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Profile: Construction sector pension scheme Back  
The Construction Federation Operatives Pension scheme (CFOPS) won the award for the best Irish pension scheme for 2004 at the IPE European Pension awards and is currently implementing the recommendations of a wide ranging review designed to meet the challenges of a changing industry. Pat Ferguson explains how it works.
LLate last year, the Construction Federation Operatives Pension scheme (CFOPS) won the award for the best Irish pension scheme for 2004 at the IPE European Pension awards. It was also shortlisted in the top three for the best European industry wide pension schemes. CFOPS currently has an active membership of 63,500 employed by 7,100 contributing employers and has funds under management of €540 million. Yet while these accolades were well received within the industry, by both members and employers alike, the CFOPS is relatively unknown in most other quarters.

The origins of the CFOPS scheme go back more than 40 years. In 1964 a strike in the construction industry closed sites nationwide. The end of this strike was brought about by an agreement on a 40 hour week and the implementation of a pension scheme for construction workers. The implementation of the Construction Federation Operatives Pension scheme (CFOPS) in 1965 as an industry wide scheme was revolutionary.

By 1969 an agreement between employers and trades unions to provide pension, death in service benefit and sick pay benefit for manual workers in the construction industry was registered in the Labour Court and became a Registered Employment Agreement (REA). It became compulsory for all employers to provide the benefits set out in the Registered Agreement and CFOPS became the main vehicle for employers to achieve this.

The scheme was non-contributory; however, in 1976 the unions agreed that workers should contribute with employers paying two thirds and members paying one third. The basic argument for the scheme was to provide a facility whereby employers could ‘top up’ the State retirement benefit received by their workers.

The structure of the industry for which the scheme was designed was based on the main contractor acting as the principle employer of most trades. Since then, the construction industry has changed in response to technology, economic factors and market trends. The workforce has fragmented and this required the scheme to adapt its facilities to track workers throughout their lives in the industry. It is now not unusual for construction workers to be employed for short periods of time with a number of contractors throughout the year.

While it is open to all pension providers to provide employers with the benefits set out under the REA, it is not normally economical for them to collect, record and invest contributions for workers who can be in the employment of any particular employer for as short a period as two to four weeks.

Equally, while it is compulsory for all employers in the construction industry to provide the level of benefit set out in the REA for all manual workers between the ages of 20 and 65 years, the scheme does not have a duty or a defined role in policing the non-observance of the REA by employers. This responsibility lies with the employers and trades unions who are the signatories to the REA and who have put in place an agency (Construction Industry Monitoring Agency) to oversee pension compliance in the industry.

The basic format of the scheme remained relatively unchanged until 1999 when the trustees gave the industry an opportunity to review its pension scheme. A 14 strong committee was formed to review the scheme and produce recommendations that reflected employer and employee expectations. The committee produced its report in 2001.

The committee, which met with various Government departments, recommended that the existing scheme should be replaced by a new hybrid scheme where each member would contribute to their own direct contribution type personal fund with pensions being provided in-house by the scheme from its own annuity fund. The contribution rate to that fund would initially be a combined employer/employee contribution of seven per cent of the average basic construction salary. The objective set out by the committee was that the industry pension, when integrated with the social welfare pension, should provide a member, after 40 years membership, with a pension equivalent to two thirds of the average basic construction salary.

The committee also recommended that the death in service benefit be increased from €20,000 to €63,500 and that the scheme’s name would change to the ‘Construction Workers Pension Scheme’.

The Construction Industry National Joint Industrial Council (CNJIC) studied the recommendations and made few changes. The trustees of CFOPS then began to structure the scheme’s benefits, its operation and its trust deed and rules. The new scheme should be fully implemented by January 2006.

The trustees also restructured the investment strategy for the scheme’s funds which are now in excess of €540 million. Historically, the performance of the scheme has been strong, given the volatility of recent years and over the long term would compete favourably with that of other European Occupational Pension schemes.
The average annual performance over three years to 31 December 2004 was 1.5 per cent, over five years was 2.5 per cent and over 10 years was 12 per cent. Over the last 40 years the annual average performance was 14.1 per cent.

A more concrete indicator of the scheme’s performance is that at no point during the turmoil in global markets over the last four years has the solvency of the fund fallen below 100 per cent. At all times since the introduction of the Pension Act 1990, the scheme has met its legal requirements.

The funds perform above average because the benchmark set by the trustees is for above average performance. The trustees ensure that fund managers maintain this performance by having regular reporting sessions by the managers. At each of the monthly trustee meetings, at least one of the investment or property managers presents to the Board on its performance.

The trustees, in recent months, have restructured the management of the scheme’s funds, moving from a balanced mandate with two fund managers, to specialist mandates with three fund managers. The scheme’s funds are split three ways - 55 per cent in equities, 15 per cent in property and 30 per cent in fixed interest. The fixed interest portfolio is managed by Credit Agricole Asset Management in Paris. The equity portfolio is split between two Irish managers, a discretionary fund managed by Bank of Ireland Investment Managers and a consensus fund managed by Irish Life Investment Managers. The scheme’s property portfolio is jointly managed by Jones Lang LaSalle which handles the scheme’s office and industrial holdings and CB Richard Ellis Gunne which manages its retail units.

The scheme has always held a higher than normal percentage of its fund in property. This has served it well over the years. Traditionally, the scheme’s holdings were in office accommodation, however, the last five years has seen it shed some of these holdings in favour of high street retail units.

The geographical spread of the scheme’s equity holdings is standard - 25 per cent in domestic stocks, 40 per cent in the European market, 22 per cent in the US and 15 per cent in the Pacific Rim. The large Irish holding is due to the fact that both of the equity managers are Irish based and also historically the scheme’s Irish stocks have performed well.

The format of the current pension scheme is complex. Each week has a pension accrual rate linked to it (i.e. an amount of pension that is purchased by that weekly contribution at retirement). These accrual rates are age related and change each year in line with the contribution change and the return in investment by the scheme made. Understandably, it could be difficult for members to understand how it works.

Accordingly, a requirement for the new scheme was that its structure would be simpler. Each member would have a personal fund. His/her contributions would be recorded with a transparent interest payment applied and costs deducted. This would make it easier to understand.

The scheme also has a large number of deferred members (184,000). These are members who at some time in the last 40 years were a member of the scheme in some cases for as short a time as a couple of weeks, or in other cases up to 30 years.

Recent changes in accountancy practice such as FRS-17 and IFRS do not impact significantly on the operation of the scheme. As the scheme operates as a defined contribution, there is in fact no liability by the employer to underwrite any of the benefits for its members once it has paid its weekly contribution. New accountancy practices under IFRS only apply to limited companies and the scheme is free to run its business under the normal best practice for pension schemes.

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