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Defined Pension Benefit Schemes Issues

Dáil Éireann Debate, Tuesday - 16 October 2012

Tuesday, 16 October 2012

Questions (86)

Clare Daly

Question:

86. Deputy Clare Daly asked the Minister for Social Protection if she will overhaul the minimum funding standard for defined benefit pension schemes which is unfair and inequitable in its present form and operates as a deterrent to the well being of these schemes and their members. [42248/12]

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Written answers

The Funding Standard provides a benchmark against which the “health” of a scheme can be tested. The existence of the Funding Standard itself is not the central issue in relation to whether a scheme is properly funded. Rather the responsibility rests with the employer and the trustees for ensuring that the scheme is properly funded and managed. However, the Funding Standard does provide the regulatory mechanism for ensuring that a scheme can live up to the “promised” level of pension benefits. The fundamental problem facing pension schemes is that pensions have become significantly more expensive, because of increasing life expectancy and lower than expected investment returns which are reflected in increased annuity rates. The recent facility to purchase sovereign annuities will enable a higher rate of return to apply, but only in the case of those schemes which actually purchase the bonds/annuities.

While it is acknowledged that increased annuity rates are causing significant problems for pension schemes, this reflects the real cost of benefits. If the Funding Standard is changed in such a way that understates the cost of the benefits (by using prescribed non-market rates, or by using sovereign bond rates without a corresponding commitment to buying sovereign annuities on wind-up), then the members may be misled about the ability of the scheme to meet its obligations, and the on-going funding of the scheme will not be enough to close the deficit. This would be likely to make things worse, as future benefits would accrue at a faster rate than they were being paid for.

The requirement for a risk reserve is being introduced from 2016, to provide a level of protection for scheme members against future volatility in financial markets. It is accepted that the requirement for a risk reserve presents an added challenge for schemes, however, guidance issued by the regulator identifies options which the scheme can consider in meeting this requirement by 2023.

The Pensions Board recently announced that the timeframe for pension schemes to submit funding proposals has been extended to 30 June 2013. This extension will give schemes additional time to help them address the issues they are facing. It should be noted that the changes to the Funding Standard are being implemented over the next 11 years, not immediately. This is the longest recovery period generally allowed in any European country.

Overall, the changes made to the regulatory structure for defined benefit schemes are intended to bring increased stability to pension promises in the future and lessen schemes’ exposure to risks.

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