The current state of funding of DB schemes has pushed many of the sponsoring employers of these schemes to consider how to minimise their defined benefit liabilities and risks. In order for the liability management process to be successful, a number of key stakeholders need to be managed. These are:
Between agenda items at a recent meeting of the Association of Pension Lawyers in Ireland conversation turned to the type of matters our various firms’ pensions practices are currently working on.
What was surprising was the amount and range of pensions-related litigation. The issues being litigated included scheme wind-ups, employer capital reduction applications and creditors accessing funds within bankrupts’ pension arrangements. The amount of current pensions-related litigation highlights the need to consider litigation risks and strategy at a very early stage in transactions that could prove contentious.
After much talk over the past 2 or 3 years, at last sovereign annuities have become a reality… nearly. This week, I was one of the speakers at the launch of the first sovereign annuity approved by the Pensions Board. Getting to this point is a major milestone in the long journey towards being able to use sovereign annuities. We are not quite there yet though.
One of the speakers at the launch was Anthony Linehan of the National Treasury Management Agency (NTMA). The view in the industry is that sovereign annuities are most likely to be backed by Irish sovereign bonds. Mr Linehan gave a very interesting presentation on the bonds which the State will issue to back sovereign annuities and the process for issuing and pricing those bonds.
It seems that the State will issue what are being called ‘amortising bonds’. These are bonds which will pay out equal annual payments which are made up of a coupon payment and part of the principal which would usually be repaid at the expiry of the bond. They are ideally suited to sovereign annuities.
New statutory requirements relating to funding defined benefit schemes have recently come into law with the coming into force of the Social Welfare and Pensions Act 2012 on 1 May and the publication of various pieces of statutorily binding guidance issued by the Pensions Board on 7 June.
The Act makes various changes to the Pensions Act 1990, principally, its sections relating to the funding standard and revaluation of preserved benefits. The Pensions Board’s guidance sets out the details of most interest. Through various changes to the Pensions Act, much of the Pensions Board’s guidance now has the force of law.
Pension issues can be a major factor influencing merger and acquisition activity. Companies may pull out of deals due to uncertainty around pensions (especially uncertainty over the funding of defined benefit plans). Pension plan deficits are now part of corporate life and how the deficit and the other pension issues will be dealt with needs to be considered early on in the deal. Outlined below are five pension issues we have seen arise in recent transactions and some solutions found to deal with them.
The Pensions Board’s deadline for the submission of responses to its consultation on the simplification of defined contribution pension provision passed at the end of February. The consultation sought views on a number of different issues. These ranged from the number of different pension vehicles to pension adjustment orders to disclosure requirements.
A&L Goodbody have been involved in the drafting of the response of the Association of Pension Lawyers in Ireland. In general, the regulation of defined contribution pension provision works but we consider that it can be rationalised, streamlined and improved somewhat. It is likely that there will be action on foot of the submissions sent to the Pensions Board. We believe that any reform of the regulation of defined contribution arrangements in Ireland will be considered alongside a review of the fees charged by pension product providers. We also believe it will be considered in light of the auto-enrolment regime that was proposed some time ago which Government has indicated will be brought into effect at some point in the future.
We wait to see what reforms will come of the consultation exercise and welcome the fact that this is an area in which the Board is being proactive in seeking to improve the regulatory framework. One key challenge we see with pension provision in general is getting workers and other individuals who are under retirement age to engage actively with retirement saving. Without such engagement, the full benefit of any regulatory simplification will not be seen.
Read more on the Pensions Board’s consultation request on the simplification of defined contribution pension provision
The trustees of pension schemes may from time to time find that they have to exercise a discretion where they have a direct personal interest in the outcome of the exercise of the discretion e.g. because they are members who benefit from the exercise of the discretion – possibly at the expense of other classes of members. Can a trustee in such a situation take any part in the decision over how to exercise the discretion and still comply with his fiduciary duties to members?
The Pensions Board has recently confirmed that they will monitor trustee training compliance on an ongoing basis. Trustees are required to record in the scheme’s annual report that they have received the appropriate training as required by the Pensions Act and within the specified time limits.
Trustees will be interested to note that the Pensions Board has recently published a new edition of The Pensions Board’s Trustee Handbook (Fourth Edition).
The Trustee Handbook provides detailed guidance on trustee duties and responsibilities and sets out good practice for trustees of occupational pension schemes. The Trustee Handbook, in conjunction with the updated free online trustee training facility provided by the Pensions Board, will assist pension scheme trustees in satisfying their training obligations.
1 February 2012 is the cut off time by which trustees, who were trustees prior to and after 1 February 2010, must have completed their trustee training. Trustees appointed since 1 February 2010 had to receive training within six months of their appointment.
Every trustee of an occupational pension scheme (except a death benefit only scheme) must undertake trustee training in accordance with the Pensions Act. If you are an employer who operates a scheme you must arrange for the trustees of that scheme (other than a professional trustee or a pensioneer trustee) to receive appropriate training. A failure to do so could result in fines and even imprisonment.
In light of the above, it would be prudent for both employers and trustees to ensure that they have met their obligations and, in particular, that trustees, who were trustees on 1 February 2010, have undertaken relevant training prior to the 1 February 2012 deadline. An alternative course of action could be to replace the current trustees with a professional trustee (who the employer is not required to arrange training for) before 1 February 2012.
As the management and governance of pension schemes continues to increase in complexity and risk both sponsoring employers and trustees of pension schemes are increasingly looking towards appointing professional advisers to bring knowledge, experience, and expertise to the governance and management of their pension schemes in an effort to reduce risk and achieve cost efficiencies.
It is important for trustees and the sponsoring employer (who ultimately may be footing the bill) to understand the nature of the relationship between them and the advisers they decide to appoint and to be prepared to question them (and the agreements governing the relationship) critically.
Pension Scheme Administrators
Many sponsoring employers and trustees appoint pension administrators and consultants to assist in relation to their pension schemes. The written agreements documenting such appointments should be reviewed.
Leaving aside the actual services to be provided by the administrator or consultant and the fees for doing so (which the trustees and sponsoring employer will need to be satisfied with) the key issues you must consider are:
- Who should be party to the agreement?
- What should the obligations and duties on the parties be?
- Who should be liable for what and what is a reasonable limit?
- How will conflicts, complaints and data protection be dealt with?
- Who controls the amendment of the agreement?
- Can the service provider get someone else to provide the service?
- How will the relationship be terminated?
Many sponsoring employers appoint professional or independent trustees. This is often under a service agreement or letter of engagement. Many of the issues outlined above in relation to administration agreements will also arise in this context. It is imperative that you understand the effect of the key provisions of such documents and the relevant provisions of the pension scheme. Particular consideration needs to be given to the charging clause and indemnity and exoneration provisions under the scheme’s governing trust documentation and how these interact with the service agreement appointing the professional trustee. If such written agreements are not already in place this should be rectified.