Trustees and employers have to focus as a matter of urgency on producing funding proposals that are viable and sustainable over the long term.
Monday 22 June 2009: At the launch of The Pensions Board, Annual Report and Accounts 2008 by the Minister for Social and Family Affairs, Ms. Mary Hanafin TD today, the Board emphasised the serious losses sustained by both defined benefit and defined contribution schemes in 2008. Despite the difficult environment in 2008, the Board maintained its regulatory focus on supervision and compliance while at the same time overseeing the introduction of new legislation to support the future security of pension provision.
Speaking at the launch the Chief Executive of The Pensions Board, Mr. Brendan Kennedy said:
“2008 was an extremely difficult year for pension savings, and the retirement plans of very many individuals have been badly affected. The falls in investment markets worldwide in 2008, which continued in early 2009, have resulted in sharp falls in the value of most defined contribution pension savings, whether occupational pensions, PRSAs or personal pensions. There has also been a significant deterioration in the solvency of defined benefit schemes where very few schemes now meet the funding standard, and a small number do not have enough assets to meet the liabilities of current pensioners.”
Although pension losses were unavoidable, the experience of 2008 was worse than it could, or should, have been. Mr. Kennedy stated:
“Too many schemes did not take account of the investment risks they were running in 2008. Too often it seems that schemes’ primary goal is to keep contributions to a minimum and they give little or no thought to risk.
As highlighted in previous years, the Board is concerned that the investment and funding of too many defined benefit schemes are based on aggressive investment return assumptions and do not take enough account of investment risks and downsides. Defined benefit scheme funding must be based on realistic assessments of investment returns and of life expectancy. It is not appropriate for trustees to focus solely on minimising contributions and satisfying the funding standard: a scheme needs to be sustainable for the long term, and trustees must therefore consider realistic costs, investment risks, and the ability and willingness of the employer to support the scheme.”
Following the introduction of legislatives changes in the April 2009 Social Welfare and Pensions Act, the Board extended the deadline for defined benefit schemes to submit funding proposals for approval. In order to meet these deadlines trustees and employers will have to focus, as a matter of urgency, on producing funding proposals that are both viable and sustainable over the long term.
The Board is equally concerned by how poorly defined contribution schemes have performed. Defined contribution scheme members should be provided with adequate and understandable explanations of investment choices and risks. All scheme members should take an active role in their pensions and, if they do not understand what is provided to them, they should talk to their scheme trustees or pension providers.
Emphasising the importance of the day-to-day operations of a scheme, Mr. Kennedy stated:
“The most important influence on whether a pension scheme can meet its obligations is not regulation, not the funding standard, but the prudent management of that scheme by its trustees and the support of the sponsoring employer on an ongoing basis.”
Focusing on supervision and regulation Mr. Kennedy explained the Board’s risk based approach:
“The Board operates a pro-active supervisory approach based on a hierarchy of risk priorities. The misappropriation of scheme or PRSA assets including the failure to pass on contributions are of highest priority for the Board and our supervisory resources are deployed accordingly. In 2008 a major concern for the Board was failure by some construction sector employers to pass on to the pension scheme money they had deducted from workers’ pay packets. Our investigations and action in this area have benefited from the assistance of the trustees and administrators of the Construction Workers Pension Scheme (CWPS), the Garda Fraud Squad, the Pensions Ombudsman, the Office of the Director of Corporate Enforcement, and other agencies.”
Other highlights in 2008 were:
- A notable addition to the Board’s supervisory powers was the introduction of the regulation of pension scheme administrators under the 2008 Social Welfare and Pensions Act. From 1 November 2008 the trustees of every scheme (nearly 100,000 schemes) had to appoint a Registered Administrator (RA) to carry out specified core functions for the scheme. By the end of 2008, 192 firms had been added to the Board’s Register of Administrators which is available on the Board’s website.
- During 2008 the Board opened 181 new investigation cases.
- During 2008, on the spot fine notices were issued to trustees of 23 defined benefit schemes concerning their failure to submit AFCs for their respective schemes to the Board as required by the Pensions Act.
- Fine notices were also issued to six employers for their failure to respond to the Board’s request for certain information in respect of their mandatory employer obligations to provide access to pension provision through a PRSA to their employees.
- The Board also brought four successful prosecutions in 2008 against employers for their failure to respond to its request for information in respect of their mandatory employer obligations to provide access to pension provision to their employees.
