Funding

Defined Benefit Scheme Promises

Defined benefit schemes promise a pension payment, which is usually based on the level of final salary. In order to fund the pension at the promised rate, a certain level of contributions must be made and maintained. Because of this requirement, Pensions legislation obliges defined benefit pension schemes to meet minimum funding and solvency requirements. The funding level must be certified.

Historically, many defined benefit occupational pensions promised retirement benefits that were pitched at the maximum permissible level.. This maximum is determined by the  level of final salary and  is subject to certain caps which have been introduced since 2009. Very few newer pensions promise the maximum level of pension benefits.

The purpose of the funding rules is to secure  that contributions, in particular, the employer’s residual contribution is maintained at a sufficient level to meet the projected liabilities of the scheme to pay pensions.


Role of Actuary

Pension actuaries must be qualified members of the Society of Actuaries in Ireland.  Actuaries must follow professional guidance in forming their opinions.  Actuaries are experts in determining the present-day funding requirements for future benefits in light of statistical, financial, economic, personal and other factors.  Actuaries estimate the future liabilities to provide benefits under pension schemes in order to assess whether there exist sufficient assets to meet the liabilities accrued.

Pension trustees should obtain appropriate actuarial advice regarding contributions and the ability to meet the scheme promises. The actuary will recommend a contribution rate.  The actuary must make assumptions regarding salary increases, investment returns and future contributions, movements in and out of the scheme. This actuary assists the trustee in complying with their general duties to fund the pension promises and obligations.

An actuary is required to certify to the Pension Pensions Authority and the members, the extent to which the scheme is properly funded, were it to be terminated.  The actuary must prepare a valuation of the assets and liabilities of the defined benefit scheme and advise a funding rate. Contribution at this rate does not necessarily mean that the trustee’s obligations to invest have been complied with.  Their obligations to protect members may require a higher level of funding.


Application of Funding Standard

The legal funding standard applies to defined benefit pension benefit schemes.  Some pre-1993 schemes are exempted.  Other pre-1993 schemes with shortfalls were given time in which to meet the funding requirement.  The shortfalls were required to be eliminated by 1st June 2012.

The exclusion for certain pre-1st January 1993 schemes applies to “frozen” schemes. The scheme must be one where no new benefits accrue, and where benefits are made wholly with reference to earnings before 1st January 1993. They must have less than 100 members, excluding pensioners.

The Department of Social and Family Affairs may exempt certain small schemes from the funding standard. It may also make regulations exempting schemes, where it would be otherwise unreasonable or contrary to the member’s interests.  The Pensions Authority may modify the requirements for funding standards to allow more time to meet the funding requirement.

The funding standard is varied in respect of schemes which are established outside of the State.  It does not apply to certain foreign schemes.  It does apply to cross-border pension schemes recognised under EU law.


Funding Certificate

The actuary of a defined benefit scheme must prepare an actuarial funding certificate in a standard form on the basis of his valuation of the scheme’s assets, every three years. It is an offence to fail to submit a funding certificate when required. It must be provided to the Pensions Authority. The Pensions Authority can modify this requirement if it would be contrary to the interests of its members.

The funding certificate is made on the hypothetical basis that the scheme is discontinued and wound up at the date.  The actuary must certify whether the assets are sufficient to meet the liabilities at this date.  Defined benefit schemes must be funded at 100%. 

The standard is met if the assets of the scheme would be sufficient having regard to its liabilities, if the scheme was wound up at that point. It must meet all liabilities including pensions in the course of payment, benefits for current and active members and deferred pensioners. benefits arising from transfers from other scheme and AVC contributions and the expenses of winding up.

For the purpose of the certificate, the liabilities of the scheme can be assumed to be provided by transferring pension assets to another pension scheme or to a buyout bond.


Publicising and Notifying Certificate

An actuarial statement must be included in the annual report to the members.  This incorporates an opinion of the scheme actuary as to whether he is satisfied that if he were to prepare a funding certificate, that it would certify that it would satisfy the requisite funding standard. If the previous certificate did not satisfy the requirement and the funding proposal has been submitted, the report must state whether he is satisfied that the scheme will satisfy the funding standard at the date of the next funding certificate.

