The Government is very aware of the serious funding challenge facing pension schemes. There are significant structural and affordability problems with defined benefit (DB) pension schemes due to a range of factors such as an under-estimation of longevity, poor investment decisions and the impact of the downturn in financial markets. The investment losses in Ireland were the highest in the OECD because of the high proportion of equities in pension fund portfolios, with some two-thirds of assets in equities compared with an average of just over one third in the 20 OECD countries where data are available.
A review of the DB model which included consultation with stakeholders was completed in 2011. The consultation resulted in a broad consensus that DB schemes as currently organised are vulnerable to shocks and the introduction of a risk reserve would provide a level of protection for scheme members against future volatility in financial markets. I accept that the requirement for a risk reserve presents an added challenge for schemes, however, guidance issued by the Pensions Board identifies options which schemes can consider in meeting this requirement by 2023.
The level of the risk reserve required will reflect the level of risk undertaken by the scheme’s investment strategy and it is estimated that this reserve will add approximately 8% to the scheme liabilities. A risk reserve of 15% would indicate that the scheme is over reliant on equity investment. It should also be noted that the requirement to hold a risk reserve is not being introduced immediately. Schemes are aware that the requirement to hold a reserve is a being introduced in 2016 and schemes will have until 2023 to satisfy this requirement. The pension promise associated with DB schemes is generally regarded as unconditional. If the scheme winds-up, the only practical way the promise can be fulfilled is to buy an annuity policy from an assurance company that guarantees a continued pension for the lifetime of the pensioner and their dependants. If the funding standard is changed in such a way that understates the cost of the benefits then the member will be misled about the ability of the scheme to meet its obligations.
I understand that a small number of European countries have eased their pension solvency requirements in response to the downturn in financial markets. I am satisfied that in all cases, the solvency regime after those changes continues to be more onerous that the current Irish regime. Overall the changes made to DB schemes are intended to reduce schemes’ exposure to risks and provide greater security for scheme members. Issues in relation to the pensions levy is a matter for the Minister for Finance who announced the pension fund levy as part of the Jobs Initiative. The levy will apply for a period of 4 years from 2011 to 2014.
