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Minister announces regulatory changes to assist defined benefit schemes in submitting funding proposals

  • Ireland
  • General

30-05-2013

The Minister for Social Protection yesterday announced some easing of the current funding standard requirements, in the context of the continuing requirement for underfunded defined benefit pension schemes to file funding proposals and/or Section 50 applications to reduce benefits by 30 June 2013.

The changes can be summarised as follows:

The Minister is delaying the introduction of proposed changes to the calculation of transfer values for active and deferred member benefits under the minimum funding standard.  These changes, if introduced, would have assigned more realistic discount rates to the calculation of these transfer values, and would therefore have increased the amounts payable, thereby increasing the measurement of scheme liabilities under the funding standard.

The Minister has introduced regulations which reduce the level of the risk reserve required to be maintained for schemes from 15% to 10% of the liabilities of the scheme, net of the value of assets held in sovereign bonds or cash deposits.

In addition, the new regulations will widen the types of these “secure” assets which schemes can invest in without being required to hold a risk reserve against fluctuations in the value of such assets.

The new asset classes are as follows:

  • Bonds guaranteed by an EU member state, but not issued by that member state.
  • Bonds created and issued by other non sovereign bodies which are considered to be financially very secure, such as bonds issued by the Central Bank of a Member State, the European Bank for Reconstruction and Development, the European Investment Bank, the International Monetary Fund and so on.
  • Euro denominated bonds issued by a company or other entity, where the investment yield does not exceed the yield on a benchmark German bond by more than a specified percentage.
  • Assets invested by a scheme in a collective investment undertaking or insurance policy to the extent that the underlying assets of that fund or policy are sovereign bonds or other matching assets as set out above. 
  • Annuities and sovereign annuities held by a pension scheme.

Revised guidance to be introduced by the Pensions Board will also enhance the ability of schemes which hold sovereign bonds to reflect any higher yield on those bonds over benchmark German bonds in the scheme’s calculation of its ability to fund its pensioner liabilities. 

The above changes provide for some easing of the cost of meeting the funding standard for defined benefit pension schemes, and will assist schemes in filing funding proposals and/or Section 50 applications to enable such schemes meet current funding standard requirements. 

These changes follow on from the recent publication of the Social Welfare and Pensions Bill 2013, under which the Pensions Board will be granted the power to direct the wind up of a defined benefit pension scheme which fails to take measures to enable it to meet the funding standard or fails to follow a Section 50 direction.  The Bill also includes a provision for an appeal to the High Court on a point of law following such a direction from the Pensions Board, or following a direction from the Pensions Board regarding a Section 50 order to reduce benefits “made other than on application by the trustees”.

These measures under the Pensions Act indicate an intention by the Pensions Board to more proactively restructure or wind up schemes where the sponsoring employer and trustees are unable to agree steps to restore the scheme to solvency.

Another change under the Bill is that the Pensions Board is to be renamed as the Pensions Authority, and the composition of the Board will now consist solely of an independent chairperson appointed by the Minister for Social Protection and two ordinary members, one nominated by the Minister for Social Protection and one nominated by the Minister for Finance.  The current structure of the board, whereby representatives are nominated from representative bodies such as the IAPF, APLI, IBEC and ICTU has been abolished.  A new Pensions Council will be established, but its membership will be at the discretion of the Minister and may be drawn from such sector groupings, but its function will be solely advisory. 

These changes, when coupled with the announcement that the Government is unlikely to legislate for any form of wider insolvency protection regime or change in the priority order for defined benefit pension schemes before 2014, indicate a policy intention to ensure that pension schemes are restructured or wound up if unsustainable during the course of 2013, with a view to introducing an EU compliant insolvency protection regime for the defined benefit system in 2014.

However, in light of the various twists and turns in policy announcements over the past twelve months, it is a foolish person who would seek to predict the course of the next twelve months.

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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