The trustees must inform the Pensions Authority if the report does not contain a statement to the effect that the scheme meets the funding standard.  They must also notify the Pensions Authority if the scheme was solvent, but the actuarial report indicates that he is not satisfied that it satisfies the funding standard or where the previous funding cert did not satisfy the funding standard, and the actuary states in the annual report that he is not reasonably satisfied the scheme will satisfy the funding standard in the next certificate.

Where the previous funding cert did not satisfy the funding standard and the actuary states in the annual report that he is not reasonably satisfied the scheme will satisfy the funding standard in the next certificate, the trustees are required to notify the Pensions Authority and submit an actuarial funding cert within 12 months of the last day of the reporting period of the annual report.

Trustees are required to notify the Pensions Authority and submit an actuarial funding cert within 12 months of the last day of the reporting period of the annual report.


Valuation Requirements

The trustees of every pension scheme must arrange an actuarial valuation at least every three years.  The actuary must consider the additional liability that would be imposed if the scheme assets increased at the rate of 4% per annum or at the rate of CPI if lower (Not commenced). This provision does not apply to schemes that require pensions to be increased at this rate or at 3%.

The actuarial valuation report must conform with guidance notes prepared by the Society of Actuaries in Ireland.  In preparing the valuation and certificates, certain investments are to be disregarded and effectively valued at zero or at a percentage of their actual value.

In preparing the valuation and certificates, a concentration of investments is disregarded above a certain level size. The maximum percentage for one asset that can be taken into account is 10% of the value of the scheme.  The concentration disregard does not apply to  the following liquid assets, securities, government securities, insurance policies, managed funds, cash deposit, unit trust.

Self-investment is excluded entirely in the actuarial valuation and certificate.  Self-investment means investment in the employer, persons employed by the employer, affiliates and certain connected parties.  This would include, for example, lease backs and loans to the employer. Investment in buildings used for the business of the employer is not self-investment, where the letting is at full market value.


Correcting Shortfall

Defined benefit schemes must be funded for 100% of their liabilities.  Where the scheme does not satisfy the standard, a funding proposal must be submitted to the Pensions Authority.  The funding proposal should be designed to eliminate the funding shortfall prior to the next actuarial funding certificate (i.e. within three years).

The submission must be accompanied by a certificate from the actuary.  The certificate should certify that the performance is not inconsistent with the performance generally available in markets in the same period. This , in effect confirms that the value of the assets is less than expected, due to poor investment returns.

The proposal must be signed by the trustees and employer signifying their agreement to it. It must be submitted to the Pensions Authority at the same time as the actuarial funding certificate.

The Pensions Authority has a discretion to modify the requirements where appropriate.  It may specify a later date for achievement of the funding standard, where the assets are less than expected due to poor investment returns.  The Pensions Authority has issued guidelines in relation to extensions and sets a maximum period for funding the deficit.

It is an offence to fail to submit a funding proposal when required.

The annual report must contain details of measures proposed in the funding proposal. The funding proposal should be designed to eliminate the funding shortfall prior to the next actuarial funding certificate (i.e. within three years).


Extended Funding Correction

Exceptionally, the Pensions Authority may allow an application for a longer period for rectification of the funding requirements. This should not extend beyond the average working life of active members.  The contribution rate for the deficit must be provided for.  The Authority has issued guidelines in relation to extensions and set the maximum period for funding the deficit.

The  Authority may extend the period for the purpose of funding where the liabilities of the scheme are greater than expected due to the following factors

  • adverse experience relating to price inflation or interest rates underlying actuarial values;
  • adverse experience relating to increases in pensionable earnings;
  • adverse experience relating to payments of benefits, and long service benefits.

The Pensions Authority may direct trustees to reduce benefits under the scheme for members in employment. The funding standard requirements are varied in respect of schemes which are established outside of the state.  They do not apply to certain foreign schemes


Defined Contributions Schemes

Defined contribution schemes promise pension payments based on the size of the individual pension investment fund at retirement. There are no requirements in relation to minimum funding, as there is no promise to pay any particular level of benefit. However, the caps apply to the benefits which may become payable.

