Ireland: Pensions Update, Summer 2015

COMMENCEMENT OF COMPANIES ACT, 2014

The new Companies Act, 2014 (the "Act") was generally commenced with effect from 1 June 2015. As previously noted, the Act involves an overhaul of the existing company law regime in place since the 1960s. The Act segregates companies by corporate type and applies different law to each type of company. There is an 18 month transition period (commencing 1 June 2015) during which all existing private limited companies will be dealt with as though they are designated activity companies ("DACs"). At the end of the transition period, they will be deemed to have become new model private companies ("LTDs") unless they elect to become DACs or some other type of company.

Some employers will prefer that their trustee company is a simple LTD (i.e. with no objects clauses). We anticipate that a significant number of employers will want the restricted role of the trustee company to be clear for directors (particularly those will little experience of companies) by having it set out on the face of the constitutional documents for the trustee company. If the trustee objects clause is to be retained, the company will have to become a DAC.

The next steps that directors of trustee companies should undertake are:

• the directors and shareholders should consider whether the company should become an LTD or a DAC, or some other company type, before the end of the transition period;
• review the company's existing memorandum and articles of association to determine the changes necessary to re-register the company as the preferred type;
• consider whether there are any contractual restrictions (e.g. covenants in bank facilities) which restrict the amendment of the memorandum and articles of association;
• consider whether the board of directors requires training on the new Act with particular reference to their duties and obligations as directors;
• pass the necessary resolution (ordinary resolution to convert to a DAC, or special resolution to re-register as an LTD or some other company type) to effect the conversion; and
• register the new constitution with the CRO.

We would suggest that you discuss any proposed changes with your legal advisers.

PENSIONS AUTHORITY – RECENT PUBLICATIONS

Financial Management Guidelines for defined benefit schemes

The Pensions Authority (the "Authority") has published guidelines for the financial management of defined benefit schemes (the "Guidelines"). The Guidelines set out the Authority's view on good practice for trustees to follow in order to understand and manage their funding and investment. The purpose of the Guidelines is to identify threats to the ability of the scheme to meet its liabilities and to allow the trustees to consider what they should do in response.

The Guidelines cover four areas:

• data about the scheme that the trustees should have available to them – this includes scheme asset values, investment return and allocations, scheme liabilities and costs;
• governance practices relevant to financial management – this includes holding regular trustee meetings, appropriate and permitted delegation, engaging advisers, service level agreements, using SIPPs and understanding scheme contribution provisions;
• processes that the trustees should follow – including review of investment strategy, contribution and funding adequacy, investment manager performance and scheme costs and using risk matrices;
• analysis that the trustees should undertake in order to arrive at decisions – the two questions the trustees should ask themselves in this regard are:
  • are the scheme contributions adequate to provide the benefits of the scheme in the short and long term?
  • what is the risk that the benefits cannot be paid?

Codes of Governance for defined contribution schemes

The Authority also recently published proposed codes of governance for defined contribution ("DC") schemes (the "Codes") which are to be read in conjunction with the Authority's Trustee Handbook. The aim of the Codes is to provide practical guidance for DC trustees to ensure appropriate decisions are made. The Codes will not be a statement of law but will set out the standards expected of trustees. The Authority was seeking submissions on the proposed Codes (the closing date for consultation was 16 June 2015).

There are 12 proposed Codes contained in the guidance issued by the Authority. The topics covered include:

• Establish a governance plan of action and trustee meetings: set out steps, timescales, ownership of tasks, service level agreements and report and monitor. Hold trustee meetings regularly with minuted outcomes – the number will depend on scheme size.
• Risk management: establish a risk management framework (including a risk register and risk controls) to identify, evaluate and manage the risks that are critical to the scheme and which have significant impact on the scheme's ability to provide reasonable member benefits.
• Keeping records and reporting scheme information: ensure records are accurate, complete and up-to-date bearing in mind data protection legislation. Ensure the Authority's online register of schemes (ISIS) contains accurate and up-to-date information.
• Investment: ensure proper investment of scheme assets and that investment powers are exercised in the best interests of the members.
• Member communications: ensure these are accurate and clear.
• Communicating costs and value for money: ensure all costs and charges borne by members are clearly disclosed to them and that they are reasonable, competitive and provide value for money.

