Sovereign annuities
Background
Legislation facilitating the introduction of sovereign annuities was passed in June 2011. Subsequently the Pensions Board published FAQs for trustees of occupational pension schemes and insurers on the use and registration of sovereign annuities. Disclosure regulations have now been issued which impose disclosure obligations on trustees who purchase sovereign annuities.
Basic Information
A sovereign annuity is an annuity issued by an insurance company in respect of a "pensioner member" which annuity is referenced to bonds issued by Ireland or any other Member State of the European Union and payments under which can be reduced due to an event of non-performance in relation to the bonds to which the annuity is referenced. Trustees of occupational pension schemes can only purchase sovereign annuities in respect of pensioner members (i.e. persons who are receiving benefits under their scheme or have reached normal pension age).
Should trustees purchase sovereign annuities?
Employers are likely to encourage trustees to purchase sovereign annuity given their favourable pricing when contrasted with traditional annuities. Trustees must consider whether to purchase sovereign annuities having taken appropriate legal and actuarial advice. Trustees should assess both the appropriateness of using sovereign annuities and the terms of the sovereign annuity being offered by the relevant insurer. All sovereign annuities must be certified by the Pensions Board but the Pensions Board does not assess the creditworthiness or stability of the Member State bond underlying the sovereign annuity.
Buy out or buy in?
One feature of sovereign annuity that distinguishes it from a traditional annuity is that the agreed payments from the sovereign annuity can be reduced if there is an event of nonperformance in relation to the bonds to which the annuity is referenced. If the trustees of a scheme decide to purchase sovereign annuities, they can do so in one of two ways: (a) they can buy the annuities in the name of the scheme and hold them within the scheme (a "buy-in"); or (b) they can buy the annuity in the name of the member and transfer the liability out of the scheme (a "buy-out").
Where the trustees purchase the annuities in the name of the pension scheme, the scheme remains fully liable to pay the member's pension and the annuities are subject to the pensions levy. If there is a non-performance in the underlying annuity bonds, the member's pension cannot be reduced to reflect this non-performance. If, however, the trustees purchase the annuity in the name of the member, the scheme's liability to that member ceases, the pensions levy is not payable and if there is a non-performance event, the member will suffer any consequential reduction in pension.
Disclosure requirements
Where the trustees of a pension scheme opt to buy a sovereign annuity in the name of a pensioner member, certain information must be disclosed to that member as soon as is practicable and in any event within two months after the trustees purchase the sovereign annuity. The information to be disclosed includes: details of the insurer issuing the sovereign annuity, the Pensions Board certification number, an explanation of the circumstances in which the payments can be reduced or restored and a statement in the form prescribed by the regulations (unless the trustees are reasonably of the opinion that any modifications would better explain the nature and effect of the sovereign annuities) stating, among other things, that if a Member State does not fulfil any of its payment obligations under the annuity, the member will bear the loss and, as a consequence, the member's pension is not guaranteed and may, in certain circumstances, be reduced.
Trustee liability
The Social Welfare and Pensions Act, 2010 amended section 59 of the Pensions Act and gives the High Court power to excuse a trustee from all or part of their liability for a finding of breach of trust in purchasing a sovereign annuity where the court finds that the trustee acted honestly and reasonably. Trustees should also consider the exoneration and indemnity provisions in their scheme in this regard.
Comment
Sovereign annuities are not to be confused with sovereign bonds on which they are based. Most schemes can at any time invest in sovereign bonds: sovereign annuities are solely available to schemes with pensioners and are drawn up by reference to individual members.
While the "buy-in" approach retains the risk of default within the scheme, it is likely to be more popular. Despite the statutory power which overrides the rules (but not section 48 of the Pensions Act) it will not be straightforward for trustees to provide members with sovereign annuities.
Break-up of the euro
There has been much coverage in the press recently in relation to the potential break-up of the euro. Commentators are predicting that, if the break-up happens at all, either one or two countries that participate in the euro will leave, or the entire euro will collapse. If Ireland were to leave the euro or if the euro currency were to collapse, commentators have suggested the likely outcome is that Ireland would return to the Irish punt. Trustees will need to consult with their investment managers should this occur. Consideration should be given by trustees to the strength of the employer's covenant which in these circumstances could increase or decrease depending on the nature of their business.
Statute of Limitations and investment litigation
The recent case of O'Hara v ACC Bank plc will be of interest to trustees and employers alike. In this recently decided High Court case, two customers brought proceedings against ACC Bank plc in relation to highly geared investments made by them. Both investments, while initially successful, proved disastrous. The customers alleged various misrepresentations by the Bank as to the safety of and returns from the investments concerned. The first customer was estopped in his proceedings as the matter had already been heard by the Financial Services Ombudsman. The second customer was entitled to proceed with his case as he was not barred by the Statute of Limitations although he bought the assets in 2003/2004. The court found that the limitation period for a negligence case ran from when the second customer suffered damage. That damage was suffered when the investments purchased by the second customer lost their value and not at the point of purchase in 2003/2004.
Comment
Working out when limitation periods run for pension schemes is tricky because in many cases there can be continuing breaches and/or the full extent of any "damage" can be difficult to determine until a crystallising event such as death, leaving service or retirement occurs. Having said that, this case does offer encouragement for, in particular, defined contribution scheme trustees (as regards limiting claims from members) in that it appears to be authority for concluding that the time limit for claims relating to investment loss starts to run from the date of the fall in value. From the trustees' perspective, if followed in a pensions scenario, this could operate to restrict the number of claims.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
