What is the Value of a Promise?

 

It is estimated that 90% of defined benefit schemes in Ireland are in deficit and that the pension schemes of 200,000 individuals are in danger of collapse with the new rules regarding funding requirements.  You will most likely see more of your clients coming to you asking what to do next.

The defined benefit scheme was the holy grail of pension schemes for a long time.  You were guaranteed a certain level of pension in retirement based on your years of service and salary.  What you effectively have is a promise and now you must ask yourself what value you can put on a promise from a scheme which is in deficit.  When advising clients who are considering exiting a defined benefit scheme, you must take particular care.  The client is considering giving up what could be a very valuable benefit, if the scheme can deliver on the promise.  However, if there are doubts as to the ability of the scheme to deliver or even survive, you would need to consider whether the client would be better off taking a transfer value now and putting those funds to work for them.

When an individual ceases employment or leaves a company pension scheme, or the company pension scheme is wound up, there are a number of options available to them.  Taking the transfer value to a buy out bond is becoming increasingly popular among clients.  The trustees of the existing company pension scheme will establish a buy out bond in the individual’s name and transfer the value of their benefits to the bond.  The aim is to put the individual in control of their pension benefits.  The buy out bond has fewer restrictions with regards to investments and often more favourable costs than a PRSA.  The buy out bond can also provide greater flexibility when accessing benefits. 

Independent Trustee Company has recently launched their new Buy Out Bond.  To find out more about  ITC’s BOB download our Brochure & Terms and Conditions.

Written by Jennie Faughnan

ITC Consulting

For further information contact our team to discuss:

Michael Keyes (01) 614 8045 / michael.keyes@independent-trustee.com

Sean Mc Loughlin (01) 614 9220 / sean.mcloughlin@independent-trustee.com

Martin Glennon (01) 603 5130 / martin.glennon@independent-trustee.com

www.independent-trustee.com

Ignoring the Elephant in the Room

The Social welfare and Pensions (Miscellaneous Provisions) Bill 2013 was announced by the Minister for Social Protection, Joan Burton TD on 22^nd May 2013.  The main pension provisions of the Bill were:

§  The Pensions Board will change its name to Pensions Authority and its governance is to change.  The Pensions Authority will consist of an independent chairperson appointed by the Minister for Social Protection and 2 ordinary members, one nominated by the Minister for Social Protection and a representative of the Minister for Finance.

 

§  A new Pensions Council will be established.  The Pensions Council will have a purely advisory function.  The Pensions Council will consist of: 

v  A chairperson;

v  A representative of the Minister for Social Protection;

v  The Pensions Regulator;

v  A representative of the Central Bank;

v  A representative of the Department for Public Expenditure and reform; and

v  Up to 8 other members who the Minister for Social Protection considers to have the relevant skills, specialist knowledge, experience or expertise to enable them to carry out their functions under the Pensions Act.

§  The name of the chief executive of the Pensions Board will be changed to the Pensions Regulator and s/he will be a member of the Pensions Council.

§  The Pensions Board will be given the power to wind up a pension scheme where the scheme is underfunded and the trustees and employer are not in a position to adopt a funding proposal, and where the trustees of the scheme fail to comply with a section 50 direction to restructure scheme benefits.

§  The introduction of a provision for an appeal to the High Court on a point of law following such a direction from the Pensions Board, or following a direction from the Pensions Board regarding a Section 50 order to reduce benefits “made other than on application by the trustees”.

While the above changes to the governance and oversight of pensions are largely welcomed, what is disappointing is that the Bill does not include the much promised proposed reform to the priority order rule, i.e. the order in which assets are distributed when a defined benefit pension scheme is in wind-up.  With a deadline of 30 June 2013 for the submission of funding proposals, for many schemes the decision not to address this issue in this Bill would seem to be a missed opportunity to reinstate some fairness between members of defined benefit schemes.   