Defined contribution schemes do not require funding certificate, provided that their benefits are secured by annuities on retirement.  Where the scheme itself makes the payments, funding standards certificates are required.

Defined contribution schemes may have target benefits.  Actuaries may be retained to advise on achieving the target benefits.

Self-administered scheme trustees should obtain appropriate actuarial advice regarding the level of contributions and the ability to meet the scheme promises. The actuary will recommend a contribution rate.  The actuary must make assumptions regarding discount rates, salary increases, investment returns, future contributions, movements in and out of the scheme.

Schemes which provide for death-in-service lump sums are usually fully insured in respect of this risk. No funding certificate is required in this case. It is required in the case of larger schemes which bear the risk.


Funding Standard

2012 legislation re-established defined benefit scheme minimum funding standards.  They had been suspended since 2009, because of the effects of the financial crisis.  The legislation also provided for a risk reserve requirement, to provide further funding in order to deal with the risk of exceptional funding events. The funding standard applies from June 2012.

An actuarial valuation must be undertaken to assess the funding of a defined benefit scheme every three years.  The actuarial report must advise on the contribution rate required to provide the promised benefits / scheme obligations. It must advise on the extent of the shortfall if the scheme is in deficit.

When the scheme is underfunded, the trustees must put a funding proposal in place.  The funding proposal must be submitted to the Pensions Authority.  The Authority may allow up to six years or until 2023, to rectify the shortfall.

The funding proposal must be submitted to the Authority within nine months, where deficits are identified by an actuarial funding certificate or actuarial funding reserve certificate. They must be submitted within 12 months, where it arises on foot of the requisite certification in the annual report.

A funding proposal is not required

  • if the deficit can be resolved before the proposal is required to be submitted;
  • if there is a proposal in place which is due to rectify the position within two years, on the assumption that the existing contributions will continue;
  • the Pensions Authority grants and exemption.

Restrictions on Benefits

If there is a shortfall, the scheme may be restricted.  Early retirement may be disallowed. The Pensions Authority may direct a reduction of benefits in a defined benefit scheme.  The direction may apply to present and future entitlements and guaranteed increases.  It does not cover pensions in payment, other than in respect of increases. The direction may be made unilaterally or upon request, in the context of a funding proposal.

Preconditions apply to putting restrictions in place, including a requirement for a comprehensive review of the scheme’s sustainability and the attempts to obtain increased employer contributions in order to maintain stability, without benefit reductions. Comments are required from parties concerned. Actuarial advice and legal advice is likely to be required. Ultimately, a fundamental reorganisation of the entitlements under the scheme may be required.


Risk Reserve Requirement I

The pension risk reserve requirement applicable from 2016, requires that 15% of holdings be used for bonds and cash, the use of a certain liquid holdings. It must assume the effect on the scheme’s assets of a reduction of interest rates of half a percent.

The required reserve is the aggregate of two amounts.

The first element of the reserve is 15% of the amount of the “Funding Standard” liabilities, less the value of EU bonds and cash (and any other prescribed assets) held. The funding obligations may be met by holding sovereign bonds, instead of cash. The Pensions Authority guidance as to their use.

The second element of the reserve is the amount by which the “Funding Standard” liabilities would increase on the effective date of the certificate if there was a one-half per cent fall in interest rates. The Minister for Social Protection may prescribe a higher or lower percentage.


Risk Reserve Requirement II

The employee may undertake to meet the risk reserve. It may be secured or unsecured subject to terms of the published guidance.  An unsecured undertaking requires that the grantor has sufficient credit quality. It in effect requires that it be one of a small number of internationally rated entities.

The reserve may not be drawn without the consent of the trustees on giving three months’ notice or when it can be demonstrated that the scheme has enough assets to meet the requirement.

The undertaking may be triggered if the scheme is wound up, the employee ceases contributions, does not pay them, or if the employer is wound up.

