Burton proposes pension funding changes in bid to ease burden on defined benefit plans

Minister for Social Protection Joan Burton is proposing a number of changes to pension regulations designed to ease the burden on defined-benefit schemes.

Such schemes have to maintain a risk reserve of 15 per cent over and above their liabilities and can only use euro-zone sovereign bonds for this purpose.

Under proposals that Ms Burton announced yesterday, the risk reserve is being cut to 10 per cent. At the same time, the new rules will also broaden the type of assets that can be used for the risk reserve to include bonds guaranteed by an EU member state, but not necessarily issued by one, and those issued by various bodies considered to be very secure.

Similarly, funds can also use euro-denominated bonds issued by any company where the investment yield does not exceed that on an identified Germany bond by more than a specified percentage.

The Minister is also proposing changes to guidelines contained in section 42 of the Pensions Act to reflect recent changes in bond yields.

Ms Burton said she is delaying the introduction of proposed changes to the calculation of transfer values, which would have had the effect of increasing schemes’ liabilities.

“Employers, unions and trustees have been making strenuous efforts to protect the viability of their schemes and I want to support them in every way possible,” she said.

The Minister explained that the overall purpose of the changes is to give trustees flexibility by increasing their funding options. However, Irish Association of Pension Funds chief executive and director of policy Jerry Moriarty gave only a cautious welcome to the proposed changes.

Scheme deficits
He argued that most defined-benefit schemes have deficits and are not in a position to start dealing with requirements for extra provisions over and above their existing liabilities. "It's not tackling the underlying problem," he said. "Most schemes are underfunded at a basic level, before you even start talking about adding reserves."

Mr Moriarty explained that in the case of a fund that has liabilities of €200 million, where €50 million is held in bonds and cash and the remaining €150 million in equities and other instruments, the current risk reserve requirement demands that it hold a risk reserve fund of 15 per cent of that €150 million, which is €22.5 million.

He pointed out that the Minister’s proposals reduce the reserve fund to €15 million.

If a defined-benefit scheme cannot meet its liabilities under the standard laid down in the regulations, trustees must submit a funding proposal to the Pensions Board explaining how they propose to deal with the shortfall. The Minister’s said yesterday the proposed changes are designed to aid schemes as they put together funding proposals.