In 2011 the Government introduced a Pensions Levy, to fund a jobs initiative that applies to all private pensions. This levy reduces the value of your pension by 0.6% for each of the 4 years running from 2011 – 2014.

The first question in relation to the levy posed to the participants was:

‘Were you aware before now that this levy was in operation?’

52% of those surveyed were not aware that the Pensions Levy had been introduced.

Awareness was lowest for those with no pension with 4 out of 10 aware that the Pensions Levy was introduced. As those people with pensions become aware on seeing a reduction in their pension benefits this will also impact further negatively on pension saving attitudes.

The next question posed was:

‘What impact (if any) on your view of pensions has the introduction of the Pensions Levy made?’

52% of all adults claimed that the pension levy has had a negative impact on their view of pensions. This was higher among the 46-54 age group where 58% was the figure. The Pensions Levy has clearly had a negative impact on individual’s views of pensions. This comes at a time when all indications show already a decline in the number of people saving for retirement.

It is also interesting that over 40% of those currently without a pension expressed a view that the levy had given them a more negative view of pensions. The government had traditionally encouraged people to save for their retirement but the levy together with proposed reductions in tax relief run contrary to this objective. The levy, Invesco argues, could result in a decline in numbers of individuals signing up to retirement planning schemes.

Invesco believe that the results of this research clearly indicate that the measures taken by Government with regards to pensions have had a negative impact on encouraging people to plan for their retirement. Any further cuts to individuals’ pensions schemes could prove detrimental in the long run as employees fail to see the incentives to saving into a pension scheme. Invesco would urge the Government to avoid any more pension cuts in the budget at all costs.

For further information on this research, you can contact us at our Dublin or Cork offices:

Dublin:

Gerry Winters (gwinters@invesco.ie)

Brian Sexton (bsexton@invesco.ie)

Miceal Gunning (mgunning@invesco.ie)

Cork:

Finian O’Driscoll (fodriscoll@invesco.ie)

John Lucey (jlucey@invesco.ie)

First of all, it was important to discover if the participants held a pension at all. The question posed was as follows:

Do you hold a Private/Public Sector Pension?

51% of those surveyed did not have any form of pension. 57% of those with no pension were female, with the highest figures (78%) between the ages of 18-24. There has been no increase in private pension provision indeed figures indicate that the number of people with private pensions is falling. This was also confirmed in the module on pension uptake among workers aged between 20 and 69 included in the Quarterly National Household Survey published by the Central Statistics Office in 2011 that showed a decline in private pensions held by self employed workers from 47% in Quarter 1 2008 to 36% in Quarter 4 2009. It is critical that stronger action and more encouragement is given to encourage private pension take up.

Are you aware that you receive tax relief on your own pension contributions?

77% of those surveyed with a pension were aware that they received tax relief on their own contributions. Those aged between 18-34 were least likely to be aware of the tax relief with over 80% of those over 35 years aware of the tax relief. This demonstrates the high level of awareness that pension savers have of the tax reliefs on personal pension contributions.

It is possible that employee tax relief on pension contributions may be reduced in the future by Government. If this happens which best describes your likely behaviour?

Almost 4 out of 10 would either cease or reduce contributions if tax relief was reduced. It is clear in the survey that the majority of those saving into a pension are aware of the relief that they receive on their contributions. The reduction in tax relief on pension contributions Invesco believe would act as a further disincentive to pension saving that is also highlighted in the survey. It seems to be overlooked by government in the attack on the pension reliefs that a pension is simply a deferred tax payment.

The Pension Levy introduced in the Public Sector in 2009 allowed tax relief on the levy amount and therefore a reduction in the tax relief will result in a further reduction to those in the public sector’s net pay. Invesco would favour no further reductions on tax relief to pension contributions.

For more information on the results of this research, please feel free to contact:

Dublin:

Gerry Winters (gwinters@invesco.ie)

Brian Sexton (bsexton@invesco.ie)

Miceal Gunning (mgunning@invesco.ie)

Cork:

Finian O’Driscoll (fodriscoll@invesco.ie)

John Lucey (jlucey@invesco.ie)

In late 2011 Invesco commissioned RED C Research and Marketing Ltd to undertake a survey on the impact that some of the recent changes together with potential reductions in tax relief would have. The results of the first question are discussed below. More results will follow in subsequent blog posts.

The survey represents a sample of 1,000 with known profiles on age, gender, class and region to ensure the sample is representative of the total Irish population aged 18+. Invesco believe that the results of the Pension Survey outline to government the difficulties in encouraging pension provision. The results also highlight that another attack on pension saving by reducing tax reliefs will further discourage pension saving and that the government should not proceed with any proposed reductions to tax relief.

