Pensions Since the Directive

Paul Kenny Pensions Ombudsman

Mary Hutch Head of Information & TrainingThe Pensions Board 28 November 2006

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EU PENSIONS DIRECTIVE

• Directive 2003/41/EC came into force on 23 September 2003 “on the activities and supervision of Institutions for Occupational Retirement Provision” – “IORPS”

• EU Member States required to implement by 23 September 2005

• Directive sets common minimum level of supervision across EU Member States

• Allows pension schemes to operate “Cross-Border”• “Budapest” protocol agreed between pension supervisors on

“who does what and when” for cross-border supervision.Link to Protocol is available on www.pensionsboard.ie

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IRISH IMPLEMENTATION

• Statutory• Requirements in Social Welfare and Pensions Act 2005• Underlying Regulations in place by 23 September 2005

• Remake Regulations 2006• Associated tax changes introduced in Finance Act 2005

• Approach• Implements essentials of Directive• No further new supervisory requirements added other than the essentials of

the Directive• Areas affected

• Scheme management• Investment• Funding• Cross-border

Note on Remake Regulations is on www.pensionsboard.ie

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SCHEME MANAGEMENT

Trustee Qualification Requirements

• S59 A(1) – addresses aspect of good repute• Person shall not act as trustee if: -

• undischarged bankrupt / composition with creditors (and is not discharged)

• convicted of fraud / dishonesty• trustee is a company and director is prohibited

under this section• Person subject of declaration under S.150

Companies Act 1990 (restriction)

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SCHEME MANAGEMENT

Trustee Qualification Requirements

• S59 A(2) requires Regulations to be made providing that:

• Trustees must possess (or employ or contract with advisers who do possess) qualifications and experience prescribed in those regulations, and

• Specifying circumstances in which trustees will be regarded as possessing the specified qualifications and experience

• “Qualifications and experience” are those appropriate and relevant to investment of resources of scheme

• enter into contract with one/more investment managers to provide investment service

• one of trustees themselves have such qualifications and experience

• employ an adviser with qualifications and experience

• Regulations only refer to need for investment qualifications

- Act and other Regulations already require appropriate professional qualifications for other aspects of running a scheme

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SCHEME MANAGEMENT

Trustee Qualification Requirements

• S59 A(3) gives Board power to determine if trustee or person proposing to act as trustee satisfies requirements

• Determination must be notified to trustee/person

- effective 21 days after date

- removes trustee who does not satisfy requirements

• Appeal to High Court

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INVESTMENT

Trustees Investment Duties• S59 1(b) duty to provide “proper investment of the

resources of the scheme in accordance with regulations and, subject to those regulations, (and S59(2) member directed investment), and rules of scheme”

• S 59 (1A) “Regulations shall prescribe rules which shall be adhered to by trustees in providing for proper investment of scheme resources in particular, in accordance with para (1) of Article 18 of IORPS Directive”

FAQs on Investment Regulations are available on www.pensionsboard.ie

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INVESTMENT

Trustees Investment Duties

• Regulations set out specific rules that must be applied to pension fund investment

- implement “prudent person” rule as required by Article 18.1 of IORPS Directive

• Assets to be invested:

- in manner to ensure security, quality, liquidity and profitability

- predominantly on regulated markets (>50%)

- in a diversified manner so as to avoid excessive accumulations of risk

• Prohibition on borrowing (except for 1 member arrangements)

• Derivatives permitted but limited

• Applies to all schemes (no exemption for small schemes)

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INVESTMENT

Trustees Investment Duties

• Insurance policies and unitised investments will be assessed on “look through” basis

- assessed on basis of underlying holdings

• Insurance policies that provide for annuities or return of minimum invested

- comply with regulated market and diversification rules

• Investment in Government bonds also treated as diversified.

