Waterford Institute of Technology Business Students Friday 21 March 2014 “Pensions regulation in Ireland” David Malone Head of Operations and Communications The Pensions Authority

Pensions Authority Established by the Pensions Act, 1990 Supervision, regulation and enforcement Policy, legal and actuarial Information and guidance

Pensions system in Ireland Pillar 1: State pension –Contributory pension of maximum of € per week = 35% of average earnings (Non-statutory political commitment to maintain at this level) –Means-tested non-contributory pension of €219 per week –Aim is essentially one of poverty prevention Pillar 2: Occupational pension schemes –Employer sponsored DB and DC schemes –Operate on a funded basis (private sector) and pay-as you go basis (public service) Pillar 3: Personal pensions –Personal pension vehicles –Includes Personal Retirement Savings Accounts (PRSAs) and Retirement Annuity Contracts (RACs) Total of pillars 2 and 3 pension fund assets = 45% of GDP - but account for just 25% of retirement income 75% rely on the State pension

Types of private pensions Company Pension Schemes Defined benefit schemes Defined contribution schemes Personal Retirement Savings Accounts (PRSAs) Retirement Annuity Contracts (RACs) or Personal Pensions

Supplementary pension provision in Ireland (as at 31 December 2013)  Defined benefit – 572,681 members in 1,040 defined benefit schemes schemes with 189,644 members are subject to the Funding Standard schemes with 338,037 Public Service employees (full and part-time)  Defined contribution - 232,939 members in 60,192 schemes  Personal Retirement Savings Accounts (PRSAs) 206,936 PRSAs with asset value of €3.46 billion  Personal Pension Plans/Retirement Annuity Contracts (RACs) (200,000 + contracts – Irish Insurance Federation)

Pensions Coverage in the Irish Workforce

Defined benefit schemes During 2013 the investment environment for pensions continued to improve however, there has been no overall improvement in the position of many defined benefit schemes. Here are some current details: 291 schemes were due to submit a funding proposal to the Authority by or after 30 June 2013 since 30 June 2013: –103 schemes have submitted a funding proposal –123 schemes have not submitted a proposal (41 of these have advised they are going to wind up) of the remaining 65 –25 have submitted a positive AFC. –3 schemes have advised that they will be submitting a positive AFC. –37 schemes have gone into wind-up or have wound up. since 1 January 2013 –96 schemes have commenced wind up or have wound up.

National Pensions Policy The recommendations include :  increasing the State pension age to 66 in 2014, 67 in 2021, 68 in 2028  new model defined benefit pension scheme  new model scheme for public servants  introducing auto-enrolment into a pension for those aged 22 years or over and in employment from 2014

Background to DB Funding Standard changes since 2012 Social Welfare and Pensions Act 2012 and 2013 Statutory Guidance Regulations

Funding Standard Reserve When does it apply? Schemes must check whether they hold FSR from 1 June 2012 and submit certificates from that date. Schemes must hold FSR from 1 January 2016 and if they don’t they must file Funding Proposal (FP) but –If FP end date after 1 January 2016, FP must –anticipate holding FSR –If Section 50 sought, scheme must satisfy FSR immediately (or at end of FP period)

Funding Standard Reserve Amount: 10% of funding standard liabilities less EU sovereign bonds/cash held plus effect on funding standard liabilities of ½% drop in interest rates less the amount by which resources would increase as a result of the same change

Funding Standard Reserve When interest rates go down - bond asset values rise; however, scheme liabilities also increase as it costs schemes more to purchase annuities. The risk reserve for the impact of a 0.5% drop in interest rates is equal to the difference between the rise in liabilities minus the increase in bond asset values. Scheme Liabilities 10m Scheme Assets Bonds and Cash 5m Equities 5m Risk Reserve calculations Impact of 0.5% drop in interest rates = 0.5m 10% of value of equities = 0.5m Total Risk Reserve 1m

Benefit Reductions (Section 50) Authority can issue S50 directions where scheme fails funding standard Authority can now specify actual measures (likely to be what’s in the application) Benefit reductions must be carried out within one month of direction Application requirements now in statutory guidance

Statutory Guidance What is Statutory Guidance? Distinct from existing Pensions Authority guidance Binding legal instrument A breach amounts to an offence Prescribed by Minister via Funding Standard Regulations Can’t be altered without Ministerial consent

Statutory Guidance (all available on the website) Section 42 – FS calculations where scheme holds sovereign annuities/sovereign bonds (S53B basis) Section 47 – Unsecured Undertaking and General Contingent Asset Guidance Section 49 – Funding Proposal Guidance Section 50 – Benefit Reduction Guidance

Pension scheme wind-up priority orders The Social Welfare and Pensions (No. 2) Act 2013 (“2013 Act”) came into force on 25 December It introduces two new wind-up priority orders and expands the type of benefit reductions which the Board may direct under section 50 of the Pensions Act Wind up priority orders under Section 48 of the Pensions Act 1990 For all schemes which start to wind up on or after 25 December 2013, one of two priority orders will apply: –the single insolvency order will apply if the scheme’s employer is solvent at the date of wind up. –the double insolvency order will apply if the scheme’s employer is insolvent at the date of wind up. In a multi-employer scheme, all participating employers must be insolvent for the double insolvency order to apply. Insolvency is defined in the Protection of Employees (Employers’ Insolvency) Act 1984 and can include (for example) liquidations, receiverships, resolutions to wind up a company.

