Putting new building blocks in place
The pension scheme for construction industry workers in Ireland is very different to other Irish plans. Not only is it an industry-wide scheme, it is also a statutory scheme. “Apart from the national social welfare system, ours is the only statutory scheme in Ireland,” says Pat Ferguson, administrator of the Construction Federation Operatives Pension Scheme (CFOPS), in Dublin.
He explains: “The scheme arose out of an agreement between employers and trade unions in the construction industry that an existing voluntary scheme would be made statutory, so that all employers in the construction industry would have to provide an occupation related pension, as well as sick pay and death in service benefits for all employees. It became enshrined in law in 1969, by being a registered agreement under labour law, the only one in the country relating to pensions.” So it is compulsory for employers to belong to the scheme.
The scheme also differs from other Irish schemes in the way it operates. “It is neither a defined benefit nor a defined contribution scheme, being a hybrid between the two,” Ferguson explains. “Once employers pay over the weekly contribution in respect of each employee, they have no further obligations to underwrite the fund, as in a DB scheme.” He adds that, with 5,100 employers in the scheme country-wide, “it would be a nightmare to have them underwrite the scheme”. The scheme is responsible for determining how much benefit it can undertake to pay out of its annuity fund, once it knows the contribution rate it is going to obtain from the employers and scheme members
CFOPS was set up because the constant movement of people within the construction industry called for a scheme where employees did not have to worry about transfers, or any costs or losses when they moved from one employer to another.
Each year employers and unions negotiate a pensions contribution rate, which is always an increase on the previous year. “Based on the negotiated contribution rate and the return obtained on the fund’s investments in the previous year, the actuary establishes an accrual rate for each weekly contribution – in the form of what benefit that contribution will buy at retirement age. This is how we allow for fluctuations in the return of the fund,” Ferguson says.
For example, for members under 35, the current accrual rate is E5.59 per weekly contribution, so a full year’s contribution will buy a pension of E209.52 a year at retirement age of 65. The accrual rate varies in 10-year bands for people aged up to 34, between 35 and 44, between 45 and 54, and over 55. “That annual pension is guaranteed. So the total pension at 65 is the sum of all that has been built up on annual basis,” says Ferguson. The current contribution rate is E23.28 per week, split roughly one third employee and two thirds employer. This is equivalent to around 4% of the average construction industry-agreed wage rates.
The operation of the scheme itself is fairly straightforward, says Ferguson. The scheme is run by a board of 10 trustees – five employer trustees and five trade union trustees – with an employer-appointed chairperson.
Currently there are 45,000 active members, 6,500 pensioners, and some 160,000 deferred pensioners making it the by far the largest scheme in the country in membership terms. “What happens is that in times of boom in the building trade, people are sucked into the industry and they will accrue a benefit for as long as they stay in,” says Ferguson. The development of some good bespoke software was necessary to keep track of this number of people, he adds.
In asset size, the fund is modest, a reflection of the low contribution rates. At the end of September 2001, assets were some E403m. “While we were hit by the September 11 events, we finished last year at just 1% or so below this, which was not bad in the circumstances.”
The fund is divided equally into two balanced mandates, one with Bank of Ireland Asset Management and the other with KBC Asset Management. “The balance each other in their strategies, with BIAM being more conservative.” There is a E35m property portfolio, which gives an additional balancing effect. Being diversified in this way helped keep the returns on an even keel he maintains.
The entire trustee board meets each fund manager on alternate months. “This six times a year meetings provide a good degree of investment control oversight. We have an external independent financial expert who briefs us each month before these meetings and advises on the funds.”
The fund managers are expected to perform above the peer group CPMS average for Irish pension funds. “That’s the benchmark we have set them. But our feeling about the peer benchmark is that you are almost heading down the consensus fund road. So we are reviewing this currently, which could result in new parameters being set for the fund managers.”
Ferguson says that the balanced structure has worked well for the fund so there is unlikely to be a move away from that to a specialist approach. “We may set parameters for the different asset classes and measure performance against local indexes rather than the peer.”
The E35m commercial property portfolio is looked after by two managers – Insignia Richard Ellis Gunne, who handle the retail side, and Jones Lang La Salle, who handle the office side, with quite a bit being managed directly by Ferguson. “Over the last three years, we have been restructuring our property. We sold a number of the office blocks and switched the proceeds into retail, as we felt that the excellent returns we had could not continue. We had carried the risk of being all office for too long and needed to broaden in retail and get more balance.
While there has been a lot of member dissatisfaction about the scheme, this not on the issue of it giving value for money, which it certainly has investment returns and for the annuities provided very cost-effectively in-house, Ferguson points out. “So with total operating costs at 5% of income, the scheme is certainly very competitive.”
The real area of difficulty is members’ understanding what their benefits are, he believes. The fundamental problem he reckons is that the contribution rate is very low, which results in low pensions.
So in 1998, CFOPS decided to undertake a major review, which involved an independent survey of scheme members by a market research firm. The review committee’s report was published last year and its conclusions are currently being negotiated by the unions and employers. It recommends a move to defined contribution (DC) style individual account for each member. The committee was persuaded to recommend the switch by figures showing that a member retiring with a personal DC fund would have enjoyed a much better pension.
This fund will have a target benefit, so that when the state old age pension is included, the total pension should be two thirds of the average of industry pay. The committee envisaged a rise in contribution levels to between 5.9% and 8.4% of pay, depending on retirement age. The pensions will be paid from the CFOPS’ fund. “This refinement avoids going into the open market, enabling us to give better and more stable annuities. Since the scheme has been in operation from 1965, the mortality and other data we have on ill-health will allow us to structure our annuity fund much more reflecting the experience of its members. The annuities will be much better than on the open market.”
Initially, the new arrangement will follow the current investment approach, but later the aim will be to give members investment choice. “We feel in time we will need to this. But there will be a lot of education of members to do before we get to that point.”
The move to DC will certainly be a dramatic change for the scheme, Ferguson acknowledges. To give members maximum flexibility, the review committee recommended that CFOPS register with the Pension Board to be a provider of Personal Retirement Savings Accounts, when they become available early next year.
“Reaction to the changes has been very good on the employee and trade union side. On the employer side, while there is going to be a cost increase, it is generally felt that it is no longer socially acceptable for workers to be retiring on a breadline pension. Once agreed it is a blueprint for the future.” He believes the way is clear to introduce the plan next year, when the negotiations are over.