The Pensions Board
Funding Standard Seminars
June 2012
Social Welfare and Pensions Act 2012
Summary of defined benefit changes
Grace Guy
Deputy Head of Legal
June 2012
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 Guidance
Section 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’Sullivan
Actuarial Adviser
June 2012
Topics
• Funding standard reserve
• Sovereign annuities
• Funding proposals
Funding Standard Reserve
• Two parts:
o non-bond asset risk reserve
o and 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
14
12
10
Equities
Bonds
Deferreds
Actives
Pensioners
8
€m
6
4
2
0
Sch1-Liabs
Sch1-Assets
Sch2-Liabs
Sch2-Assets
Funding Standard Reserve
14
12
10
Reserve
Equities
Bonds
Deferreds
Actives
Pensioners
8
€m
6
4
2
0
Sch1-Liabs
Sch1-Assets
Sch2-Liabs
Sch2-Assets
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
14
12
10
Reserve
Equities
Bonds
Deferreds
Actives
Pensioners
8
€m
6
4
2
0
Sch2-Liabs
Sch2-Assets
Sch2-Liabs(SA)
Sch2-Assets(SA)
Sovereign annuities
AFCs/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
Original
Revised
100%
2012
2015
2023
2025
The Pensions Board
Funding Standard Seminars
June 2012
Questions & Answers