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Regulatory update - Ireland

Retirement
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By Neil Herlihy | June 23, 2020

Statement by Pensions Regulator Brendan Kennedy to Society of Actuaries.

At a Society of Actuaries In Ireland event on 12 June 2020, the Pensions Regulator, Brendan Kennedy, addressed a number of matters of interest to pension scheme trustees. The text he spoke to can be accessed here and we summarise and we comment on some of the main aspects below.

IORP II transposition

Update:

Work on the regulations that will transpose IORP II into Irish law is continuing and remains a high priority, but there is no firm completion date as yet.

Willis Towers Watson Comment:

At this stage hopes of a mid-year announcement seem optimistic and we must assume, from the regulator’s remarks, that the transposing regulations might emerge closer to the end of 2020.

Regulatory engagement programme & future supervision

Update:

The Authority will be engaging with trustees of defined benefit (‘DB’) schemes to understand current practices and their levels of preparedness for IORP II. This regulatory engagement programme, which is imminent, will focus on risk management and governance processes and practices.

The comments about future supervision are essential reading for DB scheme trustees. There is an expectation that well run schemes should already satisfy the fundamental requirements of IORP II: “If protecting member benefits was the trustees’ priority, they would already have a good risk management function, would have tight financial controls, have written contracts with their administrators and service providers, sensible KPIs, a proper investment process, clear and sensible identification and management of conflicts of interest.” However, the Authority is concerned that few schemes meet these standards sufficiently well at this time

When assessing schemes, the Authority will categorise them on a 3-point scale:

  • Category 1 – well-run schemes that are assessed as being likely to meet their future obligations to members
  • Category 2 – schemes where there are significant risks to be addressed if those obligations are to be met
  • Category 3 – schemes that look most unlikely to meet obligations to members

The Authority has also signalled a strong intention to assess the culture of trusteeship, in particular in relation to how trustees objectively assess and proactively address any issues in their schemes or risks to their future delivery of members’ benefits.

Willis Towers Watson Comment:

The Regulator is likely to set a high bar to achieve category 1 status. As much as it will be important to have strong risk management and governance practices, it will also be important to be able to clearly demonstrate that they are in place, and that they are being applied. Schemes with good fundamentals, but some gaps, can expect to be in category 2 and will, we think, need to demonstrate that they have action plans to address those gaps. Our Governance Lens service enables objective self-assessment, by Trustee Boards, of their existing practices under relevant governance and risk management headings, and also facilitates objective trustee decision making about steps to take towards their desired future state.

Funding standard

Update:

The Authority notes that the funding standard is, on its own, a poor predictor of the ability to deliver benefit promises in the long term and acknowledges that use of a simple point-in-time measure such as this is insufficient.

While the funding standard will remain in place, there will be a need to consider other metrics and the future regulatory framework will consider three groups of key performance indicators (‘KPIs’):

  • Solvency
  • Risk
  • Sustainability

Within each group there will be a need to consider a range of KPIs, recognising that no single KPI is likely to be definitive. The Authority is currently working to define a set of standard financial tests that all schemes will be expected to undertake. Well run schemes will be expected to go further than the prescribed minima, however.

Willis Towers Watson Comment:

The Regulator was not in a position to confirm what specific KPIs he has in mind. However, considering the overall discussion, it seems likely that many schemes will need to build further on good work that is already being done.

While we are still speculating, it seems possible that monitoring of funding might build from existing monitoring of ongoing and statutory funding positions to also require monitoring of other measures – perhaps buy-out funding levels, or some least risk version of an ongoing measure. We expect risk management KPIs to get a lot of attention. As well as considering items such as Value at Risk or a range of shock-tests, we can foresee a possibility that there may be a need to monitor KPIs relating to interest and inflation hedging or to other significant risk exposures, including covenant. And forward-looking sustainability implies forward projections of funding measures of course, but could also include a need to consider the impact of stress scenarios, to aid in understanding risks to future funding levels as well as how those funding levels might be expected to develop.

From the Regulator’s comments, we can expect that there will be a need to use the analysis to achieve a clear understanding of the current and future risks faced by different groups of members, so that they can be appropriately managed. There is a shift in emphasis, with an increased focus on eventual delivery of benefits long into the future, and it is clear that the Regulator is well aware that – as scheme’s mature – ever smaller groups of active and deferred members may face increasing levels of risk.

Conclusion

The Pensions Regulator’s remarks amount to a clear message that is ultimately intended for defined benefit scheme trustees. To distil it to its essence: the Pension Regulator considers that there is enough information available in the public domain to enable DB scheme trustees to begin working now on how they will satisfy new requirements arising from IORP II; and, the remarks made to the Society of Actuaries in Ireland give an early high level indication of the areas that should be focused on. There are clear expectations that trustees will be able to show the concrete steps taken to identify and introduce improvements, and that all DB schemes – even the best run schemes – will have some adjustments to make. It seems clear that, when details of new minimum standards do emerge, Trustees will then be expected to assess those standards objectively, to determine if they should do more, taking account of their scheme’s particular situation.

Author

Senior Director, Head of Trustee Consulting, Human Capital and Benefits

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