Statement of Reasonable Projection Requirements

Transcription

1 Statement of Reasonable Projection Requirements The requirements for DC Statements of Reasonable Projection come into effect on 1 st July Registered Administrators will be putting processes in place to ensure schemes comply with the requirements and the purpose of this note is to alert trustees to the requirements and show them what they can expect. With effect from 1 st July 2009, DC Statements of Reasonable Projection must be provided: 1) at least once in every scheme year commencing on or after 1 st July The information contained in the document must relate to a date not earlier than 6 months before the date on which the information is furnished (in practice this will mean the Statements will be issued within 6 months of scheme year end) 2) within 2 months of a member joining a DC scheme (or the DC element of a DB scheme) or a transfer being received into a scheme for a member 3) within 2 months of the member or employer notifying the trustees that the member has left employment or is about to leave employment (other than by reason that the scheme is winding-up) 4) within 4 weeks of a member (or prospective member) requesting a Statement. The trustees can decide to apply a reasonable charge for such a request 5) within 4 weeks of the variation of the scheme benefits which the trustees are required to notify the member as being a material alteration. The earliest a scheme would have to automatically provide Statements would be by 31 st December 2009 (i.e. in the scheme year beginning 1 st July 2009 and within 6 months of the 30 th June 2009 renewal). The Statement would have to be prepared by the scheme s Registered Administrator by 30 th November However, such a scheme could choose to issue the statements as late as 30 th June 2010 provided the information is based on information at or later than 31 st December The other requirements also come into effect on 1 st July Therefore, where there are any new joiners, members leaving employment or a transfer being received into a scheme for a member on or after that date, a Statement must be issued within 2 months of the event happening, which could be by 30 th September. A sample Statement, issued by the Pensions Board, is set out in the next page. As the annual Statements must be issued within the same timeframe as the Annual Benefits Statement it is likely that they will form one document when being prepared by the Registered Administrator.

2 STATEMENT OF REASONABLE PROJECTION - DEFINED CONTRIBUTION Date of Statement: 1 January 2009 Scheme Name: The Staff Defined Contribution Pension Plan PB Number: PB Personal Details Member Name: Josephine Member Policy number: A Date of Birth: 2 February 1960 Date Joined the Scheme: 3 March 1997 Normal Retirement Date: 2 February 2025 Normal Retirement Age: 65 Fund value at date of statement (including previous transfers into fund, if any) 38,425 Future Contributions assumed in projection Your Regular Contribution Your Additional Voluntary Contribution Regular Contribution by your Employer per month per month per month Projected benefits at Normal Retirement Age Your fund of 38,425 together with 16 years future contributions, could reasonably be projected to produce the following benefit:- Projected fund at retirement 189,503 Projected pension at retirement 6,649 per annum The projected fund in CURRENT VALUES is 118,675 The projected pension in CURRENT VALUES is 4,164 per annum Maximum State Pension (the current maximum rate of State Pension (Contributory) for a single person) 11,975 per annum Notes The projected fund assumes an investment return until retirement of 6% per annum. The contributions are assumed to increase at 3% per annum. The CURRENT VALUE figures allow for price inflation at an assumed rate of 3% per annum. Investments may fall as well as rise in value. The projected pension is shown for illustration purposes only and is not guaranteed. This is because fund values are not guaranteed and the cost of buying a pension at your retirement date is unknown. This statement assumes a pension increasing at 2% per annum, payable monthly in advance, with no dependants pensions and guaranteed to be paid for at least 5 years. It assumes that is needed at retirement to buy 1 of pension per annum. The effect of charges on the projected fund is the equivalent to a reduction in the investment return of 1.1% per annum. The trustees have not been notified of any Pensions Adjustment Order in respect of your benefits. This statement does not take account of tax issues, which will depend on the rules of your scheme and tax law at the time you retire. Contact for enquiries: Scheme secretary, Scheme Building, Dublin 26 Tel IT IS IMPORTANT THAT YOU MAKE ADEQUATE PROVISION FOR RETIREMENT. THE PURPOSE OF THIS DOCUMENT IS TO ASSIST YOU IN PLANNING FOR YOUR INCOME IN RETIREMENT.