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INVESTMENT

Trustee Investment Duties

• Statement of Investment Policy Principles (SIPP)

• Regulations require all schemes >100 members (combined active and deferred) to put in place a SIPP

• SIPP must be in writing and provide : -• investment objectives• investment risk measurement methods• risk management processes• strategic asset allocation with respect to nature and duration of

liabilities• Review at least every 3 years and revise if change in investment policy

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FUNDING

• Funding Standard (Amendment) Regulations

- implement some recommendations of Board’s review of Funding Standard

• Additional grounds for funding proposal – S49 (3)(b)

• Adverse experience relating to:-

• price inflation or interest rates underlying actuarial values over relevant period

• increases in pensionable earnings

• payment of benefits (other than long service benefits)

• Also new S59 G – early retirement subject to trustees consent if scheme does not meet Funding Standard

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FUNDING

• Funding Standard (Amendment) Regulations

- also comply with some of requirements of Articles 10 and 11 of IORPS Directive

• AFCS

• Every 3 years

- dated of first AFC due after 23 September 2005 unchanged

- new period applies to any subsequent AFCs

• Also change to content of AFC

- disclosure of assets and liabilities of scheme

• Regulatory underpin of actuarial bases

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CROSS-BORDER

• Part XII of Pensions Act and Cross-Border Regulations• sets out provisions

• Cross-Border Activity• Undertaking in one Member State (Host State) may set up IORP in another Member State

(Home State)• Supervision is by Home State• Prudential rules are Home State• Social and Labour Laws are Host State• Information requirements and investment restrictions may be imposed by Host State

• Co-operation• Member States must apply Directive• Must create conditions for cross-border membership

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CROSS-BORDER

Cross-Border Schemes

• Irish approved scheme (Home Member State)

• Trustees apply to Pensions Board for prior authorisation to operate cross-border – conditions set out in S149

• Trustees apply to Board for approval to accept contributions from Host Member State – Section 151

• Approval granted by Board within 3 months• Board must notify trustees and Regulator in Host Member

State

Pensions Board Guidelines in relation to Cross-Border Schemes are available on www.pensionsboard.ie

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CROSS-BORDERConditions For Authorisation• Trustees provide written statement in form (available on

www.pensionsboard.ie)• Trustees confirm compliance with Pensions Act requirements: -

• Disclosure of Information• Trustee qualifications• Remittance of contributions• Funding Standard

• Trustees must also supply the Board with: -• AFC where applicable• PB registration number of scheme

• Small IORPS operating cross-border (<100 active and deferred members) must comply with all requirements of Directive

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CROSS-BORDER

Social and Labour Laws (Relevant Statutory Requirements• S153 sets out obligations of Board with respect to cross-border

schemes overseas with Irish members• Board must notify competent authority of Member State involved of

Irish Social and Labour Law applicable to Irish members• Regulations specify the Social and Labour Law provisions (relevant

statutory requirements) as :-• Preservation (Part III)• Disclosure (Part V)• SS 59B and 59C (Part VI)

• Applied to cross-border schemes established outside Ireland• Disapplied to non-Irish members of cross-border schemes established

in Ireland

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Occupational Pension Schemes

(Disclosure of Information)Regulations, 2005

SI 633 0f 2005Paul Kenny

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New Obligations

• 1998 Regulations revoked and replaced

• Based on Pensions Board recommendations

• Some Pensions (Amendment) Act provisions

• IORPS disclosure requirements

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• Article 1 – Citation and Commencement – different dates for different provisions*

• Article 2 – Revocation - different dates for different provisions*

• Articles 3 and 4 – Interpretation and definitions

• *Time-frame from 23 September 2005 to 1 January 2007

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Article 5 - Audited Accounts

• Operative 23 September ’05

• Scheme years COMMENCING on or after

• Accounts now required of all DC schemes with more than 100 members (active plus deferred)

• Specific exclusion from exemption for one-member schemes

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Article 6 – Valuation Reports

• Operative 23 September 2005

• New DB schemes – first valuation in 3 years, and 3-yearly thereafter

• Existing DB schemes- First AFC after 23/9/2005 can have effective 3½ years from last cert – 3-yearly thereafter

• DC schemes – liabilities valued at end of scheme year, and report ASAP

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•Article 7 – Annual Reports

• Operative 23 September 2005

• For scheme years Commencing on or after…

• No Annual Report for one-member DC schemes

• Article 8 makes changes for Alternative reports

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•Article 7 – main changes

• If Funding Proposal (DB), details to be given

• Numbers included for Death Benefit only

• S.I.P.P.

