Due Diligence in Moving to a Bundled Solution (including Master Trusts)

Sponsoring employers and trustees need independent advice on their pension arrangements. Such advice is essential before making any significant change to existing pension arrangements.

Moving to a master trust, or other bundled solution, is often presented as a simplification of existing arrangements. However, before undertaking such a move, employers and trustees need to fully consider the implications as it may impact on all elements of existing pension plan provision.

Taking just the investment element, the range in returns achieved on standard managed funds has been an 24% on the first 8 months of 20201, making a difference of €4.86 million on a €20 million fund. Over 30 years a return of 5% per annum when compared to a return of 4% per annum would make a €20 million difference on an initial fund-size of €20 million2.

Those charged with decision making will need to ensure that proper due diligence, including obtaining independent advice, is undertaken. This requirement applies to all decisions that have a material impact on pension arrangements such as when:

Continue reading “Due Diligence in Moving to a Bundled Solution (including Master Trusts)”

2020 Vision – Presentations on Transfers and Wind-Up

Update (March 2020): In December 2019 we highlighted the forces that will lead to wind-ups and transformations of Irish pension schemes. Recent turbulence has only accelerated the timelines detailed in the presentations below. As specialists in this field, please contact Fitzgerald Actuarial in order to discuss how these processes can be managed appropriately.

Following on from the successful Pensions Seminar held in Limerick and Cork in December 2019, we are pleased to provide copies of the presentations.

Once more, thanks to all those that attended and Zurich for partnering us in this endeavour.

Seminar Presentations

The Seminar contained three presentations, simply click on the presentation below to view.

Market Disruption Presentation

Transformations Presentation

DC Value Presentation

Seminars on Wind-Up and Transfer of Pension Schemes

Rose Leonard of Zurich with Michael Fitzgerald and John Grant of Fitzgerald Actuarial in Limerick

Fitzgerald Actuarial in conjunction with Zurich were delighted to hold pension seminars in Cork and Limerick in December 2019, focusing on the challenge of pension scheme restructuring through wind-up and transfer. The presentations highlighted the forces that Fitzgerald Actuarial envision leading to a transformation of the Irish pension scheme market, underlining the importance of project management in transfers and wind-ups. This is a field in which Fitzgerald Actuarial specialise.

We would like to thank all those who attended and appreciated the positive feedback that was received from each event.

We hope to hold further events next year throughout Munster and details will be available on the website and LinkedIn nearer the time.

Presentations were given by Michael Fitzgerald, Director and Consultant and John Grant, Business Development Manager and Consultant, both of Fitzgerald Actuarial and Rose Leonard, Head of Corporate Distribution and Customer Relationships, Zurich. The presentations are available in a separate post, 2020 Vision – Presentations.

 

Images from the Cork seminar

[Michael Mac Sweeney/Provision Photography]

 

Images from the Limerick Seminar

[Allie Glynn Photography]

Insurance Update – Isle of Man

The last number of years have been a busy time for both regulators and insurers in the Isle of Man with the introduction of the new risk-based solvency regime for life insurers in 2018. This article by Michael Fitzgerald looks at the most recent developments, including the introduction of the Insurance (Group Supervision) Regulations 2019 and the Corporate Governance Code of Practice for Designated insurers which came into effect on 1 July 2019.

It also looks at the next stages in the Isle of Man Financial Services Authority’s (“The Authority”) 2019 roadmap for updating the Isle of Man’s regulatory framework for insurance business and, in particular, at the proposed introduction of a risk-based solvency regime for non-life insurers in 2020.