The reason given by the Minister for not dealing with this issue is the recent Waterford Crystal case in which the EU ruled that the Irish government had failed to implement the EU Directive requiring governments to provide protection for scheme members where the employer was insolvent.  While it is of some relevance, the feeling is that this is just an excuse for the Minister failing to grasp the nettle of pension reform.

 

Written by Niamh Quirke

Independent Trustee Limited

Show me the Money

The need to trace pension monies is becoming more and more acute

Increased worker mobility, separation and divorce and the high profile collapse of some large company pension schemes.  This is the reality of the world we are operating in and something that we are seeing an increasing number of queries about in recent months.  The days of being in a job for life and paying into your company pension scheme for 40 years to receive a pension at the end of it all are long gone.  In these changing times, employees require a wider range of pension options that allow them to take control and put their pension to work for them.

A recent survey in the UK found that almost a quarter of employees have lost track of one or more of their workplace pensions.  This was attributed to the increasing number of jobs that an individual will have in their lifetime and the number of small pension benefits that may be built up and forgotten about.  It was also in some cases down to the fact that people could not locate paperwork to claim these benefits when the time came.  Having one place where you can hold all of your pension benefits together and take control of them is a solution that would appeal to many clients and their advisors.

The buy out bond is a natural fit for those who have already demonstrated a desire to take control of their circumstances.  A self-administered buy out bond can provide a greater level of control by allowing the client along with their advisors to direct how the funds are invested.  In a group company pension scheme, the individual members have little or no control over the investment strategy.  A self-administered buy out bond would allow the individual together with their advisors to create an investment portfolio that meets their specific needs rather than meeting the needs of a large group of members all with differing requirements. 

While a buy out bond can only accept benefits from one pension scheme, it may be possible to set up a number of individual self-administered buy out bonds in the one place and use those buy out bonds to co-invest in a product or to purchase a property, for example.  While the benefits can not be merged, the funds can all be used to create a portfolio of investments of the client’s choosing.

The flexibility offered by a buy out bond together with the level of control it gives to individuals make it an attractive option for clients and their advisors in these ever changing times.

Written by Jennie Faughnan

 

Independent Trustee Company has recently launched their new Buy Out Bond.  To find out more about  ITC’s BOB download our Brochure & Terms and Conditions.

For further information contact our team to discuss:

Michael Keyes (01) 614 8045 / michael.keyes@independent-trustee.com

Sean McLoughlin (01) 614 9220 / sean.mcloughlin@independent-trustee.com

Martin Glennon (01) 603 5130 / martin.glennon@independent-trustee.com

 

www.independent-trustee.com

 

Public Sector Pension Changes

 

New Single Service Pensions Scheme

The Public Service Pensions (Single Scheme and Other Provisions) Act 2012 was enacted in July 2012. It will facilitate the introduction of a new Single Pension Scheme for all new entrants to the public service.  This includes the civil service, education sector, health sector, local authorities, Gardai, Defence Forces, regulatory sector and non-commercial semi state bodies. It also includes Oireachtas members and the Judiciary.

Service-based accrual of pension will be discontinued. Instead, members accumulate money amounts towards their pensions – this will be a theoretical sum calculated annually as a fixed percentage of pay and up-rated each year by reference to the CPI. These amounts will accumulate over the span of a career to produce the pension on retirement.

 

Key Feature of New Schemes:

·         The minimum public service pension age has been raised. This is being increased initially to 66 to bring it into line with the social welfare state pension age and it will then rise on a phased basis to 67 and 68.

 

·         The maximum retirement age of the scheme is set at 70, although the Government has power to vary this by order.

·         For new entrants the calculation of pensions is on the basis of “career average” earnings – this is a change from the current position where the pension is based on “final salary”. The commencement of this provision requires a Ministerial Order.

·         The overall rate of pension contributions from staff is altered – for many the contributions will remain broadly as applies at present (approximately 6.5%), but will be higher for certain occupations.

·         The scheme modifies the earnings-linking of pensions – the new scheme provides for post-retirement pension increases to be linked to consumer prices not pay.