The first question posed was:

‘At what age do you believe, if at all, you qualify for the state pension?’

The current age at which an individual can cease work and qualify for the state pension is 65 years. However in 2010, the government introduced legislation increasing the age at which an individual will qualify for the state pension.

* Currently Under 50 years (born after 1 Jan 1961) will not qualify for state pension until you are 68 years old.

* Currently Under 56 years (born after 1 Jan 1955) will not qualify for state pension until you are 67 years old.

* Currently Under 63 years (born after 1 Jan 1948) will not qualify for state pension until you are 66 years old.

The following graph depicts the results of the above question:

48% of respondents believed that they would still qualify for the State Pension at 65 years.

A whopping 97% of those surveyed under the age of 44 years are not aware that they will not qualify for the state pension until they are 68 years.

The results indicated a clear lack of awareness on the changes to the state pension age at all ages with those under the age of 34 years expecting to receive the state pension at a younger age with nearly 1 in 10 expecting a state pension under the age of 6o years. As the state pension will form a significant part of many people’s retirement income, it is critical that the government encourages and provides incentive to encourage people to save for their retirement.

Invesco believe that the government needs to launch an awareness campaign on the age that people will qualify for the state pension. This is critical in order to drive the idea home of the importance of saving for retirement. For more information on how you can do this, please contact some of our directors:

Dublin:

Gerry Winters (gwinters@invesco.ie)

Brian Sexton (bsexton@invesco.ie)

Miceal Gunning (mgunning@invesco.ie)

Cork:

Finian O’Driscoll (fodriscoll@invesco.ie)

John Lucey (jlucey@invesco.ie)

More information to follow soon on the rest of the results from the RED C Pension Survey completed in late 2011. 

Invescotalk explores the practical steps and emotional hurdles that stakeholders (employers, trustees and members) in a pension scheme need to take and overcome in order to ensure the future of that scheme.

Doing nothing is not an option for the stakeholders in the vast majority of defined benefit pension schemes at the moment. The world has changed and it continues to change and things will only get worse for the members of those schemes unless change is embraced and implemented. The difficulty lies in getting all of the stakeholders on board and convincing them that change is not only necessary but good.

It usually takes someone with an outside perspective to convince the various stakeholders that it is in their interest to tackle the difficulties faced by their schemes. At Invesco we have been engaging with our clients for the past number of years to assist them to make the changes necessary to ensure that their schemes are not only sustainable into the future but continue to exist. We find that it is usually quite easy to get employers to buy in to the need for change, a little more difficult with trustees, but extremely difficult with members.

This is quite understandable. From the employer’s point of view a scheme which is rising in cost and impairing their balance sheet obviously needs attention; trustees are naturally cautious and always have to be convinced of the need for any change; while members will more often than not see the word change as a euphemism for benefit cuts and/or contribution increases. We address this by explaining in terms that are easy to understand how the world has changed over the past 20 years or so. At Invesco, we wish to express that due to increased longevity, pensions are now paid out 25% longer than they were 20 years ago and that this increase in outputs obviously requires a change in inputs. We also explain the various legislative and regulatory changes as well as market changes and point to the difference in cost they have made to schemes.

Scheme members frequently blame the investment markets or indeed the investment policies and strategies of the trustees and fund managers for the woes of their scheme and it needs to be explained that the downturn in the markets has had only a small part to play in the downfall of many DB schemes.

 It is of course vital to point out what will happen if nothing is done. Maintaining the status quo may ultimately result in the winding up of the scheme with active and deferred members suffering accordingly. Once consensus on the need for change is arrived at the change process itself can begin. The best way to look at this is a reverse engineering process. Instead of looking at the inputs and how they might be changed, the way to view it is from the output end – what sort of pension scheme do the stakeholders want at the end of the process? And this is where real engagement by all parties usually begins. Invesco can bring clarity to this and advise on the various different legal, investment and financial considerations which need to be factored into the decision.

Members must no longer view change as a threat but as something which is absolutely necessary for their longer term welfare. As the quote by Isaac Asimov suggests, living in the present alone is no longer an option, we must now make considerations for the future. Ultimately, it is a win win scenario for all involved but this cannot be achieved without going through a process of engagement, communication and careful change management.

 To find out more about how Invesco can help with pension scheme change management contact us on 01 2947600 or by email to info@invesco.ie

Invesco have recently developed a new rules-based consulting service for defined benefit scheme that helps trustees make investment decisions based on clearly understood criteria, thus taking any potential emotion out of the investment decision.

