FAQs on Section 50

Wednesday 18 November 2009: See the Regulation/FAQs & Guidance section of our website for updated 'FAQs on Section 50' and updated 'Guidelines for Section 50/50A'.

1. The Board’s guidance says that the Board will consent to an application only where it is satisfied that the proposed future operation of the scheme is robust enough to make any further application unlikely. What aspects of the future operation of the scheme will the Board consider in making this assessment?

2. In the assessment of robust future operation of the scheme, how will the Board assess the proposed contribution rate?

3. What does the Board consider to be a suitable long-term Irish gilt yield for use in the calculation of a scheme contribution rate?

4. In the assessment of robust future operation of the scheme, how will the Board assess the ability of the scheme to withstand future investment losses, given the proposed investment strategy?

5. Where a section 49(3) proposal is also submitted, will the Board set a maximum term for the proposal?

6. How should the trustees demonstrate their intended approach to risk management?

7. Will The Pensions Board meet with trustees, employers and/or their advisers to discuss potential section 50 or 49(3) applications?

8.Will existing deadlines apply to schemes which have been preparing section 50 applications but need to revise them in light of these FAQs?

1.The Board’s guidance says that the Board will consent to an application only where it is satisfied that the proposed future operation of the scheme is robust enough to make any further application unlikely. What aspects of the future operation of the scheme will the Board consider in making this assessment?

The Board will consider

  • the proposed contribution rate
  • the ability of the scheme to withstand investment losses, given the proposed investment strategy
  • the proposed responses to short and long-term risks
  • any other relevant factors which the trustees bring to the attention of the Board.

2.In the assessment of robust future operation of the scheme, how will the Board assess the proposed contribution rate?

The application form requires the trustees to set out the contribution rate calculated using a long-term Irish gilt yield basis and the most recent mortality projections of the Society of Actuaries in Ireland. In the Board’s view, a proposed contribution rate that is less than this will be unlikely to support the robust operation of the scheme unless other factors are or will be in place.

These factors could include a binding commitment from the sponsoring employer, the use of contingent assets or other measures arranged by or available to the trustees.

In the absence of any such factors, the Board is likely to refuse the application.

3.What does the Board consider to be a suitable long-term Irish gilt yield for use in the calculation of a scheme contribution rate?

The Board considers that a suitable rate is the long-term discount rate set out in part (A) of appendix 1 of the Actuarial Standard of Practice Pen-2 issued by the Society of Actuaries in Ireland (4.5% in version 5.6), or a rate no more than 0.5% (50 basis points) higher than this, where the scheme actuary is satisfied that such an adjustment is appropriate.

4.In the assessment of robust future operation of the scheme, how will the Board assess the ability of the scheme to withstand future investment losses, given the proposed investment strategy?

The Board’s assessment will depend on whether or not the section 50 application is combined with a section 49(3) application.

Where the section 50 application is not combined with a section 49(3) application, the Board will assess the ability of the scheme to withstand an investment stress test immediately after the section 50 reduction, and continue to satisfy the funding standard. This stress test will comprise an immediate fall of equity values of 15% and a simultaneous reduction of interest rates (applied to both assets and liabilities) of ½%.

Where the section 50 application is combined with a section 49(3) proposal, the Board will assess the ability of the scheme to meet the funding standard by the proposed date, taking account of a fall in equity values and in interest rates as described above. In this projection, only the gross redemption yield on an appropriate government fixed interest index will be assumed as the investment return.

The asset allocation used for these assessments will be based on the scheme’s proposed investment strategy three years after the submission of the application rather than the current strategy, as it may take time for trustees to realign their investments.

5.Where a section 49(3) proposal is also submitted, will the Board set a maximum term for the proposal?

The Board will not approve a term for the proposal of more than 10 years from the proposed effective date of the section 50 direction, unless there are legally enforceable remedies available to the scheme trustees in the event of the proposal going off-track.

6.How should the trustees demonstrate their intended approach to risk management?

The main risks to the sustainability of defined benefit schemes include

  • unmatched assets and liabilities
  • long-term poor investment returns
  • unanticipated increases in pensioner longevity
  • the variability of experience when the number of pensioners is small
  • the ability of the sponsoring employer to meet its contribution commitments.

To some extent, these risks can be managed or minimised by matching assets as far as possible, discretion over some aspects of benefits, margins in contribution rates, and future increases in contributions, where this is consistent with the basis on which the section 50 application has been made. The Board expects trustees to demonstrate that they have considered any remaining risks and have agreed broadly what steps they will take in the event of the risks occurring.

The Pensions Board does not regard a future application under section 49(3) as an appropriate proposed response by trustees to foreseeable short or long-term risks.

7.Will The Pensions Board meet with trustees, employers and/or their advisers to discuss potential section 50 or 49(3) applications?

In its efforts to support schemes that are going through this complex process the Board wants to help trustees where possible. However, the volume of enquiries means that it is not possible to grant all requests for meetings.

Where you have particular questions about a possible application, you should adopt the following approach:

  • Read the Section 50 and/or Section 49(3) guidelines and associated FAQs thoroughly. In the first instance where you have any questions, ask your scheme actuarial or legal advisers.
  • Before putting any questions to the Board, get the scheme actuary to prepare a draft Section 50 and/or Section 49(3) application using the relevant form on the Board’s website. This application form is designed to make sure that all necessary information is provided, and the process of completing it may answer your questions.
  • Remember that The Pensions Board will not advise on whether a Section 50 and/or Section 49(3) application should be made, or on the form, manner or level of any benefit reduction.
  • Where you still have questions, please send them by email to info@pensionsboard.ie, clearly marked as ‘Section 50 and/or Section 49(3)’. The Board will consider whether further FAQs should be published. Where necessary, the Board may contact you to discuss the issues further.

8.Will existing deadlines apply to schemes which have been preparing section 50 applications but need to revise them in light of these FAQs?

Any scheme whose deadline for a filing of a funding proposal (and/or section 50 application) expires before 30 June 2010 will be allowed to adopt 30 June 2010 as a revised deadline. There is no change to deadlines occurring on or after that date, and as before, there is no change or extension to the deadline for submitting actuarial funding certificates.

 
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