Single Insolvency Order Benefits will be distributed in the following order of priority: 1.Additional voluntary contributions (“AVCs”) and transfers in of AVCs; and defined contribution (“DC”) benefits and transfers in of DC benefits. 2.Pensioner benefits (excluding post-retirement increases), in accordance with the following limits: a)if the annual pension is €12,000 or less, 100% of the pension; b)if the annual pension is more than €12,000 and less than €60,000, the greater of €12,000 and 90% of the pension; and c)if the annual pension is €60,000 or more, the greater of €54,000 and 80% of the pension. 3.50% of active and deferred benefits, excluding post-retirement increases. 4.Remaining pensioner benefits, excluding post-retirement increases. 5.Remaining active and deferred benefits, excluding post-retirement increases. 6.Any remaining benefits, including post-retirement increases. N.B. The benefits which scheme members receive in a wind up will depend upon the scheme assets which are available for distribution.

Double Insolvency Order Benefits will be distributed in the following order of priority: 1.AVCs and transfers in of AVCs; and DC benefits and transfers in of DC benefits. 2.50% of pensioner benefits, including post-retirement increases. 3.50% of active and deferred benefits, including post retirement increases. 4.Pensioner benefits up to a maximum of €12,000 per year, excluding post-retirement increases. 5.Remaining pensioner benefits, excluding post-retirement increases. 6.Remaining active and deferred benefits, excluding post-retirement increases. 7.Any remaining benefits, including post-retirement increases. N.B. The benefits which scheme members receive in a wind up will depend upon the scheme assets which are available for distribution. However, in a double insolvency, if the scheme does not have enough assets to pay for the benefits under priorities 2, 3 and 4, the Minister for Finance will provide the necessary money to make up the shortfall, subject to criteria set out in legislation.

Pensions information Enquiry service Information booklets Pension checklists Pension calculators Free Online Trustee Training, Guidance & FAQs, alerts & Trustee supports

Why have a Pension? Life expectancy increasing – 20 plus years in retirement What kind of lifestyle do you want and how will you fund it? Current State pension = € per week 8 out of 10 people say - the State pension will not meet all their needs in retirement Pension = Income in Retirement

Tax relief on personal contributions Highest age at any time during the tax year Limit Under 30 15% % % % % 60 and over 40% For tax purposes limited to earnings up to a maximum of €115,000 in any year. Standard Fund Threshold - €2 million.

Changing world we live in Living LongerMore Contract Work More mobility in careers Changing work patterns More Part Time Working Single Parent Households Smaller FamiliesSeparation/Divorce

Changing Demographics

Pensions in the workplace The workplace is the optimum location for pension provision, information and education A company benefits from having: –a reputation and respect as a good employer –a workforce that feels valued and important –increased loyalty and commitment from staff –an enhanced staff recruitment, reward and retention package “A good pension is a valuable asset, don’t leave work without it”

Employers’ Pension Obligations  By law an employer must provide ALL employees with some form of access to a pension, whether they are in full-time, part-time, temporary, contract or casual employment.  All employers regardless of their size are obliged to provide access to a Standard PRSA for “excluded employees”  The Authority encourages employers to regard pensions as part of the recruit, reward and retain approach to staff  The Authority also encourages all employees to ask their employer about their pension rights

Registered Administrators (RAs)  From 1 November 2008 trustees of every scheme must appoint an RA to provide core administration functions  Core administration functions are: -preparation of annual reports -preparation of benefit statements -maintenance of sufficient and accurate member records to discharge above

The Authority’s approach to Regulation The Authority’s allocation of resources is risk oriented on the basis of the following priorities: 1 st priority misappropriation of pension assets or contributions 2 nd priority failure to pay benefits due 3 rd priority inadequate funding of defined benefits 4 th priority inappropriate investment 5 th priority failure to provide prescribed information to members This order represents the seriousness of the risks, not the likelihood of their occurrence. Because regulation depends on Authority access to reliable information, we will especially target failure to provide the Authority with information required under the Pensions Act, including whistleblowing obligations.

