• the trustees of the scheme;
• the employees; and
• the unions.

The trustees are under a fiduciary duty to act in the best interests of all of the beneficiaries, that is, active, deferred and pensioner members as well as contingent beneficiaries.  They may have the power to make a contribution demand.  The unions will represent the interests only of active members and even then perhaps only a proportion of the active members.  Unions also hold the important card of the threat of industrial action leading to an immediate impact on company productivity. 

An employer may decide to design a restructuring plan and put it to the trustees without negotiating with unions.  This may cause the unions to take industrial action.  Can the trustee still consider the restructuring plan while industrial action is underway?  What if the trustees include union nominees?  An employer may decide to reach agreement with unions over a restructuring plan and then ask the trustees to rubber stamp the plan – should the trustees do so if, for example, the plan has no benefit to deferreds? 

Balancing these stakeholders’ interests is a difficult task for employers.  It is also difficult for trustees.  Trustees need to remember the very important position they hold, their bargaining power and the parameters within which their decisions are taken.  Employers also need to remember that the trustees’ buy-in is usually a key part of the success of the plan. 

A properly advised trustee will refuse to agree to a proposal which is manifestly not in the interests of one category of member unless there is a perception that, all things considered, the proposal represents the best outcome for the beneficiaries taken as a whole.  The trustee will also need to consider any dispute between the employer and active members over a restructuring plan.

When we are asked by employers about handling unions, we point out all of the above and mention the need to comply with collective agreements.  Moreover, when it comes to it each employer will have to decide for itself how to deal with the unions in the context of its own workforce.  Employers need to be prepared for the long-haul if the unions really decide to be activist.  To see just what this can mean, see Labour Court Recommendations Pensions/Insurance section.

What was surprising was the amount and range of pensions-related litigation.  The issues being litigated included scheme wind-ups, employer capital reduction applications and creditors accessing funds within bankrupts’ pension arrangements.  The amount of current pensions-related litigation highlights the need to consider litigation risks and strategy at a very early stage in transactions that could prove contentious.

Here are some pointers to manage litigation risks should they arise in the future:

1. Before entering into any transaction consider what possible claims or legal proceedings might arise and take steps to structure the transaction to try to minimise the risk and/or impact of any claims.  For example, if an employer intends to restructure its defined benefit scheme and provide an age / service related defined contribution benefit structure, has it done enough to meet its duty of good faith to members and has it properly considered age discrimination issues?
2. In the transaction or originating document(s), be clear on the forum in which claims will be dealt with.  For example, in many trust deeds, there is an arbitration clause which applies to any disputes or differences arising between the employer and trustees.  Arbitration is a binding dispute resolution process, from which there is very limited right of appeal to Court.  Ensure you are aware of the dispute resolution process and what it will involve.
3. Be clear on the process, timescales, rights of appeal, possible remedies and other issues such as costs and whether the process is confidential (as arbitration is) or open (as most civil court claims are).  If proceedings are dealt with in the Commercial Court, tight deadlines will be imposed on the parties to deliver Court documents.
4. Remember that once proceedings commence, the parties will be subject to orders requiring the production of a very wide range of documents which are relevant to the dispute.  Some types of document do not have to be disclosed, especially where they are legally privileged (on the basis that they contain legal advice or were prepared in contemplation of legal proceedings) or are “without prejudice” documents.   Most other types of document will be disclosable.  A question to ask yourself is whether a document you are about to create (e.g. an email, a letter or an attendance note) is one which you would be happy to disclose and be questioned on in court.  If you would not be happy to produce it in Court, consider whether you need to create it.  Alternatively, check with your lawyer whether one of the exemptions from disclosure orders might apply.
5. Disclosure orders in proceedings will usually only be made against parties to the proceedings although disclosure can be sought from parties not involved in certain circumstances.  It might be worth speaking to your lawyers about this.  If an entity is not likely to be party to legal proceedings (e.g. a parent of a scheme sponsor), it might make strategic sense for the legal advice to be sought by that entity instead of the entity which is likely to be involved in proceedings.
6. Court imposed disclosure orders usually set a strict deadline by which disclosure must be made with some sort of sanction for non-compliance.  It is far easier to comply with such orders if there has been good document management from the outset.  Scrabbling around for badly organised files which may have been archived offsite is definitely to be avoided.
7. Retention and destruction of documents is the final issue to consider.  Documents should be retained for at least as long as the longest limitation period applicable to possible claims, bearing in mind any requirements under the Data Protection legislation not to hold personal data for longer than is necessary.  If a claim is made, you will need to be able to produce documentation to back your defence or to comply with disclosure orders.  Claims may not have to be made until a considerable period after the alleged breach occurred.

