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NEWS
December 2011/January 2012 www.esb.ie/em
Challenging times for ESB Pension Fund
Interview with Tony Donnelly, Trustee Chairperson
Tony Donnelly, Trustee Chairperson.
THESE ARE VERY challenging times for all Irish pension funds and the ESB Pension Fund is not immune to these difficulties. Just when we had hoped the financial markets had settled down after the 2007/8 crisis, we have seen significant falls this year in many assets classes.
Investment changes the Trustees made during the year have helped cushion the Fund from some of the major market falls in 2011 and ensured that the Fund has significantly outperformed the Average Irish Managed Pension Fund. However, the whirlwind and volatility of investment markets in 2011 will no doubt have an impact on the Fund.
With the ink still drying on the 2010 Pensions Agreement and with the triennial Actuarial Valuation just around the corner at year end, we talk to Tony Donnelly, Trustee Chairperson about the challenges facing ESB Pension Fund.
Tony is no stranger to the ESB Pension Fund having been a Trustee of the Fund from 1998 to 2006. Following his retirement from ESB as Deputy Chief Executive he was selected by the Trustees as their Chairperson in 2008 and subsequently reappointed this year. When not attending to his duties as Chair of the Trustees, Tony is enjoying his retirement with his wife Margaret and their family, including his grandchildren.
“I was honoured to be reappointed as Trustee Chairperson earlier this year. We are in a new era for the Scheme following the implementation of the 2010 Pensions Agreement. However, it is still a very challenging time for all parties to the Scheme given the current turbulence in investment markets and the increasingly difficult regulatory environment in which pension funds must operate.”
The Pensions Agreement 2010 was essential, given the £2b deficit identified at the end of 2008. Has this Agreement made the work of the Trustees any easier?
“The measures introduced such as Career Average Revalued Earnings (CARE) and the capping of future pension increases, which are subject to a solvency test, will help to provide greater certainty for members that there will be funds there for their retirement. The Agreement, including the £591 million special contribution from ESB, will allow the Fund to target a lower level of return of 6.25% from its current level of 7%. This reduction is to be achieved over the next 10 years. All parties to the scheme recognise that a target return of between 6.25% and 7% is still a very high hurdle, but one that must be achieved if the Fund is to have enough resources to meet the projected benefits.
“In addition to the Pensions Agreement, a Joint Governance Structure Review was conducted by ESB and the Group of Unions and it findings agreed by the ESB Board in April 2011. This has ensured that the Scheme is adhering to best practice governance structures. Some of the changes applied include the establishment of a Pensions Review Implementation Forum, the appointment of two additional Trustees with specialist experience, a selection stage to the election process for member Trustees and the staggering of the Trustee term to facilitate greater continuity in their work.”
How is this volatile investment markets affecting the Fund?
“2011 has been another tumultuous year for investment markets. Portugal became the third European country to be bailed out. Issues have escalated in Greece and now funding problems in Italy are threatening the very existence of the Euro. Large parts of the Eurozone are forecast to have high levels of unemployment for years to come, given the severity of the austerity measures. In this type of low growth environment many assets classes have performed poorly which will undoubtedly have an impact on the solvency of the Scheme. Almost 50% of the Fund is invested in equity markets due to its need to invest in higher returning assets to have any expectation of achieving a return of 7%.
Our Fund has performed relatively well compared to the Average Irish Managed Pension Fund which is down 6% year to date to end September compared to a drop of 2% for the Fund. However, any return of less than 7% means that the Fund’s solvency level has reduced. The extent of this will become clearer following the Actuarial Valuation at the end of 2011”.
“However, any return of less than 7% means that the Fund’s solvency level has reduced. The extent of this will become clearer following the Actuarial Valuation at the end of 2011.”
Apart for the very volatile investment markets, what are the main challenges facing the Fund?
“Without a doubt, the greatest challenge for the Fund will be meeting the Minimum Funding Standard (MFS), which is the statutory solvency test required by the Pensions Board. It looks at the Fund as if it were to wind up today and seek to pay benefits to pensioners, deferred members and the accrued benefits of active members.
The ESB Pension Fund still has a significant MFS deficit, even after the implementation of the 2010 Pensions Agreement, and a funding proposal must be agreed over the coming months. The Minister for Social Protection has indicated that there will be some changes to the funding standard – alas these will only add to the difficulties the Fund has in reaching the MFS – with future requirements to hold additional reserves. This will be a major challenge for the Fund.
The first of the four £18 million yearly Pensions Levy payments was paid to the Revenue Commissioners in September and this also undoubtedly will have implications for the Fund. The Scheme Actuary will assess the implications of this in the Actuarial Valuation at year end.”
So next year will be a busy year for the Trustees?
“2012 will be another very busy year for the Trustees and all parties to the Scheme. The Trustees remain focused on investment of the Fund’s assets to achieve the investment return outlined with the least amount of risk – however there are no risk free investments that would give the target return required. We all know we are living in extraordinary and challenging times - however we must remember that pension funds are long term investors and we have to remain hopeful that the future for investment markets will be much brighter than they appear today.
On behalf of the Trustees, the Superannuation Committee and the Management and Staff of ESB Pensions, I would like to take this opportunity to wish all our members, both current serving staff and our pensioners, a very happy Christmas and a peaceful and prosperous 2012.”
ESB overall winner at 2011 Published Accounts Awards
Continued from page 1
itself as a world-class innovator in sustainability and energy supply. It has to do this in the tough economic environment we find ourselves in and therefore it is important that any communication provides clear information to readers of its financial statements. The 2010 ESB Annual report For Generations Ahead does just this.
Many of ESB’s Finance staff worked hard to ensure that every element of the report was within best practice guidelines, making it a top-class communications tool and we congratulate all involved. The Group Finance team, led by Lorna Heron, deserve particular praise for the expertise, energy and enthusiasm shown in delivering the final report.
Speaking after the event, ESB’s Executive Director Finance, Donal Flynn, told EM that “transparency and clarity in our financial communications are of great importance to our numerous stakeholders. A large number of ESB’s finance team put a lot of thought and hard work into the 2010 Annual Report – I am delighted their efforts have been recognised and validated by the Published Accounts Awards. It is a great achievement – in particular when you consider the competition for the overall award”.
ESB’s Annual Report 2010 was designed and published by Zahra Media Group who also publish EM.
ESB publishes Sustainability Report 2011
ESB PUBLISHED ITS annual Sustainability Report for 2010 on Thursday October 13th. The report gives a full account of our performance against our sustainablity commitments and looks in turn at each of the aspects of corporate responsibility policy – in the workplace, in the marketplace, in the community and in its various environmental dimensions. The report also details our progress over the course of the year.
The report is benchmarked against the Global Reporting Initiative standard, a recognised template for company sustainability reporting worldwide.
The report sets out ESB’s continuing commitment to its sustainability goals and to continue to deliver on the financial, technical and environmental elements of our strategic plan and to engage with the communities we serve. The report looks at the how we can achieve these goals while meeting the challenges of reducing dependency on fuel imports, creating secure long-term energy supplies, limiting the risks of climate change and of habitat loss and of maintaining a safe working environment for our staff, contractors and the public.
A copy of the report can be viewed either at the sustainability section of ESBNet or on www.esb.ie.
