Sovereign Annuities HOW CORPORATE PENSIONS WILL EVOLVE

Transcription

1 Sovereign Annuities

2 1. How will defaults operate in practice? The Irish Life policy will be to pass on the proceeds of the Sovereign Bonds to pensioners at whatever level is payable from the bonds. Therefore if the bonds default, then this default is passed on to the pensioner 2. Why the focus on Irish Bonds? As the State Pension is backed by the Irish State is there not an element of imprudence by Sovereign Annuities involving Irish Bonds.? Is 6% yield enough for Irish Bonds? The focus on Irish bonds is because of the likely availability of bonds from the National Treasury Management Agency which will be the most suitable type of bonds to be used by pension schemes. These bonds will be offered at an enhanced yield compared to Triple A rated countries. There are advantages and disadvantages to this type of home investment. Current Irish yields are slightly higher than 6% but the new bonds will be specifically designed for annuities so that almost their full yield can be passed through to schemes in terms of pricing. Would there not be a diversification benefits of involving Belgium, Spain, Italy? There would be advantages of involving other countries. However, the right types of bonds to make it viable are not currently available from these countries 3. What are the accounting implications of buy-in and buy-out? In respect of accounting implications for a pension scheme, a buy-in is essentially an investment decision and the pensioner continues to be a liability of the scheme backed by the Sovereign Annuity as an asset of the scheme. As the pensioner continues as a liability of the scheme the accounting implications are no different to a scheme which pays the pension directly from the scheme assets but has not purchased Sovereign Annuities. In a buy-out the pensioner is no longer a liability of the scheme and the liability has passed from the scheme to the pensioner and therefore the pensioner carries the risk of default. In accounting for pension costs no pensioner liability would be included in the calculation where the pensioner liability has been bought out through Sovereign Annuities. 4. With Sovereign Annuities, is the Trustee liability fully discharged does legislation cover this adequately? No. What we have seen so far does not cover this adequately. Pensioners could attempt to sue the Trustees and it would be up to the courts to decide. However the Pensions Act gives a court the power, if proceedings for breach of trust are brought against Trustees for having purchased Sovereign Annuities, to relieve Trustees from liability. Until there is a case taken and decided on it cannot be said with certainty what, if any, liability could fall on the Trustees. 5. Will Sovereign Annuities be available for Defined Contribution plans? At the moment there are no plans to make Sovereign Annuities available for members retiring from Defined Contribution schemes. The reason for this is Irish Life need large bulk cases to encourage the National Treasury Management Agency to launch the new bonds. Bulk transactions are also more likely to include professional advisers ensuring a full understanding of the transaction and the potential risks involved. Originally, the key benefit of Sovereign Annuities was thought to be to relieve the funding position on defined benefit plans.

3 6. In a Defined Benefit wind up where a pensioner is already receiving 100, would it be legally ok to offer a choice of - a Sovereign Annuity of 100 (linked to Irish Bonds) or a traditional annuity of 80? Trustees should take legal advice on this matter. 7. How should Trustees address the communication challenges of Sovereign Annuities for pensioners? The Trustees would need advice on this issue depending on whether it is a buy-in - where the scheme retains the liability and the risk - or a buyout - where the risk of default is passed to the pensioners. It would be very important for pensioners to be aware of the risks involved and why the Trustees were embarking on the strategy. 8. What protection is there for Trustees who buy Sovereign Annuities in a wind up situation and in an ongoing situation can Trustees purchase Sovereign Annuities with out fear of litigation? No. Pensioners could attempt to sue the Trustees and it would be up to the courts to decide 9. In Sovereign Annuity buy-out who gains if the underlying Sovereign Bond returns to investment grade the pensioner or the life office? The Sovereign Annuity is linked to the payments under the bond rather than the price or rating of the bond. Regardless of what happens the bond rating, positive or negative, there is no impact on payment unless an actual default event occurs. 10. The saving of 20% indicated for Irish Sovereign bond seems low compared with 2% v 6% interest rate differential why is there not a greater saving? Despite the availability of National Treasury Management Agency matching bonds, there is still a yield loss due to the limited nature of these bonds. The greater number of bonds at different durations the National Treasury Management Agency produce, the lower this yield loss will be. 11. Is it currently legal for a pensioner to take a reduced traditional annuity when they have 100% priority? If a scheme is wound up in deficit where there are insufficient assets even to cover the pensioner liability in full then the pensioners can suffer a reduction in benefits. 12. In a buy-in, where you want to continue the Defined Benefit scheme for both active members & pensioners, can you designate Sovereign annuity buy-in specifically to cover pensioner liabilities? The buy-in of Sovereign Annuities can cover the pensioner liability. The pensioner continues to be a liability of the Scheme and in the event of a default the Trustees would have to consult with the sponsoring Employer to assess whether the Employer was prepared or in a position to make good the deficit. In a wind up, active members would have the option of using their transfer value to purchase a secured pension under a new DC scheme through the Irish Life Corporate Business DC+ product which reduces the member s exposure to investment risk.

