12 February 2015 Defined benefit pension schemes – What next for Trustees?

12 February 2015

Defined benefit pension schemes – What next for Trustees?

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• Some key DB statistics

• Funding issues

• Evolving investment strategies

• Assessing company covenant

• Increasing complexity and the growing Governance challenge

• The Standard Transfer Value basis

Agenda

2

Some key statistics


4

Some key DB statistics

Number of DB Occupational Pension Schemes2013/(2012)

Number of active members2013/(2012)

Approx. assets/liabilities

DB Schemes subject to Funding Standard

890 / (933) 178,619 / (189,644) €50bn assets€55bn Funding Standard

liabilities€8bn Funding Standard

deficit

(liabilities approx. 25% of GDP)

Other data:• Currently about 750 schemes subject to the Funding Standard

Implies a significant fall in the number of schemes over 2014

• About 250 schemes with Funding Proposals in place

• About 100 Section 50s to date many with Funding Proposals also

• 35 schemes with no Funding Proposal/Section 50 in place

Funding Issues


6

The funding crisis just won’t go away

Dec-1

1

Mar

-12

Jul-1

2

Oct-12

Jan-

13

Apr-1

3

Jul-1

3

Oct-13

Jan-

14

Apr-1

4

Jul-1

4

Oct-14

1.00%

1.50%

2.00%

2.50%

3.00%

€ 2,100

€ 2,300

€ 2,500

€ 2,700

€ 2,900

€ 3,100

€ 3,300

Annuity Interest Rate

Cost of €100 pension

Ann

uity

inte

rest

rat

e

Cos

t of €

100

pens

ion

for

a 65

yea

r ol

d

Cost of €100 pension for a 65 year old Key issues are: Bond yields keep falling offsetting

investment gains

Catastrophic accounting number at 31/12/2014 for some sponsors

Very low return expectations will make Funding Proposal ‘on-track’ assessments challenging

Fundamental instability in the statutory funding system remains

Risk reserves in from 1/1/2016

Combining a long term perspective with shorter term Funding Standard requirements is difficult

Evolving investment strategies


Portfolio construction and manager structureDiversification

Traditional Balanced Fund

Domestic/Global Bonds Domestic/Global Equities

Long-short strategiesGlobal equitySpecialist EquityEmerging marketPrivate equityInfrastructurePropertyMacroReal assetsCreditInsuranceCash

8


Consider long-term investment objectives

Key questions Possible answers / considerations

Where do you want to get to 100% funded on an MFS basis? 100% funded on a bond basis? Include additional margin for prudence (demographic / mortality risk?)

When do you want to get there? Sooner is preferable, but what is affordable? A shorter timeframe will require a higher outperformance target. How mush risk is acceptable along the way?

How do you want to get there? What mix of contributions and investment outperformance? Targeting higher investment outperformance means a greater risk of a fall in funding level.

What will you do if you don’t get there? Ask the Company for more money? Take more investment risk? Extend the timeframe?

The ‘Journey Planning’ concept

0Liabilities Paid from...

€m

Future investment outperformance

Company contributions

Existing assets

100% funded on a self-sufficiency

basis

Time

Funding level

Current position

Journey Plan

...but also need to consider the potential for bad outcomes (risk)

9


End 2009 End 2010 End 2011 End 2012 End 20130

10

20

30

40

50

60

70

80

90

100

64.358.7

52.347.2 47.5

24.929.5

33.238.5 36.7

3.8 4.44.4 3.6

3

2.8 3.2 5.9 5.15.6

2.8 3.2 5.9 5.1 7.2

Split of assets in Irish DB Schemes

Alternatives (%)

Cash (%)

Property (%)

Bonds (%)

Equities (%)

10

Assessing Company Covenant


Diminishing Company covenant – biggest single DB risk?

12

Increasing complexity and the growing Governance challenge


New legislation rarely if ever simplifies things, tends to add additional layers of complexity

Benefit changes have made administering and communicating schemes much more complicated and expensive

Closure to future accrual requires an integrated approach to administering benefits for a legacy DB arrangement and also a new DC structure

Revenue rules and preservation requirements need a radical overhaul

‘Decision tree’ at retirement has become very complex

Deferred member data becoming increasingly out of date and difficult to administer

Need for ‘data cleaning’ as schemes mature

Increasing Complexity

14


Pensions Authority consultation on financial management guidelines

• Pensions Authority has issued draft guidelines on financial management of defined benefit schemes

• Guidelines cover:

Scheme data the trustees should have available to them

Governance practices relevant to financial management

Processes that the trustees should follow

Analysis that the trustees should undertake in order to arrive at decisions

• Guidelines emphasise that trustees should ensure they have access to actuarial and investment advice

• Consultation period finished 30 September 2014

• Pensions Authority reflecting on the consultation and final guidelines due shortly

15


Pensions Authority consultation on financial management guidelines

Scheme data• Asset values and returns• Asset allocation relative to benchmark• Scheme liabilities and solvency position and

progress v Funding Proposal• Costs compared to budget• All information provided at least annually

Governance• Regular scheduled and structured Trustee

Meetings• Delegation of functions, monitoring of

advisers• Management of conflicts• Monitoring of costs and agreement with

sponsor• Written SIPP

Analysis• Are the scheme contributions adequate

to provide the benefits of the scheme in the short and long term?

• How likely is it that the benefits cannot be paid because of the risks to which the scheme is subject?

Processes• Review of investment strategy• Review of contribution and funding

adequacy• Preparation/review of risk matrix• Discussion with employer about

contributions and related issues• Review of investment manager

performance• Review of scheme costs

16

The Transfer Value basis


Standard Transfer Value basis

• Trustees of well funded pension schemes beginning to re-consider use of standard transfer value basis: Assumptions have not been updated for a long time, no longer market related Offers very poor value for transferees Link to actuarial value is weak Will depend on wording under Trust Deed and Rules

18

Documents

12 February 2015 Defined benefit pension schemes – What next for Trustees?