3 TECHNICAL REQUIREMENTS The remainder of the note summarises the technical requirements of the regulations and the actuarial guidance. It has been prepared in order to assist IAPF members and every effort has been made to ensure that the information contained within the above guidance documents is correct and accurate. However, in order to ensure they fully comply with their legal obligations, trustees should refer to the requirements which are set out in the Pensions Act 1990 (Disclosure of Information) (Amendment) Regulations The Statement of Reasonable Projection (SORP) for DC schemes must also be prepared in accordance with guidance issued by the Society of Actuaries in Ireland in Actuarial Standard of Practice Pen-12. Information to be provided - Regulations The following information must be specified in the Statement: the date of the member s normal pensionable age and any member reference number the amount of each regular employer and employee contribution and separately any AVC proposed to be paid the total projected value of the benefits payable at normal pensionable age, based on the projected value of the contributions and transfers already paid, and the projected value of future contributions on the basis the member remains in service until normal pensionable age the projected amount of pension which can be purchased with the total fund the current value of the projected total fund and pension (the projected benefits) whether or not the projected benefits are guaranteed and if not, why not the material assumptions as to inflation, future contributions and annuities the assumed rate of investment return prior to taking benefits and before deduction of charges the effect of charges A statement of the importance of making adequate retirement provision and that the purpose of the SORP is to assist in planning for pension provision but that it does not take account of any tax related issues that investments may fall as well as rise in value and, Where the SORP has been prepared as a result of a member joining a scheme or a transfer being paid to the scheme or on request from a member or after a variation of scheme benefits the SORP shall also include: o the member s date of entry to the scheme, the value of any contributions and transfer value received (this can be omitted if the SORP is being prepared within 2 months of the member joining the scheme), a statement that the Social Welfare Pension is payable in addition, subject to tests by the Department of Social and Family Affairs and the address and information number for the Department, the member s name, date of birth, known marital status and gender, the name of the trustees and any details of a Pension Adjustment Order received, and o the date of preparation of the SORP.

4 The SORP must be prepared in accordance with the actuarial guidance unless because of the structure of the scheme it is not reasonably feasible for the trustees to comply with that guidance in respect of projections of investment growth, deductions to cover charges and expenses or the cost of protection benefits. In such a case the trustees may adopt a different methodology for those projections provided they are reasonable having regard to the general purpose of the SORP and the assumptions are specified. The SORP should use a single rate of investment return prior to taking benefits, before charges, of not more than 6% per annum. A single life annuity rate shall also be used unless an alternative is more reasonable.

5 Actuarial Practice Note Requirements In summary, the requirements set out in the actuarial practice note require the following: Investment Returns The projected retirement funds must be determined allowing for the actual (e.g. monthly) timing of contribution receipts, investment growth and deductions to cover expenses and charges. The rate of investment return shall have regard to the asset mix on the basis that: o the gross investment return for equities and property will be 7% per annum o the gross investment return for fixed interest securities will be 4.5% per annum o the gross investment return for cash will be 3% per annum, and o the gross investment return for all other asset classes will be 3% per annum unless otherwise specified by the Society. In the case of geared funds, borrowings must be treated as negative holdings of the assets and the rate of investment returns applied must be the expected rate of interest payable subject to a minimum of the gross investment return on fixed interest securities. Where the allocation of contributions and/or assets is expected to change in the future (e.g. as in a lifestyling approach) the assumed investment mix for a month must be based on the expected asset mix for that month. Investment returns must be applied on a monthly basis. The effect of charges must be calculated by determining the projected fund net of deductions to cover expenses and charges, including the cost of protection benefits, and the rate of investment return both net of charges and without charges required to accumulate this fund. The difference between the two rates of investment returns required is the effect of charges. Earnings and CPI increases Where retirement benefits are illustrated as a percentage or multiple of salary the benefits must be determined on the basis of the salary escalating at a compound rate of 3% p.a. Where benefits in monetary form are expressed in current value they should be deflated by 3% p.a. Where contribution increases apply they should be reflected on the basis consistent with the assumed rate of investment return but not more than the assumed rate of deflation. If it is necessary for this purpose to make assumptions regarding general increase in earnings, this should be at 3% p.a. and increases in CPI should be at 2% p.a. Annuity Assumptions Illustrations of annuities must show annuities which escalate at 2% p.a. unless the rules of the scheme specify otherwise in which case that rate must be used. All annuities must be assumed to be payable monthly in advance and for a guaranteed period of 5 years, unless the rules specify other terms.