·         The scheme reduces, but does not eliminate, fast accrual terms – these generally apply to emergency services groups such as the Gardai, members of the Permanent Defences Force and Firefighters (as well as office-holders, the Judiciary and Oireachtas members). The uniformed services will retain their early retirement age which reflects operational needs.

·         For the President, Oireachtas members, the Judiciary and the Attorney General and others who earn accelerated pension benefits at present, the new scheme acknowledges their special circumstances by providing for a doubled rate of accrual together with a doubled rate of contribution (13%) for all new entrants to these offices. It is proposed that the President continues to receive a pension on retirement from the office. Anyone who is or was an Oireachtas member prior to the enactment of the Act retains those benefits and scheme membership if there is a break in their Oireachtas tenure.

Given the current moratorium on recruitment on the public sector, it will be some time before the above changes kick in. However, there is plenty to consider when advising the next generation of public sector workers in years to come.

 

Paul Gilmer

www.independent-trustee.com/consulting

I'm an Advisor, get me out of here!

 Clients need financial planning now more than ever and Independent financial advisors are still best placed to assist clients with fulfilling their financial objectives

 

Despite this we are starting to see an increase in advisors leaving the market. There are undoubtedly many reasons for this such as mergers, retirements and unfortunately business failures, however when we looked at the Central Banks Annual report published in April we were surprised at number of revocations in 2012 versus the number of new authorisations.

2012

No of Retail Intermediaries( including authorised advisors, multi-agency intermediaries, mortgage intermediaries)	3238
No of Retail Intermediaries- Authorisations	253
No of Retail Intermediaries Revocations	797

The report also highlighted that of the 797 revoked licences, 191 related to tied insurance intermediaries.  

 

At the start of this year there were  1: 1389  advisors per head of ROI population. Interestingly when you compare this to the UK market and CF30 Authorised Advisors the figure is 1:2265. Despite this figure over 1100 UK advisors left the market in the last 18 months,  RDR has been cited as the biggest influencing factor.

 

The US is seeing a similar trend in that the advice market is contracting at -2.3% per annum.

 

Unfortunately we don’t have a crystal ball but It’s reasonable to project that numbers in Ireland will continue to contract particularly if we adopt a version of the UKs regulatory framework.  It is also reasonable to predict that those  those who opt to stay in the market will have to adapt to a changing industry but the question id like to pose to the readers of our blog is .. “ Do you think that the Irish public will benefit from less advice in the market?”

Michael Keyes

Independent Trustee Company

Aidan Mcloughlin on RTE’s Morning Edition discussing the impact of the recent European Court of Justice pension ruling

The court found that under EU law the State had an obligation to protect the pension entitlements of workers in the event of a company becoming insolvent.

To view the interview on RTE One's Morning Edition, on the 26th April 2013 please click here.

Minister for Social Protection Joan Burton T.D Launches the OECD Review of the Irish Pension

Today the Minister for Social Protection Joan Burton T.D. launched the OECD Review of the Irish Pension system.

Review’s Main Findings and Policy Recommendations:

• Ireland is facing challenges on the financial sustainability of the pension system as the population ages; despite large projected increases in expenditure over the next 50 years, however, Ireland's pension spending will still be comparatively low in international comparison.


• The economic situation of pensioners in Ireland is comparatively good, both with respect to other age groups in the population and in international comparison.


• Ireland and New Zealand are the only OECD countries which do not have a mandatory earnings-related pillar to complement the State pension at basic level; as a result, Ireland, like New Zealand, faces the challenge of filling the retirement savings gap to reach adequate levels of pension replacement rates to ward off pensioner poverty.


• Private pension coverage, both in occupational and personal pensions, is uneven and needs to be increased urgently.


• Pension charges by the Irish pension industry on large occupational Defined Contribution (DC) plans are not too high when assessed on an international context; they are however rather expensive for small occupational schemes and personal pension schemes.


• The existing tax deferral structure in Ireland provides higher incentives to save for retirement to high incomes as the incentives work through the marginal tax rates.


