(April 23, 2013) — Ireland should consider changing its pension laws to allow defined benefits to be cut in the case of scheme underfunding, a report from the OECD has urged.
In a wide-ranging review of the entire Irish pensions market, the OECD suggested allowing accrued benefits to be cut in case of underfunding, as they do in the Netherlands, should be considered.
The report also looked at ways of sharing the risks between plan members and pensioners, as well as plan sponsors.
Irish schemes already retain the ability to reduce accrued benefits of active and deferred members, and future pension increases can also be reduced or eliminated.
Under the Irish Pensions Act, trustees can apply to the regulator to reduce accrued benefits as part of a recovery plan in a move that effectively asks the regulator to direct them to reduce benefits.
Despite the multiple hoops which need jumping through to obtain this – telling members, taking actuarial and legal advice, confirming the employer cannot afford the contributions required etc – it is a reasonably common feature of recovery plans and the most common actions are to remove any future guaranteed pension increases and increase retirement age.
The report also found that Irish legislation regarding the protection of DB plan members is weak; current legislation allows any sponsor to walk away from DB pension plans, shutting them down, without creating a high priority debt on the employer.
Moreover, the priority currently given to pensioners ahead of other members if a scheme winds up creates large inequalities, hitting those close to retirement hard.
Strengthening Irish legislation regarding the protection of DB plan members by prohibiting a wind up of DB plans where assets cover 90% of pension liabilities was suggested.
“This funding requirement would introduce some type of guarantees for members and it would allow at the same time some degree of risk sharing. The funding ratio should be calculated following prudent standard actuarial valuations,” the report suggested.
“Moreover, the priority currently given to pensioners before other members if a scheme closes because of sponsor bankruptcy should be eliminated.”
DB schemes should also be encouraged to invest in Irish infrastructure projects through the establishment of a clear framework, the OECD said, but it was clear that a general subsidy to all infrastructure projects should be avoided as it would distort capital allocation.
The new funding standards should also be revised as they may “create new risks for pensioners by offering strong incentive for pension funds to invest in government bonds, in particular sovereign annuities”, the report concluded.
The suggestions have been welcomed by the Irish Association of Pension Funds; chief executive Jerry Moriarty told aiCIO the suggestions to introduce a guarantee for DB members, allow some degree of risk sharing and to calculate the funding ratio using prudent standard actuarial valuations had all previously been called for by his lobbying group.
“The pensioner priority is a very real and live issue at the moment and really needs to be addressed urgently,” he added.
Moriarty also supported the idea of a revision of the funding standards to take into account the ire felt by the industry on what he called the “whole imposition and operation of risk reserving”.
Under the new standards, schemes will be required to hold risk reserves to insure against equity losses and unfavourable interest rate movements by 2022.
However, this significantly impacts the capital committed to schemes – the Irish government estimates this provision could add 10% to a scheme’s funding requirement.
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