Invesco believe that the investment strategy should be customised to reflect the unique liability profile and objectives of the scheme. The strategy begins with establishing a clearly defined governance structure to help trustees focus their time and resources on value-added activities and decisions. After that, targets, decision criteria, and contingency plans are established. This ensures that changes can be quickly implemented to take advantage of opportunities or protect against risks in the market without having to await a quarterly trustees’ meeting. Trustees must also understand the potential benefits and consequences of their choices. An investment should only be added to the strategy if trustees understand the factors that will drive returns and the risks that might lead to a loss.

Invesco’s Optimal Consulting Service

Invesco’s Optimal Consulting service helps trustees to structure their investment strategy and asset allocation based on the longterm goal of achieving and maintaining the target funding level. Our focus is not on investing excess time or capital on identifying outperforming managers or on timing the market, but rather on establishing targets and triggers to capture excess gains and move assets into a lower-risk “liability matching strategy” when the opportunity arises.

We believe that investment decisions do not need to be excessively complex with layers of fees and structures. Optimal Consulting allows trustees to fulfill their statutory duties while providing the knowledge, guidance and confidence needed to make informed decisions. In short, what Optimal Consulting offers trustees is a rules-based philosophy for devising and implementing an investment strategy. This not only facilitates better and more effective decision making but also takes the emotion out of the decisions.

To find out more about Invesco’s Optimal Consulting service you can contact Invesco on 01 2947600 or by email to info@invesco.ie

With this in mind, how can defined benefit scheme Trustees make sure that their investment strategy is designed to weather this storm in 2012?

Invesco has four suggestions that should be considered by all stakeholders involved in the investment decisions:

1. Agree to reduce risk when opportunities arise.  Remember that volatility can give you as much of a reason to look for opportunities on the upside than to manage risk on the downside. Take advantage of market gains with an agreed (and properly documented and executed) de-risking plan. Be prepared to capture and lock-in any positive returns.
2. Don’t sacrifice growth potential because of uncertainty. The majority of schemes need to maintain an overweight allocation to Growth Assets in order to help with deficit recovery. Of course, this requires accepting the additional risk associated with these higher volatility investments but don’t give up the opportunity for growth and recovery just because the outlook is uncertain.
3. Reduce the mismatch between assets and liabilities.  Waiting for yields to increase to some pre-determined level before extending the duration of your bonds to match your liabilities could prove to be a slow and futile strategy. Making a small change – like reallocating contributions to longer duration bonds – moves you one step closer to a liability-matched portfolio and provides some new protection in the event that yields decrease further. “Wait and see” should not be an option.
4. Diversify your Growth Assets. Do not rely completely on equity markets to deliver returns. Asset classes like commodities, active currencies, absolute return strategies and infrastructure have similar characteristics in terms of expected risk and return, but their values will move up and down at different times and for different reasons than equities. If you are not comfortable with these different or seemingly more complex investments, agree to additional training before making your decision. Diversification is the only “free lunch” that you can get when investing and lack of knowledge should not be an excuse for not taking advantage of it.

If you want to discuss your current investment strategy, make adjustments, or confirm that you are starting 2012 on the right foot, please contact your Client Services Manager or Invesco at (01) 294 7600.

Defined Contribution Pension Schemes

Members of a DC scheme access benefits upon retirement determined solely by the contributions paid into the scheme by that individual, or alternatively, on behalf of the individual by their employer. Ongoing member engagement is necessary if employers are to get full value from their investment in their Defined Contribution (DC) pension schemes.

However, in many workplaces the only support to such DC members is a standard presentation on the scheme and its benefits, given once a year. The presentation barely changes from year to year and is done more out of a sense of duty than anything else.

But this really doesn’t cut it anymore. This one size fits all approach neither addresses the needs of the employer nor those of the members and certainly doesn’t take into account their changing circumstances. For example, a member approaching retirement will have almost nothing in common with a colleague just joining the scheme. The typical DC pension member goes through four stages during his career, as broken down below:

Stage 1

The first stage involves recruiting members to the scheme by selling its benefits. The importance of saving for retirement, the available tax reliefs, any flexibility within the scheme, ancillary benefits and, most importantly, the level of employer contributions needs to be impressed upon staff. This is sometimes overlooked due to the financial pressures placed on members, however, it is critical that members understand the importance of saving for retirement from an early stage in their career.

Stage 2

The next stage in the lifecycle comes when members encounter financial pressures as their career develops such as growing families, mortgages and so on. Of key importance at this point is the education of members regarding their choices in relation to areas such as contribution levels and investment options. Members need to understand the various asset classes that their pension is invested in, the risks associated with investment, and the long term effects of contribution and investment decisions. This will help ensure that members encountering financial pressures do not make decisions regarding their pension that they may later regret.

