The Pensions Authority and Defined Benefit Schemes: A New Relationship for the IORP II era
23 October 2020
The Pensions Authority published a document entitled “Information for trustees of defined benefit schemes” (The Document) on 7 October. In the Document the Pensions Authority gives further clarity to some of the points made by the Pensions Regulator in his statement. We summarise the contents of the Document and consider what it means for trustees.
The Pensions Authority notes in the information document that it is changing the way it supervises defined benefit (DB) pension schemes. The increased level of supervision will have implications for DB scheme trustees. It notes that while the Irish legislation is not yet in place, the requirements of the IORP II Directive (Directive) are well known. While most trustees will be aware of aspects of the Directive, it is questionable as to whether all DB scheme trustees will have obtained advice on the Directive at this point in time, when the contents of the legislation are not yet known. The Pensions Authority refers to its new “risk-based and forward looking” method of supervision in the Document and states that trustees should expect “to change the way they approach their work”.
Defined Benefit Challenges
The Document explores the difficulties presented to DB scheme trustees in carrying out their duties and ensuring that the scheme can meet the promise and pay benefits to members. It refers to a lack of certainty for sponsor support as well as uncertainty for future salaries, investment returns and ultimate beneficiary numbers.
The Document then sets a plan for the categorisation of DB schemes. There will be three categories of DB scheme going forward:
- Demonstrate proactive scheme management, including managing their scheme so that members have a reasonable chance of receiving the benefits promised by their schemes.
- Know the requirements of the Directive and their legal obligations. Trustees must identify the steps that must be taken to meet their obligations under the Directive. There is no doubt that the necessary legal advice should be taken to ensure that a trustee’s obligations under the Directive are fully understood.
- Examine a wider range of data. Trustees will be required to prepare and examine a wider range of financial and actuarial data. This data must include financial and actuarial projections as to what is likely to happen to their scheme in the future.
- Understand solvency, sustainability and risk. The Pensions Authority once again echoes the Regulator’s statement in confirming that the funding standard alone is no longer a sufficient measure. The Pensions Authority will now review every DB scheme through the lenses of solvency, sustainability and risk. This is a significant change to the old requirements which focussed almost exclusively on the funding standard.
The Document then sets a plan for the categorisation of DB schemes. There will be three categories going forward:
- Category 1: those schemes likely to pay benefits as promised. The Pensions Authority aims to monitor those schemes in this category to ensure that they can remain in category 1.
- Category 2: those schemes unlikely to be able to pay benefits unless there is change. In these instances, the Pensions Authority aims to bring about the necessary change in governance, administration, funding and risk management to bring such schemes up to a category 1 status.
- Category 3: those schemes unlikely to be able to pay benefits. In these instances, the Pensions Authority will look to a reduction of benefits or scheme wind-up.
The Document also confirms that the Pensions Authority is developing further criteria for categorisation.
How trustees should prepare
The Document then sets out a list of recommended actions to prepare as well as suggesting that the Directive should be read by trustees. The Pensions Authority recommends as follows:
- Assess the knowledge and experience level of the trustee board
- Review all service agreements
- Identify who might act as the trustee board’s risk management function holder
- Build knowledge and expertise in:
- Potential risk identification
- Risk quantification and risk management
- Risk interdependencies and scenario planning
The Pensions Authority aims to give trustees an opportunity to make an assessment and to consider how their scheme is likely to be categorised under the new IORP II apparatus. The category into which a scheme falls will determine the level of attention from the Pensions Authority.
Familiarity with the requirements of the Directive is a necessity at this stage and trustees cannot afford to wait until the legislation is published.
For further information regarding compliance with the IORP II Directive, contact a member of our Pensions team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.