• The Irish legislation regarding the protection of Defined Benefit (DB) plan members is weak. For example, the guarantee schemes in Ireland (Insolvency Payment Scheme and the Pensions Insolvency Payments Scheme) provide partial protection to DB plan members' benefits in case of sponsor insolvency. In addition, the legislation allows any sponsor to walk away from DB pension plans, shutting them down, without creating a high priority debt on the employer. Moreover, the priority currently given to pensioners before other members if a scheme winds up creates large inequalities across members. This outcome is particularly harsh for those close to retirement.


• There is unequal treatment of public and private sector workers due to the prevalence of DB plans in the public sector and DC plans in the private sector


• The State pension system lacks transparency, both with respect to the calculation of benefit entitlements and to the interplay of the contributory and non-contributory pensions.


• The link between contributions and benefits in the Irish State pension scheme is very weak, for reasons spelt out in the report, contrary to what people‘s perceptions of this link may be.


• The State pension scheme could be modernised to encourage working longer in line with the prevailing international trend.


• The new scheme for public servants is being phased in only very slowly and is unlikely to affect a majority of public sector workers for a long time.

Parametric changes in the State pension system

• Within the existing State pension system, Ireland could consider a number of parametric reforms which would improve the financial sustainability of the pension system in the future.


• The long-term retirement age, which at 68 is relatively high in international comparison, could be linked to life expectancy after 2028 in order to ensure that improvements in life expectancy do not significantly extend the duration of retirement.


• To provide incentives for workers to remain in the labour market longer and on the other hand provide more flexibility in making the retirement decision, increments and decrements of the State pension could be introduced for early and late retirement.


• More flexibility could also be provided in allowing retirees to combine work income and pension receipt; this could also ensure better adequacy of retirement income.


• Looking ahead, the adjustment of pensions – which have been frozen in recent years - also needs to be considered as this has a large impact on the evolution of pensions in payment; various options of combining indexation to wage growth and price inflation could be considered.

 

Structural reform of the State pension system

• Given the complex structure and the inequities resulting from the benefit calculation method in the public pension scheme and the interplay between the contributory pension, the non-contributory pension and other means-tested elements of retirement income provision, Ireland should consider a structural change of the State pension scheme.


• At a minimum, the current inequities in the treatment of workers‘ contributions to the system should be removed and all contributions made should be honoured in the calculation of the pension benefit, as foreseen in the current plans to adopt a total contributions approach from 2020 onward.


• The best two options out of the three described in the report, for a structural reform of the State pension scheme are: a universal basic pension or a means-tested basic pension. Both of these options would have the advantage, compared with the existing scheme, of introducing a much simpler, more transparent and less costly public pension scheme.

 

Option 1: a universal basic pension scheme

• A universal basic pension scheme for the entire population would be based on residency requirements, provide a single flat-rate benefit and cover all of the Irish population, regardless of their life-time work or contribution status. It could be financed by taxes, contributions or a combination of the two.


• A basic pension scheme could be complemented with either mandatory private pension provision or auto-enrolment into to private pension schemes.  Participation could be targeted at workers above a certain income level as workers on low earnings would already be receiving a comparatively high replacement rate through the basic pension.


• The Household Benefit Package and Free Travel Scheme could either be transformed into a cash supplement and merged with the basic pension or it could be awarded to pensioners who need the extra benefit as a means-tested cash supplement.


• Setting the level of such a basic pension for all citizens in order to meet the twin goals of social adequacy and financial sustainability would require more detailed analysis, including the costing of alternative revenue scenarios.

 

Option 2: a single means-tested pension

• An alternative would be a single means-tested pension financed out of general revenue. The Household Benefit Package, the Free Travel Scheme, and other means-tested "advantages" would be included in the pension amount.


• The main design issues to be addressed under such a scheme would again be the appropriate level of the means-tested benefit, at what schedule the benefit should be withdrawn for higher earnings, what type of administrative arrangements would be needed and how much this scheme would cost under alternative scenarios.


