The Pensions Board Funding Standard Seminars

June 2012

Grace GuyDeputy Head of Legal

June 2012

Social Welfare and Pensions Act 2012

Summary of defined benefit changes

Background/Sources

• Government Announcement October 2011

• Social Welfare and Pensions Act 2012

• Statutory Guidance

• Regulations

What are the Key Changes?

• Funding Standard Reserve (FSR)

• Funding Proposals (Section 49)

• Benefit Reductions (Section 50)

• Funding Standard calculations where scheme holds sovereign annuities/sovereign bonds (known as S53B basis)

Funding Standard Reserve

Amount:

• 15% 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 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

• Unsecured undertakings can be used for FSR in certain cases

• Self-investment/concentration of investment limits don’t apply to FSR

• New Funding Standard Reserve Certificate (FSRC)

• FSRC effective dates follow AFC effective dates

Funding Proposals (Section 49)

• Technical rules set out in statutory guidance

• Standard 3 year proposal still baseline

• Removal of Investment Test

Benefit Reductions (Section 50)

• Board can issue S50 directions where scheme fails FSR

• Clarification around preservation rules

• Board can now specify actual measures (likely to be what’s in 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 Board 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• Section 42 – FS calculations where scheme holds

sovereign annuities/sovereign bonds (S53B basis)

• Section 47 – Unsecured Undertaking Guidance

• Section 47 – General Contingent Asset Guidance

• Section 49 – Funding Proposal Guidance

• Section 50 – Benefit Reduction Guidance

Statutory Guidance

Section 42 Guidance

• Actuary must comply with when certifying AFC where trustees want to use section 53B basis (hold EU sovereign annuities/bonds)

• Used in addition to ASP PEN 3

• Covers both extent of credit to be taken and procedures for trustees/actuaries before section 53B basis can be used

Statutory Guidance

Section 42 Guidance

• Trustees must take advice, pass resolution and notify members before scheme can use section 53 basis

• Actuary must receive confirmation from trustees that they have taken advice, passed resolution, notified members before section 53 basis is used

• Actuary must ensure resolution remains in place on any subsequent certification

Statutory GuidanceSection 47 Guidance

• Unsecured undertaking for FSR – credit rating of ‘A’ or higher

• General contingent asset guidelines for FS and FSR – asset must be secured

• Undertakings and CAs must be capable of enforcement in certain circumstances and be for a minimum of 3 years duration

• Undertakings/CAs will be detailed on AFC/FSRC

Statutory Guidance

Section 49 Guidance

• Actuarial certification of FPs• Later dates for FPs• Where no FP required (notwithstanding negative

certificate)• Notifying The Pensions Board if terms of FP breached• The Pensions Board can in certain cases declare a FP

invalid

Statutory Guidance

Section 50 Guidance

• Puts existing regime on statutory footing

• Trustees must have requested contribution from employer

• Must meet FSR immediately or at end of FP period

• Consultation process on statutory footing

Regulations

• Funding Standard Regulations

• Disclosure Regulations

• Miscellaneous Regulations

Social Welfare and Pensions Act 2012

Funding implications

Pat O’SullivanActuarial Adviser

June 2012

• Funding standard reserve

• Sovereign annuities

• Funding proposals

Topics

Funding Standard Reserve• Two parts:

onon-bond asset risk reserve

oand interest rate risk reserve

• The higher the level of EU bond or cash holdings, the lower the asset risk reserve required.

• The higher the level of matching of bond assets with liabilities by duration and amount, the lower the interest risk reserve required.

Funding Standard Reserve

Sch1-Liabs Sch1-Assets Sch2-Liabs Sch2-Assets0

2

4

6

8

10

12

14

Equities

Bonds

Deferreds

Actives

Pensioners

€m

Funding Standard Reserve

Sch1-Liabs Sch1-Assets Sch2-Liabs Sch2-Assets0

2

4

6

8

10

12

14

Reserve

Equities

Bonds

Deferreds

Actives

Pensioners

€m

Sovereign Annuities

• Different from traditional annuities

• Payments linked to payments from sovereign bonds

• Investment risk not borne by life office

Impact on funding standard figures requires either

• purchase of sovereign annuities

• purchase of sovereign bonds

Sovereign Annuities

Sch2-Liabs Sch2-Assets Sch2-Liabs(SA) Sch2-Assets(SA)0

2

4

6

8

10

12

14

Reserve

Equities

Bonds

Deferreds

Actives

Pensioners

€m

Sovereign annuitiesAFCs/actuarial statements

1. any sovereign annuities held by scheme netted off pensions

2. other pensions in payment valued as ordinary annuities

3. pensions in payment valuation reduced to allow for sovereign annuity pricing

a) by reference to the market in respect of sovereign bonds used by the market

b) by reference to the guidance in respect of sovereign bonds not used by the market

Funding proposals

• Funding proposal submission deadlines

Submission to the Board : later of

- within 12 months of their last scheme year end falling on or before 31 May 2012

- 31 December 2012

• Funding proposal end dates

Latest date trustees can apply for is 31 December 2023

Schemes may have 11 years to deal with deficits

Funding proposals • Criteria

– Investment return no more than 6% p.a.

o 4.5% p.a. for S50 cases

– Pensioners matched with bonds by end of proposal

– Proposals must meet reserve at the end of the proposal.

– Reasons for underfunding confirmed

• Sovereign annuity reduction

o Pensioners matched immediately

o long term reduction assumption 5% maximum

Funding proposals

2012 2015 2023 2025

100%

Original Revised

The Pensions Board Funding Standard Seminars

June 2012

Questions & Answers