6 If the remaining term to retirement is less than 3 years, either a current annuity rate or one broadly consistent with current rates must be used or else a statement to the effect that longterm annuity rates have been used and that the actual annuity may differ in retirement must be made. In determining the annuity an interest rate of 4% p.a. must be used and the practice note also specifies mortality assumptions and provision for improving mortality. If a guaranteed annuity rate applies that is higher than the assumptions this must be used. Charges The current basis for protection (i.e. risk) benefits, with allowance for rates increasing with age, must be assumed unless there is reason to believe the charging basis will increase. Reductions in mortality and other risk charges must not be included. If a deterioration in risk experience and charges is expected this must be reflected. Deductions to cover expenses and charges must include charges for profit where applicable. The current charging basis for expenses must be reflected unless there is reason to believe this will increase in the future. In particular any systematic adjustment in charges to reflect inflation of expenses must be allowed for. Reductions in charges must not be anticipated unless contractually guaranteed. The actual (e.g. monthly) timing and actual level of expense deduction must be reflected. It may be assumed that investment return is achieved after: meeting the costs of buying and selling investments, including stamp duty, to the extent that these are arm s length costs that are actually disbursed. These do not include charges for investment management custodial and other fees which are the necessary costs of maintaining an investment fund, to the extent that these are arm s length costs that are actually disbursed; and meeting the arm s length cost of routine property maintenance, including property valuation fees and rent collection. These charges need not be shown as deductions to cover expenses or profit. The following costs are not regarded as implicit in the investment return: costs of buying and selling investments or maintaining properties which are in excess of what could be negotiated on an arm length s basis bulk discounts on stockbroker commissions which are retained for the account of the provider of the contract or investment vehicle; or the costs of investment management. All other charges must be treated as deductions to cover expenses. Typically (but not exhaustively) these include: contribution charges, premium charges or bid/offer spreads regular management charges net of loyalty bonuses extra management charges on Initial or Capital units retention of dividend and other income policy or account or contract fees reduced allocations of contributions to units Non-investment periods during which contributions received are not allocated to units

7 rounding charges. If the effects of these are uncertain best practice would be to illustrate a worst-case scenario Explicit charges e.g. for policy/account/contact set-up charges or medical expenses In addition penalties may apply which must be allowed for. For products where the charge is explicit but its level is not known precisely at inception the illustration should be based on best estimates of anticipated deductions. The targeted levels of deduction on which the pricing was based may provide a suitable estimate. Where the assets of a scheme or of a contract is an investment in other packaged products or investment vehicles it will be necessary to look through to the underlying assets to ensure all charges are included. Additional Information Any additional information required to ensure the SORP is fair, clear and not misleading must be included. An appropriate adjustment must be made to the calculations where the prescribed illustration gives a misleading impression of the charging basis. The SORP must include a clear explanation of how and why a departure has been made from the prescribed formula. Exceptions If the actuary advises the trustees that as a result of the structure of the scheme it is not reasonably feasible to comply with aspects of the practice note he or she must specify in writing to the trustees the rationale for this advice. If the trustees avail of the provisions to depart from the prescribed requirements the actuary must: Apply the provisions of the practice note as far as is reasonably practicable and specify in writing to the trustees: o The assumptions underlying the chosen methodology o The differences between the chosen methodology and that specified in the practice note and o The reasons for believing that the chosen methodology provides a reasonable basis for projections of investment growth, deductions and costs and/or for calculating the effect of charges as applicable.