• Combining the public and the private pension pillars, a means-tested scheme would function best in combination with mandatory participation in private pension plans. In a voluntary scheme, even with an auto-enrolment mechanism, there would be disincentives to contribute to a private pension, unless a certain amount of pension savings were exempted from the means-test for lower-earning groups.

 

Reform of the public service pension scheme

• At a minimum, a faster phase-in of the new rules of the occupational scheme for public servants should be considered; this would entail including existing public servants in the new scheme based either on a certain cut-off age or on length of service.


• Any new private pension scheme for private sector workers should also be extended to public servants, at a minimum for new entrants but ideally also for some of the existing public servants.

 

Policy options to expand private pensions coverage and retirement savings

• To increase adequacy of pensions in Ireland, there is a need to increase coverage in funded pensions. Increasing coverage can be achieved through (1) compulsion, (2) soft-compulsion, automatic enrolment, and/or (3) improving the existing financial incentives.


• Compulsion, according to international experience, is the less costly and most effective approach to increase coverage of private pensions (OECD Pensions Outlook, 2012, Chapter 4).


• Automatic enrolment is a second-best. Its success in increasing coverage depends on how it is designed and on its interaction with incentives in the system.


• The cost of establishing and managing auto-enrolment may be higher. Auto-enrolment requires monitoring, accurate record-keeping, fiscal incentives and careful design. Implementing a centralised institution to manage the system and provide default investment options would add to the costs.


• There is a misalignment to correct between the existing tax deferral structure in Ireland that provides higher incentives to high-income earners and the policy goal of increasing coverage, especially for middle to low-income people.


• International evidence (Germany, Australia, and New Zealand) suggests that flat subsidies and matching contributions increase incentives to save for retirement for middle to low incomes.


• Existing private schemes need to be subjected to the same rules as the new schemes under auto-enrolment or compulsion.

 

Improve the design of DC arrangements

• The design and institutional set-up of DC pension plans need to improve in line with the OECD Roadmap for the Good Design of DC Pension Plans.


• Establish appropriate default investment strategies, while also providing choice between investment options.


• Establish default life-cycle investment strategies as a default option to protect those close to retirement against extreme negative outcomes.


• Encourage annuitization as a protection against longevity risk. For example, a combination of programmed withdrawals with a deferred life annuity (e.g. starting payments at age 85) could be an appropriate default.


• While still keeping the principle of pension savings being ―locked away, the Irish Government could consider allowing withdrawals strictly only in the event of significant financial hardship.


• Specialised private institutions (e.g. pension funds, asset managers) should manage the assets. The establishment of an autonomous public option could be envisaged to provide competition, lower costs, and a default pension fund for those unable or unwilling to make investment or fund choices.

 

Enhancing benefit security in DB schemes

• Strengthen the Irish legislation regarding the protection of DB plan members when plans wind up. For example, healthy plan sponsors should not be allowed to ―walk away from DB plans unless assets cover 90% of pension liabilities. This funding requirement would introduce some type of guarantees for members and it would allow at the same time some degree of risk sharing. The funding ratio should be calculated following prudent standard actuarial valuations. Moreover, the priority currently given to pensioners before other members if a scheme closes because of sponsor bankruptcy should be eliminated.


• Further legal reforms may be needed to introduce more flexible DB plans that for instance allow for accrued benefits to be cut in case of underfunding (e.g. the Netherlands) and, more generally, for risks to be shared between plan members and pensioners, as well as plan sponsors.


• Establish a clear framework to facilitate domestic investment in infrastructure projects, but a general subsidy to all infrastructure projects should be avoided as it would distort capital allocation. It is clearly desirable that pension funds should help support economic growth in Ireland, but the objective should not be used as an excuse to impose low returns on pension fund members.


• Revise the new funding standards as they may create new risks for pensioners by offering strong incentive for pension funds to invest in Government bonds, in particular sovereign annuities.

Further comment and analysis to follow.