Isle of Man Insurance Statistics

The Authority’s Annual Report for 2018/2019 was published on 5th September and summarises the size of the insurance sector as follows:

table of Statistics from Isle of Man Authority Insurance

 

Regulatory Change & Roadmap

The Authority’s most recent regulatory update examines progress on the principal areas of change:

  1. The development of a more sophisticated risk capital and solvency regime
  2. Enhanced regulatory reporting
  3. Additional conduct of business requirements
  4. Enhanced corporate governance requirements, including Enterprise Risk Management (ERM).
  5. Introduction of a group supervision framework
  6. Enhanced requirements in respect of general insurance intermediation; and
  7. The introduction of public disclosure requirements where appropriate

 

Life Insurance Risk Capital and Solvency Regime

The new risk capital and solvency regimes were introduced with effect from 30 June 2018. Their key purpose was the introduction of new reporting requirements for life insurers, with existing requirements being transposed into the new regulations for non-life insurers.

The new life insurance regime follows the principles of Solvency II with some differences in detail on the Standard Formula approach reflecting, for example, the fact that Isle of Man based life insurers’ books of business are strongly multi-currency in nature. Pillar 3 implementation has also focused on key disclosure rather than information overkill. The detailed regulations were introduced as the Insurance (Long Term Business and Valuation and Solvency) Regulations 2018 (“the Regulations”)

However, risk-based capital solvency regulation is still evolving. The European Commission has already carried out an interim review of the Solvency II Delegated Regulation looking at the detail of calculating the Solvency Capital Requirement under the standard formula. The full review is to be completed in 2020 and consideration of such issues as the cost of capital rate for risk margin, interest rate risk and long-term guarantees has been postponed to the full review. It should be noted that the Isle of Man regulations already use a lower cost of capital of 5% pa rather than the 6% under Solvency II.

Changes already agreed cover such areas as:

  • Reduction of reliance on credit rating agencies
  • Treatment of long-term and un-listed equities
  • More proportionate look-through approach
  • Guarantees by regional authorities and local governments

As all companies under the Regulations in the Isle of Man are required to use a Standard Formula approach, this EU review in 2020 may have implications for the shape of future Isle of Man legislation.

The Authority have naturally been following Solvency II developments with interest.

With regard to its own timetable for review of the Regulations, it is mindful that the updated framework has only been in force for a period of just over 12 months and the EU review will not be completed until 2020.   Additionally, the Authority have indicated that the post Brexit position will be an important consideration, given the current market composition of the Island’s life assurance sector.

Taking these factors into account, they have stated that “while the Authority may continue to make minor changes to reporting requirements, the Authority does not currently anticipate making any significant changes to the Regulations, probably for the next 2 years and that they will keep the situation under review and continue to engage with stakeholders, particularly at the point at which any changes are being considered”.

The updated Corporate Governance Code for Designated Insurers (including enhanced ERM requirements and the formalisation of the Own Risk and Solvency Assessment (ORSA)) and conduct of business requirements came into force on 1 January 2019.

As of 1 July 2019, the regulatory framework has been broadened with the introduction of the Insurance (Group Supervision) Regulations.

The new Group Regulations only apply to insurers where the Authority is deemed to be the Group Supervisor. This arises only in the context where the group headquarters, or the most significant insurance operations of the group, are based on the Isle of Man.

 

Risk Capital & Solvency Regime Non-Life Insurers including Captives

New reporting requirements for Isle of Man regulated non-life insurers will be introduced along with a new capital framework from 1 July 2020. On 22 July 2019 the Authority issued a consultation paper CP19-05/T04 on the proposed new regulations “Insurance (Non-Long-Term Business Valuation and Solvency) Regulations 2020. These follow a series of Quantitative Impact Studies.

As with life insurers, only a small number of non-life insurers belong to insurance groups of which the Authority expects to be Group Supervisor.

The Island’s non-life insurance sector is predominantly made up of captive insurers and associated specialist insurance management companies, ranging from subsidiaries of the major international insurance broking and risk management organisations to local operations.

Third party commercial writers and providers of insurance to individuals make up a relatively small portion of the non-life market on the Isle of Man. Most Captives are authorised under Class 11 and Class 12 of the existing Insurance Act.

Following consultation with the Isle of Man Captive Association the Authority has published a further consultation paper CP19-04/T04 on “Class 12 Insurance Authorisation”.