It behoves us all to be mindful that disputes can and do happen and to plan accordingly.

One of the speakers at the launch was Anthony Linehan of the National Treasury Management Agency (NTMA). The view in the industry is that sovereign annuities are most likely to be backed by Irish sovereign bonds. Mr Linehan gave a very interesting presentation on the bonds which the State will issue to back sovereign annuities and the process for issuing and pricing those bonds.

It seems that the State will issue what are being called ‘amortising bonds’. These are bonds which will pay out equal annual payments which are made up of a coupon payment and part of the principal which would usually be repaid at the expiry of the bond.  They are ideally suited to sovereign annuities.

The reason why sovereign annuities are not quite a reality is that none of these amortising bonds have been issued yet. It seems that the NTMA has been waiting for yields on Irish sovereign bonds to come down to around the 6% level which is the level acceptable to the State in the short term. Now that yields are at this level, the NTMA is waiting for demand for the first tranche of these bonds to reach €100 million before it will issue these bonds. How will this critical mass be reached? One way is that one or two large schemes will decide to use sovereign annuities creating the necessary demand. Another way is that a number of smaller schemes will let insurers know of their interest and when that interest reaches the critical threshold insurers will ask the NTMA to issue the first bonds. So we are nearly but not quite there.

My talk at the launch covered the situations in which trustees might seek to use sovereign annuities. These are:

• Buying out pensioner liabilities to downsize an ongoing scheme;
• Buying-in sovereign annuities to hold as scheme investments to benefit from the reduced funding standard pensioner liability calculation; and
• On wind-up.

My view is that most of the initial demand for these annuities will come from scheme sponsors who will try to persuade trustees to make use of sovereign annuities as part of defined benefit scheme restructuring. Trustees will naturally be suspicious of sovereign annuities given that they are a brand new product and they lessen the security of benefits for pensioners where benefits are bought out. I believe that this suspicion will subside over time.

Should trustees be looking seriously at sovereign annuities yet? I think that they should if only to understand the full range of options for managing a scheme’s liabilities or securing liabilities on a winding-up. That said, given that it isn’t yet possible to buy a sovereign annuity, looking into these annuities is something that trustees could put on the long finger, at least for the moment.

New statutory requirements relating to funding defined benefit schemes have recently come into law with the coming into force of the Social Welfare and Pensions Act 2012 on 1 May and the publication of various pieces of statutorily binding guidance issued by the Pensions Board on 7 June.

The Act makes various changes to the Pensions Act 1990, principally, its sections relating to the funding standard and revaluation of preserved benefits. The Pensions Board’s guidance sets out the details of most interest.  Through various changes to the Pensions Act, much of the Pensions Board’s guidance now has the force of law.

What to read

The guidance is of sufficient importance, and is clearly enough written, that we would recommend any interested party to read the guidance for themselves.  Perhaps the most useful starting point in reviewing both the Social Welfare and Pensions Act 2012 and to the Pensions Board’s guidance comes from the Board’s Funding Standard Overview Guide (which does not have statutory force) which summarises the main points of the new funding requirements. We then suggest reading the guidance on section 49 (funding proposals) before reviewing the other guidance.

Need to re-start work now on funding proposals

The most important point we would highlight is that schemes which have submitted an actuarial funding certificate certifying that the scheme fails the funding standard but which have not submitted a funding proposal now have until the later of the end of this year and 12 months after the end of the last scheme year falling before June this year. Where a funding proposal incorporates an application for a section 50 order reducing benefits, the new submission deadline is not earlier than the end of February 2013. The existence of the new deadlines means that trustees who need to submit funding proposals and scheme sponsors need to focus their minds over the next few weeks on the content of their funding proposals. 

