I propose to take Questions Nos. 155 to 158, inclusive, together.
The persistent funding difficulties of defined benefit schemes are well recognised. Employers, unions and trustees have been making strenuous efforts to protect the viability and many measures have been introduced to support these efforts. Between 1980 and 1999, the defined benefit pension environment was healthy with average pension schemes managing fund returns of the order of 20% per annum. Until 2000, few schemes had any difficulty meeting the Funding Standard. DB pension schemes have suffered a series of shocks over the last number of years. At the end of 2007, 80% of defined benefit pension schemes satisfied the Funding Standard. At the end of 2008, following the downturn in financial markets, the situation was reversed with in excess of 80% of schemes failing to meet the Funding Standard at the end of 2008. The Funding Standard was suspended at that time in order to give the trustees and sponsoring employers adequate time to assess their schemes and consider a response to improve the funding position.
The reintroduction of the Funding Standard was delayed on a number of occasions pending changes to legislation which were designed to help trustees respond to the funding challenges facing pension schemes and protect scheme members. These changes were carried out in the context of the publication of the Green Paper on Pensions in 2007, the downturn in financial markets in 2008, and the review of the defined benefit pension model in 20010/2011:
- Significant legislative changes in the Social Welfare and Pensions Act in 2009 allowed for the restructuring of underfunded schemes by removing the priority given to post-retirement increases for pensioners to ensure a more equitable distribution of assets in the event of the wind-up of a DB scheme;
- The powers of the Pensions Board were strengthened to ensure that pension contributions are remitted by employers to scheme trustees;
- The Pensions Insolvency Payments Scheme was established to reduce the cost of purchasing pensions for trustees where the employer has become insolvent;
- Legislation was introduced in 2010 and 2011 to provide the option of a sovereign annuity for trustees;
- Changes to the defined benefit model and the Funding Standard were introduced in the Social Welfare and Pensions Act 2012. The re-introduction of the Funding Standard followed;
- Legislation is being brought in the current Social Welfare and Pensions Bill to strengthen the powers of the Pensions Board.
The primary change to the Funding Standard in 2012 was the introduction of a requirement for a risk reserve to assist the longer term stability of defined benefit schemes. This was introduced to provide a "buffer" against volatility in the financial markets and provide some level of protection for scheme members. The risk reserve has an in-built mechanism to incentivise trustees to better match their assets with the scheme's liabilities in their investment strategies and guidance was issued in this regard. In view of the current funding status of defined benefit schemes, an extended time period was given for the introduction of the risk reserve: it will be operable from 2016 and schemes do not have to meet the reserve until 2023.
Trustees of defined benefit schemes are expected to submit funding proposals to the Pensions Board at the end of June 2013. At present, it is considered that 80% of schemes are underfunded. It is the responsibility of the Pensions Board to ensure that the minimum funding standard is enforced and I will be receiving regular updates from the Board on the timeliness of submissions. Following receipt of proposals, it will be possible to get a more accurate indication of the level of under-funding in defined benefit pension schemes. It will also allow for the impact of the many measures already introduced by Government to be assessed, including the potential benefits to schemes of the use of sovereign annuities/bonds. Compliance with the regulatory structure is essential for the future sustainability of defined benefit schemes and to protect members' benefits.
This requires consideration of a number of policy options, including corporate debt. The Review of the Irish Pension System which was published by the OECD in April this year which described the Funding Standard (including the recent changes) as "undemanding" will also inform further developments in this area. I am keeping the situation under review and will report back to Government in the coming months on these issues. A wider package of legislative proposals and additional reforms will be considered at that stage.