In the draft regulations, reduced regulatory requirements are proposed to apply to the following types of (re)Insurers

  1. (Re)insurers where policyholders (or direct policyholders underlying reinsurance) are directly or indirectly related to the (re)insurer
  2. (Re)insurers where policyholders (or direct policyholders underlying reinsurance) are sophisticated parties that have consented on an informed basis to being (re)insured by a class 12 (re)insurer
  3. Commercially fronted reinsurers
  4. Other re-insurers where the underlying direct insurance is ancillary to a main non-insurance activity of the reinsurer’s group
  5. A class 12 (re) insurer whose non-class 12 insurance business represents less than 5% of its total business.

The final definition of a class 12 insurance will be crucial to the proposed regulations impact on the captive market. A key factor in determining whether the Authority expects to be Group Supervisor for non-life insurers is whether an insurer should be treated as a class 12 or commercial insurer.

As ever the devil is in the detail and we await the next iteration following the closing of the consultation period on 13 September.

 

IORP II & Data Integrity

The Chinese proverb “May you live in interesting times”, may not seem like a good introduction to the passing of further legislation affecting pension plans, but with so many changes afoot times are definitely getting most interesting.

In this article, John Grant takes a look at why data integrity should be at the top of all trustees and employers action lists and how the new Pensions Directive IORP II will shape the evolving Irish pensions’ landscape.

The “Institutions for Occupational Retirement Provision Directive 2016”, known as IORP II, is due to be implemented in Ireland in 2019. This EU Directive sets out a number of common minimum standards across the EU for IORPs i.e. pension schemes 

Wake-up Call on Data Quality

For the first time, there will be a requirement for schemes to produce annual benefit statements for deferred members. This is a huge challenge, as contact with deferred members tends to be more sporadic, with data typically being revised and updated when a deferred member reaches retirement or requests a transfer value.  Unless a scheme has recently undergone a major data cleansing exercise, there will be significant time and cost associated with such a Data Integrity Project.  

Sponsors and trustees alike need to start planning for this, a project that will assist in compliance with General Data Protection Regulations (GDPR). Inevitably, this will put pressure on pension scheme administrators and questions should be asked as to how they are preparing for this major challenge.   

Companies with schemes of more than 100 members (active and deferred), a long history of pension provision and / or a high level of staff turnover are guaranteed to bear the full weight of the Directive. However, those responsible for smaller schemes are not out of the woods, with indications from the Department of Employment Affairs and Social Protection that the legislation may not contain any derogation for small pension schemes. 

Thus we believe that at this stage, all trustees and sponsoring companies should be looking to review their member Data Integrity as soon as possible.  A big question is whether resources are available for such an undertaking.  

 Higher Levels of Governance & Professionalism 

Just as ‘Solvency II’ and and the ‘Insurance Distribution Directive’ have increased compliance demands on insurance companies and insurance intermediaries, ‘IORP II will lead to higher compliance demands on pension trustees, sponsoring companies and scheme administrators 

This latest  EU IORP Directive requires that those that effectively run an IORP: 

  • Are of good repute and integrity 
  • Are suitably qualified, both individually and as a group
  • Put in place key functions covering internal audit, risk management and actuarial (this last function being required for schemes with a defined benefit element)
  • Provide an effective communication and reporting process for members and beneficiaries

While a number of functions may be delegated by trustees, the legislation is clear that where functions are delegated, the trustees remain responsible. For any pension scheme subject to the new regulations there will be considerable practical implications beyond those associated with annual benefit statements.  

 Transposing IORP II into Irish Legislation 

Each EU country has to transpose the EU legislation into national law, ensuring that the minimum harmonisation levels are met. Derogation allows individual member states to provide exemptions to smaller schemes (those with less than 100 active and deferred members). As at 1st April 2019 we continue to await the details of exactly how this legislation is to be transposed into Irish Law.  

