1. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
In Association with:-
Online CPD for Accountants &
Professional Advisors
Pensions in Crisis:
An Update
Presenter:
Des O’Neill CPA; A.C.I.S; ACCA
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2. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
Pensions in Crisis: An Update
James McConville
McDowell Purcell
11th November 2011
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3. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
Pensions in Crisis: An Update
• Origins of the Crisis and the GFC
• The Impact on Irish Pensions
• Remedial Measures
• National Pensions Framework
• Recent Events
• The Future
Origins of the Pensions Crisis
• Dot‐com bubble burst in 2000. Stocks continued to fall until
2003.
• Also impacted by 9/11.
• “Perfect pension storm” – falling equities and rising bond
prices.
• Governments responded to Dot‐com bubble bursting by
reviewing funding standards and requiring further
contributions of employers.
• Many in industry felt reforms made it more difficult to
manage pension risk.
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4. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
The GFC
• US Federal Reserve reduced interest rates to counter stock
market falls 2000 to 2003.
• Easy credit conditions helped fuel subprime housing bubble
in US.
• Collapse of subprime market saw huge losses for US
pension funds – $1.3 trillion in 2007/8.
• Major US banks and other institutions failed or had to be
rescued.
• Contagion spread to Europe where further banking
failures/rescues took place – Northern Rock, Anglo, INBS
etc.
Impact of GFC on Pensions
• 60% of all pension schemes in OECD area are defined
benefit schemes.
• Global pension assets fell by 20% in 2008.
• 2008 loss of USD$5.4 trillion (OECD) is roughly equivalent to
China’s current GDP.
• Markets recovered in 2009 but DB funding levels did not
follow suit.
• Market recovery offset by falls in corporate bond yields –
reverse of position in 2000‐2003.
• Insufficient to help DB schemes out of insolvency.
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5. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
Impact on Pensions in Ireland
• Membership of pension schemes falling back to 1990’s
levels.
• 80%+ of defined benefit (DB) schemes in deficit.
• Members in defined contribution (DC) schemes have seen
the value of their accounts hit be investment losses.
• Remedial measures have had little impact.
• Negative response to introduction of pension levy.
• Ireland now ranked 29th of 44 countries in Allianz 2011
Pension Sustainability Index.
The Nightmare Scenario
• DB schemes forced to wind up due to insolvency of
employer (Waterford Glass).
• DB schemes forced to wind up due to decision of solvent
employer to close business in Ireland and move elsewhere
(SR Technics).
• Both schemes were in deficit but the members and the
trustees were powerless to stop the winding‐up.
• Members received only a fraction of the benefits they were
promised.
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6. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
The Nightmare Scenario (Cotd.)
• Many DB schemes in the process of or considering winding‐
up.
• SR Technics scenario may apply, even if intention is simply
to wind up DB scheme and establish DC arrangement.
• Not just a trust deed issue. IR issues may apply if benefit
promise is contained in the employment contract.
• Are professional trustees as objective as they should be?
• Are individual trustees vulnerable to corporate pressure.
Regulatory Response
• Pensions Board imposed a temporary moratorium on
funding proposals and promised greater flexibility with
regard to funding plans.
• Similar measures applied by regulators in Finland, Japan,
and US.
• Regulators in Canada, Denmark, Netherlands, Norway,
Switzerland and UK chose to adjust funding requirements.
• Introduction of sovereign annuities – may increase trustee
purchasing power in DB schemes but pension will be
performance‐related.
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7. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
Government Response
• Deferral of Annuity Purchase (DC Schemes Only)
• Social Welfare and Pensions Act 2009
• Commission on Taxation (2009)
• National Pensions Framework (2010)
• Further changes in 2012‐2014?
Deferral of Annuity Purchase
• Minister for Finance issued circular in December 2008
permitting deferral of purchase of retirement annuities by
DC schemes.
• Hope was that this would enable the trustees to purchase
in better market conditions in the future.
• Scheme discontinued in March 2011. Those purchasing
annuities after 1 January 2011 had addition option to invest
in approved retirement fund.
• Unclear how successful the scheme has been.