4 13. What is the legal exposure of Trustees if they decide to go for Sovereign Annuity buy-in or buy-out for pensioners? Trustees should get legal advice before purchasing Sovereign Annuities. The Pensions Act gives a court the power if proceedings for breach of trust are brought against Trustees for having purchased Sovereign Annuities to relieve Trustees from liability. However, until a court case is taken and a decision made it is unclear as to what exposure the Trustees have in these instances. 14. When you give some one a hammer everything looks like a nail We want to reduce priority for pensioners but is a product which will vary in value appropriate for this? The use of Sovereign Annuities in the wind up of a Defined Benefit scheme will ensure that there is more assets remaining to cover active members and deferred members and for this reason will have to be considered by Trustees and sponsoring Employers. The price of Sovereign Annuities, just like the price of Conventional Annuities, will vary depending on underlying bond yields. Sovereign Annuities will present another set of options to Trustees in the wind up process which allows them to tap into more favourable bond yields and a lower price. 15. How do we trust the new products being discussed DC+ & Sovereign Annuities? At the time, endowment mortgages & Defined Benefit schemes were the white knights and they did not last the course of time how do we gain comfort that these new products will not follow suit? These new products are options for Trustees, members and sponsoring Employers to consider. They are not the silver bullet that will sort out all the problems of the Defined Benefit world- but we feel confident that they will form part of the solution. 16.If a Defined Benefit scheme has already transformed to a hybrid Defined Benefit / Additional Voluntary Contribution, what advantages would Sovereign Annuities provide to actives, deferred and pensioners what advantages to Trustees, Employers and scheme members. The most common type of hybrid arrangement is to provide a Defined Benefit pension up to a certain salary level. The balance of pension over this salary level is funded on a Defined Contribution basis. Defined Benefit pension accrued before the change may not have been affected i.e. they remain a liability. Overall, even though future Defined Benefit liabilities have been reduced, the Trustees and Employers may face the same problems that other Defined Benefit schemes face - large unpredictable deficits and unaffordable funding requirements. Buying in Sovereign annuities in these circumstances are useful to Employers and Trustees as they can reduce the scheme s deficit and funding requirements under the Minimum Funding Standard rules. The plus for members of all categories is that it will increase the likelihood that the Employer can continue to fund the scheme. 17.Is there a circular / political issue with Irish Sovereign Annuities if more and more are bought it will be harder for the Gov to default (the grey vote) and so they become more attractive driving down yields and increasing costs? We think that there is certainly good reasons to use Irish Bonds as part of the Sovereign Annuity for a variety of reasons - we are closer to the Irish position and therefore better understand the risks and there would be a lot more pressure on the government in a default situation for obvious reasons. As the fiscal position of the country improves, the difference between Irish and German bonds will reduce and Sovereign Annuities will be closer to Conventional Annuities in price and the risk of default will have diminished. Sovereign Annuities are a way of tapping into the current yield difference thereby giving some funding options to Defined Benefit schemes that are in deficit.

5 18. Are Sovereign Annuities a practical solution to levelling up coverage for actives, deferreds and pensioners where a Defined Benefit scheme winds up in material deficit? Yes particularly in schemes where if Sovereign annuities were not used, active members and deferred members would otherwise receive no benefit or very low benefits.