New issues to consider

The requirements mean that several new matters need to be factored into the thinking on funding proposals, such as:

• The new requirements and options relating to funding proposals which extend beyond the date of the next actuarial funding certificate or funding standard reserve certificate;
• Having to fund for the new risk reserve if the funding proposal period ends after 2015;
• Ways of mitigating the impact of the risk reserve, such as by increasing scheme investment in cash and EU sovereign bonds or putting in place an unsecured payment undertaking;
• Reducing the value placed on some or all of the pensions in payment under the scheme for funding standard and funding proposal purposes (called valuing pensions in payment on the section 53B basis) by holding sovereign annuities or EU sovereign bonds; and
• The minimum requirements for secured contingent assets to count as scheme resources for funding standard purposes.

This will all take time

Trustees and scheme sponsors also need to bear in mind the time it will take to put in place the measures that may go into a funding proposal.  For example:

• Trustees need to take appropriate advice, pass the required resolution relating to using sovereign annuities on a winding-up and make various disclosures before the scheme actuary can use the section 53B basis to value funding standard pension liabilities; and
• Before trustees can use contingent assets or unsecured undertakings for funding standard / funding reserve purposes, they will have to take appropriate professional advice and be satisfied that the assets or undertakings comply with the applicable guidance.

Conclusion

Funding discussions for many schemes had stalled or been put on the long finger pending the publication of the new funding requirements.  Now that the requirements are known, it is time for those discussions to be re-commenced as a matter of urgency.

1. Funding Issues 

A purchaser will usually prefer to structure the deal to allow it to take on the target without any defined benefit liabilities or at least to take on limited or fully funded defined benefit liabilities.  There are a number of ways this may be achieved, including:

 
2. Invalid Deeds of Amendment

Deeds of amendment which reduce benefits may be declared invalid in the event of a challenge from a member if, for example, the amendment breaches a restriction in the amendment power on reducing accrued rights or tries to correct a past mistake. If such a deed is invalid, the plan’s funding position may be worse than it appears. Detailed due diligence is required to analyse if this is a potential issue. If it is an issue, from a purchaser’s perspective, it is better to crystallise the liability and seek appropriate funding from the vendor rather than rely on an indemnity in the sale agreement. This is because potential claims may not be made until after the limitation period applying to an indemnity expires and any attempts post-closing to crystallise a liability may invalidate the indemnity.

3. Plan provisions

Measures to limit the purchaser’s defined benefit liabilities post closing often require the co-operation of the plan trustees. One of the most important parts of the due diligence process is to consider who controls the key powers under the plan’s provisions:

 4. Industrial Relations Issues

While it may be possible (subject to employment law) to avoid establishing a defined benefit arrangement for the target’s employees post closing, industrial relations issues need to be on the radar when contemplating a transaction involving a defined benefit plan. Pension entitlements are increasingly at the forefront of employees’ minds. While there is a strong move away from defined benefit to defined contribution pension provision, a loss of defined benefits and a new owner may give rise to IR issues. This is significant, because:

1. many employers who operate defined benefit plans are unionised;
2. there is a strong social partnership culture inIreland; and
3. there may be a significant number of fora to which a disgruntled employee may take claims based on the same facts which can cause significant management headaches.

 
5. Contractual Issues

While it can often be difficult to arrive at a definitive view, an analysis will need to be carried out to determine whether employees can claim a contractual entitlement to a particular type or level of pension benefit.

 
Conclusion

Pension issues in mergers and acquisitions can be significant and may affect decisions as to the price and the structure of the transaction. Pension issues are becoming more complex and need to be examined early on in the transaction in order to avoid significant problems down the line.

A&L Goodbody have been involved in the drafting of the response of the Association of Pension Lawyers in Ireland.  In general, the regulation of defined contribution pension provision works but we consider that it can be rationalised, streamlined and improved somewhat.  It is likely that there will be action on foot of the submissions sent to the Pensions Board.  We believe that any reform of the regulation of defined contribution arrangements in Ireland will be considered alongside a review of the fees charged by pension product providers. We also believe it will be considered in light of the auto-enrolment regime that was proposed some time ago which Government has indicated will be brought into effect at some point in the future. 