Stage 3

After this comes the mid-career stage when financial pressures begin to ease and members’ expectations begin to change. It is at this point that members should be encouraged to review the performance of their pension investment as well as their long term objectives for it. This should be done in conjunction with a review of their own personal life goals and objectives and members should possibly reconsider their investment choices and contributions in this light. For example, if an individual has ambitions to retire early they will have to start making provision for that goal sooner rather than later both in terms of additional contributions and investment strategy.

Stage 4

Lastly, we come to the point when members begin moving toward retirement and serious planning has to begin. This is where members have to be given all of the information they require to make the right choices. They need to decide if an ARF (Approved Retirement Fund) or a standard annuity is more appropriate for them. If members have been informed and educated correctly, they will then be in the right position to organize their expected benefits in their preferred format at retirement.

These are the clear and obvious benefits which structured communication and education can have for members but there are also very real benefits for employers. Employers invest a lot of money in staff pension benefits and it often goes unappreciated. However, if members are engaged on a regular and indeed personal basis the true value of the employer contribution will become apparent.

Instead of sending out Christmas cards this year, we’ve made a donation to the Simon Community. Since the campaigns foundation in 1999 the Simon House of Cards Appeal has become Ireland’s most successful corporate fundraising campaign. The money raised will be used to offer friendly support and shelter to the thousands of homeless people in Ireland this Christmas.

Merry Christmas from Invesco!

 

1. Know your job

All trustees must have received Pensions Board approved trustee training by February 2012. Thereafter, trustees must receive trustee training every two years and new trustees must receive trustee training within six months of appointment.

2. Know your scheme

The terms of the trust under which a pension scheme is set up are generally detailed in a legal document called the trust deed and rules. Trustees can only act within the terms of the trust deed and rules. Trustees who act outside the terms of the trust may be found liable for a breach of trust. Therefore, trustees must be fully aware of the provisions of the scheme in the trust deed and rules.

3. Inform members

The Disclosure of Information Regulations require trustees to disclose basic scheme information to pension scheme members. In order to satisfy this requirement trustees generally issue members with an explanatory booklet which sets out in plain English the members’ benefits and entitlements. However, as a result of the Finance Act 2011 much of the tax information contained in explanatory booklets is now considerably out of date. As a consequence trustees should consider updating their scheme’s explanatory booklet to reflect these changes.

4. Seek expert help

Pensions are a complex area. The penalties for trustees and employers for noncompliance with the Pensions Act and Disclosure Regulations can be onerous. Consulting with appropriate experts in relation to any trustee duty will offer protection to trustees.

5. Be engaged

The Pensions Board recently confirmed that trustees are not expected to be infallible or to be full time professionals but that one of the essential trustee requirements is to remain engaged. You are not expected to be an expert as the consultants for your scheme should provide this expertise. If you feel you are not getting the response you need ask for a review by another consultant.

Deposit Guarantee Scheme (DGS)

The Deposit Guarantee Scheme was increased from €20,000 to €100,000 in September 2008 and Credit Unions were included for the first time. This scheme provides a guarantee of €100,000 per person, per institution covered.  This guarantee is still in place and does not have an end date. It covers all of the Irish banks as well as Ulster Bank and KBC Bank.

Eligible Liabilities Guarantee Scheme (ELG)

The Credit Institutions Eligible Liabilities Guarantee Scheme (ELG) was introduced on the 9^th of December 2009.  The ELG Scheme updates and revises the bank guarantee under the government guarantee scheme on a 6 month basis and is governed by the EU. The Guarantee governs fixed term deposits over the €100,000 limit. To qualify for the ELG Scheme the term must be a fixed term of 5 years or less taken out with one of the participating institutions after the date they signed up to the agreement and before the 30^th June 2012 (pending sign off from Europe). The current participants are AIB, Anglo Irish Bank, Bank of Ireland, EBS Building Society, ICS Building Society, Irish Life & Permanent and Irish Nationwide Building Society. 

Deposit Security with Foreign Owned Banks

Investec, Nationwide UK and Northern Rock are all covered under the UK Financial Services Compensation Scheme, which protects deposits for up to £85,000 Sterling per person per bank.  National Irish Bank is covered under the Danish Government Guaranteed Scheme and covers deposits for up to €100,000 per person. Rabo Bank is regulated by the Dutch Central Bank and also provides security for up to €100,000 per individual.

For more information, contact Invesco directly on 01 2947600 or email us at info@invesco.ie