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Pension chief calls for full disclosure Back  
John Feely, the recently elected chairman of the Irish Association of Pension Funds, had called for full disclosure of pension costs. In an address to an IAPF conference in September he said these disclosures should include all details from charges to likely future benefits, and the risks of adopting particular approaches. He believes that disclosure will need to be driven by legislation and the adoption of industry standards.
We have a uniquely Irish pension system and one of which we can all be proud. We have managed so far to avoid any serious mal-functions and have provided benefit to many thousands of people, many of whom didn’t realise what was being provided until the day they retired.

So that’s where we are starting. But I don’t suppose many of us, or indeed any of us believe that we cannot improve things future and will have to accommodate change. And it is against this background that I am highlighting issues that I believe are important and that we need to tackle.

‘Pensions are becoming more and more complex...Plan sponsors, trustees, scheme members and other pension savers are fighting a loosing battle to keep up.

In the current environment of openness and transparency we are all aware of the need for appropriate ethical standards and governance. Pension scheme governance is driven more by legislation than adoption of best practice standards. Certainly as a society we seem to be faced with one inquiry after another. To me it seems we are moving from an environment that tolerated sharp practice to one that requires proper behavioural standards.

Life seemed a lot simpler 30 years ago and there is no doubt that the pension arrangements of the time were appropriate to the requirements. However, occupational pension provision was really the realm of the larger employer. Employees in smaller companies and the self employed typically had little to no provision.

Today things have changed. Clearly employer-sponsored defined benefit schemes still predominate but most new arrangements are now defined contribution. This change has come about mainly because employers want to control pension costs but also because employees are demanding more flexible arrangements.

Low interest rates and increased life expectancy have continued to substantially increase the cost of pension provision. Quality of pension coverage and adequacy of pensions is bound to reduce against this backdrop, although the high levels of investment return through the eighties and nineties have mitigated this effect.

In overall terms the traditional pension arrangements have not kept pace with the changing requirements of pension savers. Changing employment patterns in particular, require new approaches to long term retirement provision. Pension savers need flexibility to be able to adopt their financial arrangements to suit their particular circumstances at various times during their career. Employers need flexible arrangements to suit their employment needs.

We also have a new era in financial services. The consumer is at last being put centre place. This is because the media has encouraged a higher level of understanding and involvement in financial decision and also because the current environment is one where everyone is prepared to question the appropriateness of financial services products to suit their own circumstances.

In my view it is time to begin to adopt our arrangements to suit the environment today and into the future. And the key is flexibility. At the moment we think about work and retirement as mutually exclusive. This might have been ok in the past when employees stayed in the one employment for most of their working lives and looked forward to the ‘long break’ at the end. But with the greater ability to change careers there is much less need for such discrete change. The culture must change to allow greater transition from work to retirement. This should also extend our working lives and alleviate the pressure of the cost of providing pensions in the future.

We each have our own individual needs and preferences and the future pension system must be able to accommodate these.

What might a model look like 30 years from now; certainly one that provides flexibility and choice. To begin to achieve this we must look at the elements of the current structure that are currently inflexible. This means fundamentally changing revenue pension rules and introducing flexibility into the State pension systems. It also means developing new types of pension that have the best elements of the current arrangements and accommodate the needs of employers, employees and other pension savers.

While I believe that PRSAs will make an important contribution, especially around increasing cover I believe a lot more needs to be done looking at the types of occupational schemes we have at present.

So if we are to satisfy our future retirement needs current rules that restrict the development of more flexible pension arrangements must be eliminated, allowing the evolution of pension arrangements that satisfy the needs of employees and employers and other pension savers.

When the IAPF was putting together responses to the NPPI consultation document our survey of pension fund holders listed the most important reasons why they did not have pension cover. One of these was that they many people felt they did not understand pensions.

So have we managed to make things simpler? Well the Pensions Bill is one of the largest pieces of legislation ever produced and there is still more to come. The introduction of PRSAs provides a simpler pension option but there are concerns I have concerns that even adding a simpler option to what’s there already adds complexity. And more requirements being placed on trustees.

With the need for greater flexibility in pension arrangements I believe it is next to impossible to make things simple. While there is clearly room to improve, the most important issue is to simplify the message and to provide more education and training.

IAPF held a pensions forum in April. As part of this forum consideration was given to the need to highlight governance issues and to begin to address these.

Asset governance is clearly a high profile area. The IAPF investment survey highlights some gaps that we need to address. These are generally to do with the appropriate establishment of investment principles and the use of investment management agreements to ensure the effective management of the pension fund assets.

Another issue that is particularly contentious is voting rights and how they are exercised by trustees and investment managers.

Similar governance issues arise in relation to the day-to-day management of the scheme, pointing to the adoption of the best practice standards for pension scheme management.

Scheme governance is not as well developed as asset governance and has generally evolved with legislative requirements. But as an industry we need to do more, building best practice standards, adopting service agreements and again ensuring appropriate training and competence.

In the environment where there is choice this must be accompanied by full disclosure of all details in relation to financial transactions, from the cost of such transactions to the likely future benefits and the inherent risks of adopting particular approaches. This disclosure will need to be driven by legislation and the adoption of industry standards.

There is an overwhelming need to develop and adopt best practice standards covering all aspects of pension provision.

The IAPF are conscious that we must understand the opinions of our members on such issues and we intend to follow this up with a survey of member opinion and regular contact. In practical terms IAPF needs to lead from the front on these issues, from seeking changes to rules to identifying new approaches, promoting education, promoting and indeed providing training and guidance, setting out principles of best practice and researching the needs of consumers, employers, employees and other pension savers.

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