6 DC +

7 1. Will Irish Life offer indexed pensions in their DC+ product will IL offer spouse pension on death in retirement? Yes spouse s pension on death in retirement and pension increases post retirement are an option. 2. Under the DC+ product if all actives opt for transfer values to secured pensions, what happens to the existing pensioners of the Defined Benefit scheme will there be a large deficit to be funded by the company to cover pensioners? DC+ is a potential solution for active and deferred members. Pensioners remain first priority for funding (though not their increases) and other solutions need to be considered to deal with them e.g. Sovereign annuities or funding the deficit? 3. Please indicate what level of charges will apply to DC+? DC+ customers will benefit from the same level of competitive charges as our existing customers. Apart from the costs associated with the purchase of the secured pension, the ongoing costs for DC+ will be similar to the current charging structure for Defined Contribution schemes. 4. Can I access Sovereign Annuities in DC+ to plug some of the gap between my Defined Benefit promise and my secured pension in DC+? The DC+ secured pensions are deferred annuities. The Sovereign annuity legislation only allows for immediate annuities. 5. DC+ presentation assumes 20% contribution is this realistic? The 20% contribution level referred to is a combination of Employer, Employee and Additional Voluntary Contributions. Contribution levels being made to Defined Benefit schemes are often as high as or higher than this level. In order to arrive at a solution that will close out Defined Benefit liabilities yet continue to provide high quality pensions Employers and Employees may be willing to agree substantial contribution rates for the replacement scheme. 6. Is DC+ only open to wind up of Defined Benefit scheme if so why particularly as Defined Benefit members have the option to choose the deferred annuity option or go with Defined Contribution? Up to now, if members were moving from Defined Benefit to Defined Contribution the transfer value from the Defined Benefit scheme would be invested in the Defined Contribution scheme and would therefore be exposed to future investment market risk. We understand that the move from Defined Benefit to Defined Contribution can be difficult for members, Trustees and sponsoring Employers and for this reason we have designed DC+ to give members the option of using their transfer value to purchase a secured pension payable from normal retirement date thereby reducing the member s exposure to investment risk. Although designed for the move from Defined Benefit to Defined Contribution, DC+ could also be a very attractive option for existing DC members, particularly those with large funds built up. 7. Can you please speak about fees in Defined Contribution schemes? It seems to me that in Ireland fees are very high and this has a negative impact on scheme members? Fees in the pension industry in Ireland compare favourably to pension industry fees in the UK and further afield, despite the fact that providers abroad

8 generally operate in far larger markets and so can take advantage of larger economies of scale. The Irish pensions industry is very competitive, and this competition ensures that, broadly speaking, fees incurred by Trustees or members in pension schemes represent good value for the financial products and services provided. 8. What is the pricing basis for the secured pension under DC+? Irish Life Corporate Business is endeavouring to provide the most competitive deferred annuity rates in the Irish market. The rates will compare favourably with current immediate annuity rates. 9. Can Defined Contribution schemes (non Irish Life) get the deferred annuity at the same rates as DC+? We would hope that the secured pension option will be made available regardless of whether the Defined Contribution scheme being set up is a result of a Defined Benefit scheme closing or not. 10. What happens the secured pension if the member leaves employment? The member will have three choices: Leaving the secured pension as a deferred benefit in the DC+ scheme. Transferring the secured pension into an Irish Life Personal Retirement Bond. Transferring the value of the secured pension into any buy-out bond. The member s other funds accumulated in the DC+ plan will have to be transferred at the same time and in the same way as the secured pension. 11. Guaranteed deferred annuities have been expensive: Will it be possible to purchase a guaranteed deferred annuity in DC + based on a Sovereign Bond? The secured pension premium rates will compare favourably to immediate annuity rates so we believe many customers will find them a good option. The Sovereign annuity legislation only allows for immediate annuities so secured pensions will not be priced on a Sovereign annuity basis. 12. The speakers have suggested that members will make a choice re DC+ but surely the ultimate responsibility will rest with Trustees or does it? The Trustees could decide to allow the members to choose how their transfer values from the previous Defined Benefit scheme into a new DC+ Plan are invested. In the same way as Trustees frequently allow members to choose from a range of funds. If they do so the Trustees will need to ensure that members are provided with adequate information to allow them to make an informed choice and advise the members that they, the Trustees, are not responsible for the investment choice made by the member. Investing in a deferred annuity will just be another investment option under a DC+ Plan. Members should also avail of professional advice before making any decision. 13. Is the secured pension under DC+ subject to statutory revaluation from the date of purchase to Normal Retirement Date? The secured pension is an asset of a Defined Contribution plan and is not subject to statutory revaluation.

9 14. How is the DC+ secured pension valued? Are Sovereign annuities used? The secured pension is a conventional immediate annuity. Sovereign annuities are not used.