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8. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
Social Welfare and Pensions Act 2009
• Pensions Insolvency Payment Scheme (PIPS)
• Post‐retirement increases demoted in statutory order of
priorities
• Increased restructuring options for schemes (s. 50/50A PA)
• New offence where contributions not remitted by employer
• Protection for trustees in court action for breach of trust
Commission on Taxation
• A single tax relief rate – 33%.
• Greater equity amongst members.
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9. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
National Pensions Framework
• Reform of the State Pension
• Introduction of an auto‐enrolment system
• More flexible options at and after retirement
• A single tax rate
• Tighter regulation
• Tracing of members
• A new public service pension scheme.
• New model DB scheme
• Cap in lifetime benefits
Current Events
• Cherry picking the Framework.
• Pensions Levy.
• The Funding Standard Moratorium.
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10. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
Cherry Picking the Framework
• Fine Gael proposed reduction in tax relief to 21%.
• Insurance Industry proposed pensions levy.
• Adjustment of tax relief to 33% (in line with Commission
recommendation) and/or revised lifetime benefits cap
(€60k pa pension?) expected Dec 2011.
National Pensions Framework (RIP)?
• In October 2011, the Government announced that auto‐
enrolment would not be introduced before 2014.
• Slow pace of public sector pensions reform.
• No sign of DB model.
• New expert group on pensions in 2012.
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11. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
Pension Levy
• Finance (No.2) Bill 2011
• Passed by Oireachtas in June 2011.
• Annual valuation of scheme assets on 1 July, with a stamp
duty of 0.6% of scheme assets collected annually on 25th
September, when valuation reported to Revenue.
• Provisions to pass on cost to members and/or reduce their
benefits.
• To run until 2014 but could continue.
Pension Levy (Cotd.)
• IAPF estimates a reduction in 9% in pensions in payment
over lifetime of levy.
• Industry has warned that the impact on already insolvent
DB schemes could be catastrophic.
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12. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
Funding Standard Moratorium
• Government announced in October 2011 that the funding
standard moratorium would be lifted prior to end of 2011.
• Pension schemes in deficit must submit a funding proposal
to the Pensions Board.
• Since 2008, the Pensions Board has continuously extended
the deadline to submit funding proposals due to the GFC
and in respect of proposed new legislation by the
government in relation to pensions following the
Framework.
Funding Standard Moratorium (Cotd.)
• Once moratorium lifted, DB schemes must decide whether
to submit proposal or else wind up.
• Fear is that the pensions levy and the revised funding
standard will force many DB schemes to wind up.
• Three possible standards being considered:
Option 1: Current funding standard
Option 2: Introduces risk reserves to meet 15% fall in
equities and 0.5% in bond yields.
Option 3: Sufficient risk reserves to meet 20% fall in
equities, 1% in bond yields and 0.5% rise in inflation.
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13. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
Funding Standard Moratorium (Cotd.)
• Option 2 would see 10% increase in liabilities under current
funding standard.
• Option 3 would see 50% increase in liabilities under current
funding standard.
• Option 3 would bring Ireland into line with EU industry
standard but would virtually wipe out all remaining Irish DB
schemes.
• Even current funding standard, if restored with additional
funding period, unlikely to save DB schemes.
• Industry calling for less stringent reform or 5‐year
moratorium.
The Future
• Government sacrificing long‐term pension reform in favour
of short‐term Revenue gain.
• National Pension Reserve Fund already depleted.
• Less time to offset pension time bomb.
• No public engagement with pensions.
• Challenging backdrop for new expert group on pensions.
• Australian‐style system now only viable solution.
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14. A Personalised CPD Certificate of Completion will be forwarded to you upon completion of this course. These notes do not serve as proof of completion alone.
Pensions in Crisis: An Update
James McConville
McDowell Purcell
11th November 2011
James McConville Email: jmcconville@mcdowellpurcell.ie
Partner Website: www.mcdowellpurcell.ie
McDowell Purcell
James McConville
The Capel Building
Mary's Abbey @jamiemcconville
Dublin 7 Also on:
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