Ultimately, the intention is that trustees will be required to submit an annual compliance return to the Authority in which they will confirm compliance with the Codes. This will first require the enactment of relevant legislation.

We are currently working with clients to develop a checklist for their schemes based on the Codes. If you would like to discuss such a checklist, please contact your usual adviser on the Arthur Cox pensions team.

QUALIFIED RECOGNISED OVERSEAS PENSION SCHEMES ("QROPS")

With effect from 6 April 2015, the conditions for a scheme to be a QROPS have changed as specified by Her Majesty's Revenue and Customs ("HMRC") in the UK. In addition to the existing conditions, a scheme must now satisfy the "Pension Age Test". The Pension Age Test requires that benefits deriving from funds which received UK tax relief must not be paid to a member before age 55. If your scheme is a QROPS, you will have received communication from HMRC in this regard. They require that all registered QROPS confirm to them in writing that they meet this requirement. This can be done by showing either that: (a) Irish legislative requirements; or (b) that the rules of the scheme do not permit payment of UK member benefits before age 55.

• Irish occupational pension schemes are allowed to provide benefits on early retirement from the age of 50. Therefore, the first method of satisfying the Pension Age Test cannot be met (i.e. that the law of the country prohibits the payment of benefits before age 55 unless the member is retiring due to ill-health).
• The second method of satisfying the Pension Age Test requires a review of scheme rules. If the rules prohibit the payment of pension (including by early retirement) before age 55 whether generally or specifically in the case of UK members, then the test will be met.

If neither of the methods can be used to satisfy the test then employers and trustees have two options: (i) amend the provisions to prohibit the payment of benefits before age 55 in respect of UK members; or (ii) cease to be a QROPS. If the scheme is no longer a QROPS this will not affect members who have already transferred UK tax relieved funds into the Scheme and who are in receipt of benefits (even if they retired before age 55).

However, as a consequence of ceasing to be a QROPS: (A) the Scheme will no longer be able to accept new transfers into the scheme from the UK without the member paying a UK tax charge of approximately 55% on the transfer; and (B) HMRC have recently confirmed that members who have received a UK transfer in and who subsequently transfer out or retire before age 55 may be subject to a UK tax charge (this will depend on whether they are tax resident at the time of transfer out/retirement or were UK tax resident in the 5 years before the transfer out/retirement).

UK CASE LAW - IBM REMEDIES JUDGMENT

Earlier this year, the High Court of England and Wales issued its ruling on the remedies available to members in relation to the judgment it previously issued against IBM finding that IBM had breached its duty of good faith towards those members when introducing pension changes.

The ruling on remedies is over 180 pages long and deals with a number of clarifications and issues many of which are very specific to the facts of the case. However, two interesting points emerge. They are that, taking account of the overriding finding of IBM not having acted in good faith:

• The notices issued by IBM to cease future accrual on a defined benefit ("DB") basis were found to be "voidable". Affected members can therefore choose to have their benefits treated as if DB accrual continued (losing the proceeds of the replacement defined contribution arrangement) or to keep the replacement defined contribution benefits.
• The members' agreement that salary increases would not be pensionable was unenforceable. Affected members are contractually entitled to retain such increases. As a result, the trustees of the DB scheme were required to treat them as pensionable in accordance with the rules of the scheme.

It is important to note that the remedies judgment does not prevent either of the above methods being used by employers in the future. However, in the particular circumstances of the IBM case, IBM was found to have breached its duty of good faith and accordingly the two methods could not be validly used by it.

Following the IBM case, if employers seek to close their pension scheme to future accrual, the manner in which this can be achieved will need to be carefully considered and appropriate legal advice taken. There would be significant financial consequences for employers if it was subsequently found that the scheme closure was unenforceable and the members were treated as remaining in pensionable service.

It seems likely that IBM will seek to appeal the decisions of the High Court to the Court of Appeal. This may not, therefore, be the final word on the matter.

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.