10 General 10

11 1. How can you have access to Approved Retirement Fund options under a buy-out bond from a Defined Benefit scheme? If a person has paid Additional Voluntary Contributions in the Defined Benefit scheme or if the Defined Benefit scheme transfer value goes into a Defined Contribution scheme before subsequently moving into a buy-out bond. 2. Will ILIM (Irish Life Investment Managers) be offering a suite of Euro Sovereign Bonds which will provide a match for possible Sovereign annuities? ILIM currently manage assets valued at 33bn. 11bn of this amount is in bond mandates specifically designed for pension funds. ILIM intend to offer a suite of Euro Sovereign Bonds which will provide a match for Sovereign annuities. 3. When will we know the new Minimum Funding Standard rules? The Pensions Board have not announced yet when they will publish the new Minimum Funding Standard rules. 4. In all the proposals discussed this morning, will a Section 50 only be required in a wind up situation? No a section 50 application will still be required in ongoing schemes where there is a deficit which can not be dealt with. 5. Should the same company be allowed to advise the Employer and the Employees /Trustees? There is a lot of emphasis at present on having the right governance structures in place for pension schemes, both defined benefit and defined contribution and to ensure that the various service providers operate to service level agreements that are objective and measurable. In the life of any scheme there will be times when conflicts of interest arise and where in those circumstances it will be appropriate for the Employer and the Trustees to have different advisors. In normal circumstances, conflicts of interest will not arise and it is in order to have the same advisors. The advisors should be aware of such conflicts and should raise them as an issue to the extent that different teams within the same advisory company may become involved to strengthen the process and provide comfort to all parties. 6. What remuneration alternatives will replace pension in excess of reduced Standard Fund Threshold (SFT)? Irish Life Corporate Business are exploring numerous options should the Standard Fund Threshold reduce to a level which will make it prohibitive for people to continue saving into pension schemes. One such option could be an Employer sponsored savings plan. However, detail on how this type of product may function has not been finalised yet. 7. Should the whole area of pensions between Public and Private be brought to a level of fairness now that Defined Benefit is dead effectively and should this be our industry focus now that the threshold is likely to reduce to 1.5m? If the Standard Fund Threshold were to reduce to 1.5m the difference between Public and Private sector pensions would become very evident and may accelerate changes to bring the two into line. However it is not the place of Irish Life Corporate Business to comment on the level of fairness between Public Sector Pensions and Private Sector Pensions. 11

12 8. What percentage of individuals buy annuities with indexation According to our book of business, approximately 13% of annuities are bought with escalation included. 9. In a number of schemes Defined Benefit and Defined Contribution have been combined as a solution to the funding issue have Irish Life explored this as a product offering? We are aware that a number of companies have introduced hybrid schemes whereby the Defined Benefit scheme liability is capped based on a level of pensionable salary or benefit and Defined Contribution is introduced to cater for pensionable salary or benefit in excess of the cap. This essentially is down to scheme design and Irish Life Corporate Business are in a position to offer day to day pension administration services which would be capable of running a hybrid scheme with an element of Defined Benefit and Defined Contribution within the scheme design. At present Irish Life Corporate Business provide pension administration services to over 200,000 members of occupational pension schemes. 10. Resistance to change is not an option can you comment on the resistance of members and unions to changing from Defined Benefit to Defined Contribution and how best they can be brought around to the new Defined Contribution world? Resistance to change is understandable particularly when it affects financial security in retirement. Members in Defined Benefit schemes want to hold on to these schemes and perceive these schemes to be guaranteed. However as we know the continuation of the Defined Benefit scheme is only as good as the Employer s commitment to the scheme and their ability to fund any deficits as they arise. A lot of companies are coming to the conclusion that they can no longer afford to fund the Defined Benefit promise and as a consequence are forced to wind up the Defined Benefit scheme. This is a difficult move for all of the parties concerned - sponsoring Employer, Trustees and members. Sovereign Annuities can soften the blow by ensuring a more equitable distribution of scheme assets and a greater proportion of remaining assets for active members and deferred members. DC+ provides an option for active members and deferred members to use their transfer value coming out of the Defined Benefit scheme to purchase a secured pension payable from normal retirement date thereby reducing the member s exposure to investment risk. Both of these product initiatives from Irish Life Corporate Business will help in the transition from Defined Benefit to Defined Contribution and will help smooth the way for members to make the transition more acceptable. 11. Can you comment on why the Pensions Board have been so slow to re introduce the funding standard has the credibility of the Pensions Board been damaged by the repeated deferrals of its re introduction? We do not know the reason behind the delay but we do not feel that it has damaged the credibility of the Pensions Board. 12