that had been approved by the government. These included provisions which:
• Required employers to provide a minimum of 12 months’ advance notice (which could be reduced by agreement between the trustees and employer, after consultation with the members) of their intention to terminate their liability to contribute to the scheme, and imposed requirements on the employer to consult with the trustees and the members during that period.
• Reduced the timescale for submission by the trustees to the Pensions Authority of a funding proposal (ie, a recovery plan where a scheme does not meet the funding standard at the certification date) from nine months (or 12 in some circumstances) to six months.
• Provided for the Pensions Authority to impose a schedule of contributions in the event that the employer and trustees were unable to agree a funding proposal by the end of that period, with the contributions under that funding proposal being a debt on the employer.
The Society of Actuaries in Ireland (SAI) submitted a paper to the minister expressing some concerns about the proposals. In particular, it was thought that the advance announcement of the proposals would create a window of opportunity for employers that sponsor schemes where the scheme documents require no notice of termination to take pre-emptive action, and issue a termination notice before the bill was enacted. In the event, this has not happened to any great extent, although the window is still open.
The SAI felt that the introduction of a six-month deadline to submit a funding proposal was not necessary and could be very difficult to meet in practice. Agreeing a funding proposal involves detailed discussions and negotiations between trustees and employer, which may require the involvement of an overseas head office and discussions with trade unions, as well as taking advice from the actuary, legal adviser and perhaps covenant assessor.
The proposals would increase the likelihood that employers would wish to agree funding proposals with trustees, as otherwise the Pensions Authority would determine the contributions payable, based on assumptions over which neither employer or trustees have any say, and the contributions so determined would become a debt on the employer, whereas there was no corresponding provision in relation to agreed funding proposals.
The SAI also pointed out that the text as drafted gave rise to a number of ambiguities and inconsistencies around the operation of the proposals which would need to be addressed before the bill was published. In the event, when the Social Welfare, Pensions and Civil Registration Bill was introduced in the Dáil in July by the new minister, Regina Doherty (Varadkar had been appointed taoiseach in the interim), only the provision introducing a six-month deadline was included, although the minister made it clear that that amendments to reflect the other proposals will be introduced at committee stage. This was scheduled for 9 November but has not yet commenced, and at the time of writing of this article the detailed text had not been published.
The review of the funding standard undertaken by the Pensions Authority has not been published, and it is not known what, if any changes, might be proposed on foot of this report. As mentioned above, the requirement to value pensions in payment at their market buyout cost has been questioned and this has certainly been very onerous during the prolonged period of low interest rates.
It is also very difficult in practice for the actuary to determine the market annuity cost for the purpose of certifying whether the scheme meets the standard and the SAI is considering how these difficulties might be addressed.
The IORP II Directive must be transposed into Irish legislation by January 2019 and legislation is expected in the autumn. The Pensions Authority has indicated that there will be consultation on the proposed changes and one such consultation, on the requirements for the introduction of key functions – internal audit, risk management and (for DB schemes) actuarial – has already taken place.
As IORP II did not introduce any new quantitative requirements, the responsibilities of the actuarial function are similar to those of the scheme actuary already included in the Pensions Act, although the wording of article 27 of the Directive, which is very similar to the corresponding wording in Solvency II, may require some interpretation to make it appropriate for an Irish pension scheme.
The risk management function, and the requirement on the
trustees to produce an own risk assessment on a regular basis, will impose additional duties on trustees, although in many schemes, some risk monitoring and management is already undertaken, usually with significant input from the scheme actuary.
It is hoped that the transposition on the Directive into Irish law will build on existing practices, and not impose an excessive administrative burden on trustees, at least initially.
Other aspects of the IORP II Directive which will provoke some discussion are the provisions relating to the Pensions Benefit Statement, and the requirement for trustees to consider environmental, social and governance (ESG) issues in their investment strategy and risk assessment.
It seems likely that 2018 will be a busy year for DB pension scheme trustees, sponsors and advisers. In addition, there are likely to be other developments in pensions policy, with the taoiseach having stated in September last that a new auto-enrolment pension scheme would be introduced, with the expectation that the first payments into these funds would be made by 2021.
Philip Shier is actuarial manager at the Society of Actuaries in Ireland