 


References and Sources

Irish Books

Irish Pensions Law & Practice Buggy, Finucane & Tighe         2nd Ed (2005) Ch.9

Pensions; Revenue Law and Practice (ITI) Dolan, Murray, Reynolds, McLoughlin (2013)

Trustee Handbook the Pensions Authority 5th Ed 2016

Statutory Guidance the Pensions Authority (Various)

Website

www.pensionsauthority.ie

UK Books

Pensions Law Handbook 12 Ed Nabarro Nathanson Bloomsbury

Corporate Insolvency 6e: Employment & Pension Rights (6th Revised edition)

Occupational Pensions (Subscription) Lexis Nexis

Pensions Law and Practice with Precedents (Subscription)    Sweet & Maxwell

Sweet & Maxwell’s Law of Pension Schemes (Subscription)

The Guide for Pension Trustees World Economics Ltd

The Guide for Pension Trustees website, you can:

Tolley’s Pensions Law Looseleaf Service (Subscription)

Statutes

Pensions Act, 1990

Pensions (Amendment) Act, 1996

Pensions (Amendment) Act, 2002

Pensions (Amendment) Act, 2006

Social Welfare and Pensions Act, 2005 (Part 3)

Social Welfare Reform and Pensions Act 2006

Social Welfare and Pensions Act 2007

Social Welfare and Pensions Act 2008

Social Welfare (Miscellaneous Provisions) Act 2008

Social Welfare and Pensions Act 2009

Social Welfare and Pensions (No. 2) Act 2009

Social Welfare (Miscellaneous Provisions) Act 2010

Social Welfare and Pensions Act 2010

Social Welfare and Pensions Act 2011

Social Welfare and Pensions Act 2012

Social Welfare and Pensions (Miscellaneous Provisions) Act 2013

Social Welfare and Pensions Act 2013

Social Welfare and Pensions (No. 2) Act 2013 49/2013

Social Welfare and Pensions Act 2014

Social Welfare and Pensions (No. 2) Act 2014 41/2014

Social Welfare (Miscellaneous Provisions) Act 2015 12/2015

Social Welfare and Pensions Act 2015 (Part 3)

REGULATIONS MADE UNDER Section 42:

188/2012 The Occupational Pension Schemes (Funding Standard) (Amendment) Regulations, 2012

62/2009 Occupational Pension Schemes (Funding Standard) (Amendment) Regulations, 2009

295/2006 Occupational Pension Schemes (Funding Standard) (Amendment) Regulations, 2006

595/2005 Occupational Pension Schemes (Funding Standard) (Amendment) Regulations, 2005   Revoked

278/2002 Occupational Pension Schemes (Funding Standard) (Amendment) Regulations, 2002

REGULATIONS MADE UNDER Section 48:

429/2003 Occupational Pension Schemes and Personal Retirement Savings Accounts (Transfer) Regulations, 2003

509/2009 Occupational Pension Schemes (Wind-up) Regulations, 2009

REGULATIONS MADE UNDER Section 49:

188/2012 The Occupational Pension Schemes (Funding Standard) (Amendment) Regulations, 2012

295/2006 Occupational Pension Schemes (Funding Standard) (Amendment) Regulations, 2006

595/2005 Occupational Pension Schemes (Funding Standard) (Amendment) Regulations, 2005   Revoked

REGULATIONS MADE UNDER Section 51:

842/2007 Pensions Act (Disclosure Of Information) (Amendment) Regulations, 2007

582/2006 Occupational Pension Schemes (Disclosure of Information) (Amendment) Regulations, 2006

301/2006 Occupational Pension Schemes (Disclosure of Information) Regulations, 2006

633/2005 Occupational Pension Schemes (Disclosure of Information) Regulations, 2005     Revoked

215/1991 Occupational Pension Schemes (Disclosure Of Information) Regulations, 1991   Revoked

REGULATIONS MADE Section 51A:

137/2007 Occupational Pension Schemes (Review of Actuarial Work) Regulations, 2007

REGULATIONS MADE Section 52:

268/2014 The Occupational Pension Schemes (Funding Standard) (Amendment) Regulations 2014

135/2013 The Occupational Pension Schemes (Funding Standard) (Amendment) Regulations, 2013

295/2008 Occupational Pension Schemes (Funding Standard) (Amendment) Regulations, 2008

337/2000 Occupational Pension Schemes (Funding Standard) (Amendment) Regulations, 2000

298/1999 Occupational Pension Schemes (Funding Standard) (Amendment) Regulations, 1999           Revoked