• Trustee access to “Appropriate” training?

• Procedures in place to receive and remit contributions onwards

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•Article 7 – main changes 2

• Statement re “condition” of scheme – financial, technical & other risks, their nature and distribution

• Unless already disclosed (e.g., in booklet), details of IDR arrangements

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•Article 8 – Alternative Reports

• Operative 23 September 2005 –etc.

• Small schemes – fewer than 100 members (active and deferred)

• One type of report – types A and B abolished

• Arrangements if more than one insurer

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Content of alternative reports

• Contributions received• Numbers covered for death benefit only• Access to trustee training/• “Condition of scheme” statement• IDR Process• S.I.P.P• Details, if funding proposal • Valuation report• Statement that scheme has not been audited by an

auditor

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Articles 9 and 10 –Disclosure of Reports, etc,

and Constitution

• Operative 23 September 2005

• No change in time limits for disclosure

• No changes to disclosure on Constitution of the Scheme

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Article 12 General Disclosure to Individuals

• Technical changes only

• Operative dates – from 23/9/05 (termination of employment and

Investment matters)– to 1/1/2007 (Members in employment,

retirement/death, winding-up, PAOs)

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Article 13 –Members in Employment

DB requirements• Benefit statement may include or ignore

allowances / emoluments*• Leaving service benefit @NPD (post 1/1/2007)*• Extra DB benefits secured by AVCs• State if integrated• State pension subject to Social Welfare tests –

details of Dept *And how calculated

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• Article 13 –Members in Employment

DB requirements 2• Method of calculating contributions is in the

Rules

• Who to contact if you think contributions not remitted

• Statement on trustee duties re contributions

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Article 13 –Members in EmploymentDC requirements (inc DC Element)

• Statement of Reasonable Projection based on past and proposed contributions

• State if integrated• State Pension subject to Social Welfare tests

– details of Dept• Breakdown of contributions received and

invested; explanation of differences• New statement of Reasonable Projection if

TV in, change to scheme, etc

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Statement of Reasonable Projection• Included with Annual benefit Statement

– Also on joining, leaving, on request and if scheme benefits change

• Benefit levels at specified date, based on

– Value of fund @date of statement

– Estimated value of past and future contributions

• Assumptions: investment return, future contributions, date of retirement/ leaving – but NOT inflation

• Advise importance of making adequate financial provision for retirement

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•Public Authority schemes

• Paragraph 13 of Schedule D sets out detailed requirements

• Paragraph 12 permits notification of how the information can be accessed electronically

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Article 14 – termination of Employment

• Operative 23 September 2005

• DB: if TV is reduced, by how much?

• DC: Statement of Reasonable Projection

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Article 15 – retirement or Death

• Operative 1 January 2007

• DC members must be told of option to take a lower pension with escalation factor

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Article 16 – Winding Up

• DB: Members must be told if any transfer amount reduced because of solvency issues (Section 34(2))

• DC: Statement of Reasonable Projection

• Operative 1/1/2007, but small scheme exceptions from 1/7/2006

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Small Scheme Exceptions

• No annual reports, accounts or valuations provided:– Report within 3 months and annually– Containing:

• Date of windup event• Estimate of Realisable asset value• Estimate of cost of liabilities• Receipts and payments to date• Progress report• Information requested by Board

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Article 17 – Pensions Adjustment Orders

• Operative 1 January 2007

• Nothing new here except that Non-member spouse must be told if TV reduced for solvency

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Article 18 – Investment Alternatives, Default Investment Strategy DC

Schemes and “Elements”• Where scheme gives investment options,

– Within 3 months of request:• Investment Alternatives

• Default Investment strategy

• Name Investment Manager

• Describe investment alternatives, risks, etc

• How member gives directions

• Charges on investment alternatives

• Name/address for enquiries

• If trustees not liable, say so (S.59 (1C))

• Information on investment portfolio, risk exposures and costs