- In March 2008, the Board successfully applied for an order in the High Court directing an employer in the construction sector to pay arrears of contributions of €186,825. The Board also instigated criminal proceedings under the Pensions Act against this company and one of its directors which came before the District Court on 24 September 2008. The defendant failed to appear in court and a bench warrant was issued for the director’s arrest which, at the time of writing, is still with the Gardaí for execution.
Speaking about the Government’s response to the public consultation process for the Green Paper on Pensions, Tiarnan O Mahoney, Pensions Board Chairperson, noted:
“The Government has the difficult task of examining the various issues raised through the consultation process during a rapidly changing economic and pension landscape. The outcome of these deliberations should result in a comprehensive framework for the future of pension policy in Ireland, and provide a stable environment within which Irish people can provide for their retirement.”
The Chairperson went on to say:
“The investment losses since 2007 have been so great that some people are asking whether it makes sense to save for retirement at all, however, Pensions Board’s research shows that eight out of ten of us don’t consider that the State pension alone would be adequate for our retirement. Therefore we must save to provide additional retirement income and we must learn lessons from our recent experience. The standard of living of this generation is considerably higher than in the past, we are typically living longer and healthier lives and as a result, pensions are considerably more expensive. This is a fact that must be reflected in our retirement planning. However, too often it is not. There is often a disconnect between the pensions many expect to receive and the contributions that they make or are being made on their behalf.”
Throughout the year the Board continued to provide technical support and advice to the Minister for Social and Family Affairs, her Department officials and the Government, as Ireland tries to achieve stable pension provision during a time of international uncertainty.
The Report is available on www.pensionsboard.ie.
For further information, please contact:
David Malone Tel: (01) 613 1900
Head of Information
The Pensions Board
Andrew Nugent Tel: (01) 613 1900
Assistant Head of Information
The Pensions Board
Jackie Gallagher Tel: (01) 475 1444 / 087 237 1838
Q4 Public Relations
2008 at a glance
- At 31 December 2008 there was a total active membership of 852,119 in occupational pension schemes on the Board’s register, up from 824,709 in 2007.
- The total number of PRSA contracts in force was 155,632 up from 130,709 in 2007.
- The Board received Actuarial Funding Certificates (AFCs) in respect of 402 schemes in 2008. Of these, 279 (69%) indicated that the schemes in question satisfied the funding standard. The remaining 123 schemes (31%) failed to satisfy the funding standard. In 2007, 81% of the schemes that submitted certificates that year satisfied the funding standard.
Legislative Changes 2008/2009
- In September 2008, The Pensions Board granted a six month extension to the deadline for defined benefit schemes to submit funding proposals for approval.
- In December 2008 the Minister for Social and Family Affairs introduced further changes to the rules governing defined benefit scheme applications for extended funding periods under section 49(3) of the Act and followed up in the April 2009 Social Welfare and Pensions Act with a number of further changes to the Act. The key changes included in the 2009 Act are in Section 48, where guaranteed post retirement increases are demoted from the priority order. Section 50, extends the category of benefits that can be reduced by Pensions Board direction to deferred benefits and post retirement increases and in Section 50A, trustees of a scheme may in specified circumstances make such amendments to the scheme as they deem appropriate with the consent of the Board. In order to allow pension scheme trustees to consider the effect of these changes and to discuss them with their sponsoring employers The Pensions Board has decided to further extend the deadline for defined benefit schemes to submit funding proposals for approval.
- In December 2008 the Minister for Finance, announced an option for members of defined contribution occupational pension schemes to defer the purchase of a retirement annuity with their pension funds for a specified two year period.
- Revised regulations introduced by the Minister for Social and Family Affairs mean that from 1 July 2009, members of defined contribution schemes will be provided with estimates of what pension they may receive when they retire.
- Guidelines on these changes are available on The Pensions Board website.
The Funding Standard
The funding standard was introduced in 1991 in order to set out the minimum assets that a defined benefit pension scheme must hold and what steps must be taken if the assets of the scheme fall below this minimum. Under the Pensions Act, Defined Benefit schemes are required to submit an Actuarial Funding Certificate (AFC) to the Board every 3 years. An AFC indicates whether or not a scheme could meet all its liabilities were it to wind up on the effective date of the AFC. If the AFC indicates that the scheme is underfunded this triggers a requirement that a Funding Proposal be submitted to the Board which must outline how the scheme intends to bring itself back to full funding of its liabilities by the time of the preparation of the next AFC (i.e. within 3 years). In certain circumstances the Board may allow for the trustees of the scheme a longer period than 3 years in which they propose to rectify the underfunding of the scheme.