We wait to see what reforms will come of the consultation exercise and welcome the fact that this is an area in which the Board is being proactive in seeking to improve the regulatory framework.  One key challenge we see with pension provision in general is getting workers and other individuals who are under retirement age to engage actively with retirement saving.  Without such engagement, the full benefit of any regulatory simplification will not be seen.

Read more on the Pensions Board’s consultation request on the simplification of defined contribution pension provision

The general rule is that:
It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the respondent’s, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict (Lord Herschell in Bray v Ford 1896).

Typically, however, a trust deed will contain a provision authorising the trustees to exercise discretions even where they might benefit from the exercise of the discretion. Do such clauses actually stand up to scrutiny and protect the integrity of the exercise of the discretion?

Academic views on whether such clauses can override the “inflexible rule” mentioned above vary from those who say that a trust instrument may expressly authorise trustees to act in ways benefitting themselves to others who think that there is some doubt in the case law about the effectiveness of such clauses.

It is to be hoped that such clauses do work. If they do not, it will be hard to find beneficiaries or employees who are willing to stand as trustees. It would also undermine the benefit of the member-nominated trustee provisions of the Pensions Act – the Act does not contain a statutory provision allowing interested member trustees to act notwithstanding a personal interest in the outcome of a decision. 

We do not see why the Courts should not uphold the validity of such clauses. Apart from academic commentary, there are analogous situations where the cases confirm that a trust deed may provide that a trustee may benefit from his position as a trustee, such as where there is a charging clause in a trust deed allowing a professional trustee to charge for its services. 

If trustees are to be asked to exercise a discretionary power in which they have a personal interest, the trustees should seek early legal advice. Rather than relying on an express provision allowing the trustees to act notwithstanding their personal interests, it may be better for a conflicted trustee to stand down or otherwise to manage the conflict. Alternatively, if this is not possible, the trustees might consider going to Court for directions before they take any decision.

Trustees will be interested to note that the Pensions Board has recently published a new edition of The Pensions Board’s Trustee Handbook (Fourth Edition).

The Trustee Handbook provides detailed guidance on trustee duties and responsibilities and sets out good practice for trustees of occupational pension schemes.  The Trustee Handbook, in conjunction with the updated free online trustee training facility provided by the Pensions Board, will assist pension scheme trustees in satisfying their training obligations.

Every trustee of an occupational pension scheme (except a death benefit only scheme) must undertake trustee training in accordance with the Pensions Act. If you are an employer who operates a scheme you must arrange for the trustees of that scheme (other than a professional trustee or a pensioneer trustee) to receive appropriate training. A failure to do so could result in fines and even imprisonment. 

In light of the above, it would be prudent for both employers and trustees to ensure that they have met their obligations and, in particular, that trustees, who were trustees on 1 February 2010, have undertaken relevant training prior to the 1 February 2012 deadline.  An alternative course of action could be to replace the current trustees with a professional trustee (who the employer is not required to arrange training for) before 1 February 2012.

It is important for trustees and the sponsoring employer (who ultimately may be footing the bill) to understand the nature of the relationship between them and the advisers they decide to appoint and to be prepared to question them (and the agreements governing the relationship) critically.  

Pension Scheme Administrators

Many sponsoring employers and trustees appoint pension administrators and consultants to assist in relation to their pension schemes.  The written agreements documenting such appointments should be reviewed.

Leaving aside the actual services to be provided by the administrator or consultant and the fees for doing so (which the trustees and sponsoring employer will need to be satisfied with) the key issues you must consider are:

1. Who should be party to the agreement?
2. What should the obligations and duties on the parties be?
3. Who should be liable for what and what is a reasonable limit?
4. How will conflicts, complaints and data protection be dealt with?
5. Who controls the amendment of the agreement?
6. Can the service provider get someone else to provide the service?
7. How will the relationship be terminated?

Professional Trustees

Many sponsoring employers appoint professional or independent trustees.  This is often under a service agreement or letter of engagement. Many of the issues outlined above in relation to administration agreements will also arise in this context. It is imperative that you understand the effect of the key provisions of such documents and the relevant provisions of the pension scheme. Particular consideration needs to be given to the charging clause and indemnity and exoneration provisions under the scheme’s governing trust documentation and how these interact with the service agreement appointing the professional trustee. If such written agreements are not already in place this should be rectified.