Dáil Éireann Debate, Tuesday - 12 June 2012
336 Deputy Michael McGrath asked the Minister for Social Protection the discussions she has had with the pensions industry in respect of addressing the funding shortfall faced by many defined benefit schemes; the way sovereign annuities may assist in addressing this; and if she will make a statement on the matter. [25597/12]
Amharc ar fhreagraThe Government is conscious of the significant structural and affordability problems with defined benefit (DB) pension provisions due to a range of factors such as underestimation of longevity, poor investment decisions and the market turmoil that occurred in 2008. While pension funds have recovered somewhat, significant underfunding challenges remain for many schemes.
The requirements of the Funding Standard were suspended on a temporary basis to allow trustees time to respond to the challenges facing pension schemes. In 2009 and 2010, a number of amendments were made to the Pensions Act to assist trustees respond to these challenges. The changes included the establishment of a Pensions Insolvency Payments scheme, changes to how the assets of a scheme are distributed should a scheme wind-up, and broadening the scope for schemes to restructure scheme benefits.
The sovereign annuity is an initiative proposed by the Irish Association of Pension Funds and the Society of Actuaries and is a new type of annuity product where payment under the policy will be directly linked to the proceeds of Euro denominated bonds issued by any EU member state. Legislation for sovereign annuities was introduced in the Social Welfare and Pensions, Act 2010.
Work commenced on an examination of the DB pension model in 2010. A consultation process on possible options in relation to changes to the DB model was conducted in late 2010 and summer 2011. This included the pensions industry, trade unions and employer representatives. The outcome of that consultation is available on my Department website at the following location:www.welfare.ie/EN/Policy/Legislation/Regulatory%20Impact%20Analysis/Documents/ riapension.pdf.
Following the consultation, the Government approved changes to the DB model and legislation was introduced in the Social Welfare and Pensions Act, 2012 to give effect to some of these changes. The primary change is that pension schemes will be required to hold a risk reserve in addition to those required under the Funding Standard. The level of the risk reserve that the scheme needs to fund is related directly to the amount of investment risk the scheme is carrying. Credit under the Funding Standard will be given to schemes that reduce their investment risk and better match their pensioner liabilities. This risk reserve will act as a "buffer" against future volatility in financial markets and is designed is to help the security of members benefits and the sustainability of DB pension schemes.
The Funding Standard was re-introduced by the Pensions Regulator on 7 June 2012 and schemes will be required to submit funding proposals in the coming months.
The sovereign annuity initiative provides pension schemes with an additional option which was not previously available. Pension schemes that purchase sovereign annuities or the underlying bonds will benefit from a reduction in their liabilities under the Funding Standard to the extent that they actually make those purchases. The nominated bonds underpinning these annuity policies can also be bought by investors or by pension scheme trustees who wish to pay pensions directly from the pension fund.