In October 2018, The Pensions Authority published a guidance note to provide assistance for those charged with running pension schemes in Ireland. The following are taken from this note: 

  • The trustee board should consider the production of a Board Manual 
  • All significant activities should have documented policies and procedures, the rationale for the various decisions should be recorded and all material should be retained and available for inspection and audit 
  • The trustee board should satisfy itself that the trustees, including any potential new trustee prior to his/her appointment, collectively meet the proper standards and should document how it has satisfied itself in that regard
  • The trustee board should meet at least four times per calendar year and at least once in every six month period
  • The Pensions Authority will be adopting a forward looking and risk based approach to supervision

The above all help to provide a picture of how the market is developing, with many procedures being required to be documented, implemented and reviewed regularly. The note also underlines a minimum time commitment required of trustees, one which helps to underline the more substantial and demanding nature of the role, even where significant parts are delegated.   

This will lead to compulsory reviews of trustee boards, their make-up and whether each trustee is able to devote sufficient time to the role. Inevitably questions on the nature of existing trustee boards and whether in their current form they remain appropriate will need to be met, along with the challenge and cost of an increased compliance burden. 

Exactly how far reaching the regulation proves to be may also depend upon whether any use is made of derogation for smaller schemes.  

 The Pensions RoadMap 2018 – 2023 

In February 2018 the Government brought out its “A Roadmap for Pension’s Reform 2018 – 2023 Report. This report is instructive to see the likely direction of the Irish pensions market and included six separate strands, the third strand entitled “Improving Governance and Regulation including the EU Pensions Directive ‘IORP II’”.  

Among the comments under this Strand were: 

  • The need to raise scheme governance standards in the existing system 
  • The need to provide for economies of scale and number of pension schemes in Ireland which by international norms is excessively high 

To help such a move it is envisaged that future provision by smaller employers will increasingly be by means of membership of large multi-employer structures or through pensions contracts.  

The message is clear, pension schemes face increased oversight and governance demands, placing pressures on trustees and the resources of sponsoring companies. Exactly how this will pan out for existing schemes will need to be addressed, but clearly the expectation is that not all schemes will continue in their current form; smaller schemes will come under most pressure.  

The second strand of the Pensions Roadmap concerns Auto Enrolment, a proposal to bring in a government sponsored defined contribution scheme with an automatic enrolment facility, targeted at employees without access to a pension plan through their employment. The key objective of this strand is to increase pensions coverage across the workforce, particularly in sectors that traditionally have not provided pension schemes to their workforce. This is a very interesting development and likely to affect a lot of smaller/medium sized businesses in particular 

 Why the Delay? 

There is clearly a lot of highlevel changes going on in the Irish institutional pensions market with the government having an end goal of better pensions coverage, less dependence on the State and better standards of governance 

Even taking into account that the IORP II legislation states that the “system of governance shall be proportionate to the size, nature, scale and complexity of the activities of the IORP”, it is inevitable that smaller schemes will see a disproportionate increase in costs.  With auto enrolment not happening until at least 2022 the focus must be on the practical implications of IORP II for all stakeholders of existing arrangements. Feedback from the auto-enrolment process may have caused a rethink on where that balance should be and whether use should be made of derogation for smaller schemes.  

Conclusion 

It is unequivocal that IORP II will lead to higher compliance demands on trustees, sponsoring companies and scheme administrators, just as Solvency II and the Insurance Distribution Directive have increased compliance demands on insurance companies and insurance intermediaries.  

Trustees and sponsoring companies alike should consider how resources, processes and documentation are to be put in place to meet the higher standards. The challenge for trustee groups, sponsoring companies, insurance companies and intermediaries is how to meet these demands in an adequate and cost effective manner.  

The good news is that The Pensions Authority stated in its Guidance note back in October 2018 that there would be a period of 18 to 24 months to adapt to the new regime.

However, time is already ticking and the data integrity issue will need urgent attention, especially for those schemes which have significant numbers of deferred members. We would suggest that a data audit would be sensible for most schemes. To understand how we  may assist you in gearing up for the realities of IORP II and other compliance challenges, contact John Grant or email info@fitzgeraldactuarial.ie for more general queries