Eversheds Pensions Briefing The latest news and views for trustees and employers

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1 Eversheds Pensions Briefing The latest news and views for trustees and employers 6 November 2014 Ian Devlin Francois Barker Peter Fahy

2 Overview Time to take stock A lot of change Where are we now? What do recent developments mean for you? 1

3 Looking Back 2007/2008 A softer outlook but not a slump Excellent value in Irish equities IAPF Investment Seminar January % of DB schemes met MFS 1444 DB schemes Pensions Board Annual Report % of DB schemes open to new entrants IAPF Benefits Survey

4 Looking Back Green Paper Published in 2007 overview of regime and possible reforms Raising Social Welfare pension age Options in reforming funding standard and changing priorty order Extending ARF option Moving to career average model for public sector Options on soft mandatory or mandatory pensions State annuity fund Options in terms of DB lifeboat fund 3

5 Looking Back - Green Paper Policy reform overtaken by events Deepening banking crisis 2009/2010 EU / IMF bailout and National Recovery Plan ( NRP ) 2010 / 2011 Waterford Wedgwood collapse 4

6 NRP Impact on Pension System? Commitment to reduce pension tax relief by 940m by 2014 Implementation of NRP proposals Annual earnings limit reduced to 115k from 150k Tax free lump sums capped at 200k SFT reduced from 5.4m to 2.3, now 2.0m Pensions levy 5

7 Regulatory / Legislative Developments Initial Government responses to DB funding crisis Funding proposal deadline extended tough decisions deferred Section 50 powers broadened and reprioritising of pension increases 2009 Sovereign Annuities

8 Regulatory / Legislative Developments Further changes to regulatory regime: Funding deadlines 30 June 2013 Risk reserves 2016 but having a cash cost now Mandatory wind ups for unsustainable schemes 2013 Changes to priority order Changes to revaluation -?? 7

9 Where are we now? Developments in Practice Hard decisions now being/have been made 14% of DB schemes open to new members 79% of DB schemes closed to future accrual 890 DB schemes Pensions Authority Annual Report 2013 Approximately 50% of DB schemes wound up since Many unsustainable but some opportunistic wind ups 61 schemes yet to submit funding proposals (September 2014) 8

10 Our Experience Wind Ups Trustee / employer relationship more arm s length Employer conscious of need to be seen to be reasonable Actuarial advice forming basis for demands above MFS more conservative basis being used Trustees flexing contribution powers where possible Covenant reviews being carried out prior to any settlement Much more risk adverse approach, more complex and arm s length negotiations 9

11 Our Experience Restructurings Section 50 pension increase changes / full accrual freeze most common More arm s length interaction leading to extensive negotiation process Funding Agreements to underpin funding proposal commitments the norm Trustees seeking and getting concessions eg parental guarantees, wind up notice periods Recourse to Senior Counsel where high levels of risk involved 10

12 Our Experience Other Developments Cross border IORP Migration of Irish DB schemes to Continent Often more employer-friendly funding regimes Trustees need to do proper due diligence 11

13 UK & EU Pensions Update A view from across the Irish sea Francois Barker Partner Eversheds LLP francoisbarker@eversheds.com

14 UK and EU pensions update EU update IBM in the UK Other UK / EU pensions policy developments 13

15 EU developments

16 1. How many articles and how many pillars are there in the IORP II draft directive?

17 Revised IORP Directive Proposal put forward by European Commission in March 2014 Revised Directive focuses on improving governance and transparency No new solvency requirements (yet!) 16

18 Revised IORP Directive Proposals include requirements for IORPs to: put in place effective risk management, internal audit and actuarial functions; be run by persons with adequate professional qualifications, knowledge & experience; prepare remuneration policy; provide prescribed information to members, including pension benefit statements; appoint depository to safeguard plan assets, where members fully bear investment risk; and notify national regulator before activities are outsourced 17

19 Revised IORP Directive Key concerns 1. Ability for Commission to direct how risk assessments should be carried out 2. Requirement for trustees to have professional qualifications 3. Prescriptive requirements relating to pension benefit statements 4. Cost of appointing depository for DC schemes 18

20 Revised IORP Directive What next? Draft Directive subject to approval of European Council and European Parliament Council aiming to reach agreed position by 9 Dec Parliament expected to start focusing on this towards end of this year/early next Also subject to review by new Commission 19

21 2. How much has EIOPA estimated the holistic balance sheet would add to the deficits of UK DB pension schemes?

22 Holistic Balance Sheet Latest consultation launched by EIOPA Issued on EIOPA s own initiative Contains proposals for: how HBS would be calculated; how HBS would be used as part of regulatory regime for IORPs 21

23 Holistic Balance Sheet 6 options for way in which HBS could be used Risk management tool Insurance style capital requirement Insurance style solvency requirement would add billions to deficits of DB schemes Even use as risk management tool could have significant implications 22

24 Holistic Balance Sheet Next steps Consultation closes - 13 Jan 2015 Draft technical specification Early 2015 Quantitative impact assessment mid/late 2015 Technical advice to Commission late 2015/early 2016? 23

25 3. How many pages long is the IBM judgment?

26 IBM case in the UK Complex scheme to be closed to future accrual Member / employer communications members had reasonable expectations of continued accrual IBM s UK business case lacking Not a proper pensions consultation Conclusions: Breach of duty of good faith under schemes Breach of duty of trust and confidence under employment contracts 25

27 IBM case in the UK - Impact Employers need to tread very carefully when changing schemes Any scheme change will need historical review and close trustee scrutiny Old communications may be hostages to fortune Timing is everything 26

28 4. From April 2015, what percentage of a DC pension pot can be taken as cash in the UK?

29 Other UK / EU pensions developments VAT on pension scheme spend UK 2014 budget DC flexibility 28

30 Impact of these developments in Ireland Peter Fahy Partner Eversheds peterfahy@eversheds.ie

31 IBM in Ireland Is it relevant? Reasonable expectation red flags Post S.50 wind ups S.50 on top of a prior S.50 Consecutive benefit changes, where prior statements not complied with Position of Employer Position of Trustees 30

32 Other Developments Buy Ins and Buy Outs More feasible as schemes mature MNCs are driving Often using foreign insurers UK market practice coming into play Impact of new UK pension freedoms? Annuity capacity Retirement under UK regime 31

33 EU Developments VAT treatment of DC schemes ATP case DC schemes should benefit from VAT exemption for special investment funds Finance Bill 2014 exemption proposed Significant cost benefit for DC schemes Look back claim for prior years is open Scope of exemption what management services? 32

34 EIOPA has not gone away you know Extract from EIOPA Work Programme

35 Consultation Paper on solvency of IORPs Holistic Balance Sheet Advice to the EC on EU solvency rules for IORPs. Likely to put Irish system under further scrutiny. Pensions Authority focus on derisking of DB schemes likely to continue. 34

36 A Last Word Can an employer be a fiduciary? New argument by trustees Exercising a discretion under trust deed Thrells v Lomas special circumstances? Power vs duty 35

37 Contact Peter Fahy Partner peterfahy@eversheds.ie Ian Devlin Partner iandevlin@eversheds.ie Francois Barker Partner Eversheds LLP francoisbarker@eversheds.com

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