Regulation, Supervision and Enforcement On the spot fines regime introduced in September fine for each offence = €2,000 Compulsory trustees training introduced in February 2010 Registered Administrators introduced in November 2008

Sanctions for non-compliance Pensions Authority prosecutions: The Authority may take prosecutions against persons who breach provisions of the Act or Regulations made there-under: Offences can be prosecuted by the Authority on summary basis (District Court) or by DPP on indictment (Circuit Court) On summary conviction- a fine not exceeding €5,000 or imprisonment for term not exceeding 1 year or both On conviction or indictment by DPP- a fine not exceeding €25,000 or imprisonment for term not exceeding 2 years or both (or in the case of a prosecution under Section 58(a) a fine not exceeding €25,000 or imprisonment for term not exceeding 5 years or both)

Engagement and Enforcement Activity On-the-spot fines During 2012 the Authority issued fines notices to 17 trustees of 6 schemes for certain breaches of the Pensions Act. The breaches concerned related to: –failure to submit or late submission of actuarial funding certificates –late preparation of trustee annual reports –failure to furnish annual benefit statements to members €66,000 was paid by trustees in fines to the Authority and subsequently passed on to the Exchequer during Meeting with scheme trustees During 2012 the Authority convened 52 meetings with individual schemes where trustees were called to the Authority’s premises to discuss their schemes compliance with the Pensions Act. RA on-site inspections The Authority carried out 28 on-site inspections of RAs in The selection of RAs for inspection is done both on a risk–based and random selection basis and covers the broad spectrum of RAs based on their type and size of business.

Trustee Challenges AdministrationInvestmentRegulationCosts Communication

Main duties of Trustees under the Act register the scheme with the Pensions Authority ensure contributions are deducted and paid over to the scheme invest the funds and pay the benefitsensure that the funding standard is metkeep records and accountspreserve or transfer benefitsensure equal pensions treatmentapply the resources of the scheme on wind updisclose information as required

What the Authority expects of trustees Before describing, it may be useful to set out what we do not expect: –Trustees are not expected to be full-time –Trustees are not expected to be pension professionals –Trustees are not expected to be infallible. Nonetheless, trustees are looking after money on behalf of other people. Therefore there are minimum standards they must satisfy: –They must have certain basic knowledge –They must engage –They must act reasonably –They must have process

Risk Management for Trustees Where trustees do not have the knowledge themselves, they engage professionals – most often covering administration, investment and communications. It is the trustees’ job to: –question the professionals –to push back, and not to accept answers that they don’t understand or do not feel to be right. The trustees must recognise that it is their responsibility to make decisions, and their options should be set out for them clearly by the professional advisers. This is probably the most challenging aspect of being a trustee. It is important that trustees identify the decisions that they are making, and that they have set out the alternatives among which they are deciding.

Risk Management Strategy Unless trustees have a strategy for dealing with risks, they are not managing their scheme properly. There is no single or simple answer - trustees must identify the best answers for their own scheme. Hoping it won’t happen or hoping that something will turn up is not a risk management strategy. –As a trustee do you know the costs? –How optimistic are the calculations? –How much might they vary? –Are you depending on high equity returns? –What happens if you don’t get them? In the long run, trustees will do themselves and all others concerned with the scheme most good if they look at scheme funding from all angles.

Supporting Trustees The Authority supports trustees in the following ways:  the Trustee Handbook  an extensive range of guidance and FAQs on pension matters generally  booklets and checklists for trustees  the Authority provides an information and enquiry service  a register of trustee training providers is available on the website  the Authority has developed an e-learning facility for trustees which is free of charge and can be accessed on the website

Engage with your pension Understand - what type of pension you are contributing to if you have one. Check out the booklet ‘What are my pension options?’ and visit Understanding your pension on Review - the adequacy of your pension contributions regularly. Check if you are contributing enough to have the income you want when you retire. Use the Pensions Calculator at can help you work out the figures. Keep an up to-date pensions file - read and check your annual pension benefit statement and or your pension scheme annual report. Ask questions - you should ask that your pension information be explained to you in plain language and keep asking until you are happy and understand the information.

Engage with your pension Charges - you should always be aware of the charges against your pension fund and have them clearly explained to you by the trustees of your pension scheme or your pension provider. Check out the checklist on ‘Investment, Risk, Fees and Charges’ and visit Understanding your pension on Investment risk - it is important to understand how your pension savings are being invested, the type of strategy and the level of risk involved. Check out the checklist on ‘Investment, Risk, Fees and Charges’ and visit Understanding your pension on Tax relief - the Government supports you to save for your retirement, allowing you tax relief on your pension contributions at your highest rate of tax. It is important to understand the tax relief benefits and to make sure you receive your full entitlement. Use the Pensions Calculator at to help you work out the figures.

Engage with your pension Approaching retirement - it is especially important to review any investment decision taken in the years running up to retirement. On retirement you may receive a number of different choices regarding how to draw down your pension, this is something you should research well in advance. You should speak to your trustees, employer, colleagues or financial advisor. Standardisation of State Pension Age - the qualifying age for the State pension will gradually increase over the coming years where the State Pension (Transition) at aged 65 years will no longer be paid from 1 January –This means that there will then be a standard State Pension age of 66 years for everyone. –State pension age will increase to 67 in 2021 and to 68 in 2028.

Pension Adjustment Orders (PAOs) A PAO designates part of the pension benefits –to a non member spouse –or person representing a dependent child. The Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 (“the Act”) came into force on 1 January 2011 For further information, see - “A brief guide to the provisions of the Family Law Acts” booklet

You are the future Don’t just watch things happen Make things happen

and to finish….. Thank you for your time and attention. I hope you found my presentation interesting and of some benefit.

Questions & Answers