Benefit Pension Schemes Threatened By Funding Standard

Monday, 27 September 2010 10:06

Written by Noel Cotter

Business group IBEC today said the survival of many defined benefit (DB) pension schemes is at stake given the "draconian" minimum funding standard set by the Pensions Board.

The group said that, given the extremely volatile market conditions, Government should reduce the minimum funding standard to give companies the necessary flexibility to make the best long-term investment decisions.

Speaking on the issue, IBEC director Brendan McGinty said: “Many private sector defined benefit pension schemes are facing a November deadline from the Pensions Board to submit proposals on how they plan to address scheme deficits. However, companies are concerned that they are being forced to make investment decisions that will meet the draconian minimum funding standard in the short-term, but will negatively impact the long-term viability of these schemes.

“Currently, the Pensions Board requires pensioner liabilities to be measured by reference to market annuity costs. However, lower bond yields have meant that annuity costs have increased by approximately 15% since the start of 2010. This has increased funding standard liabilities and the level of deficit that needs to be funded, as well as impacting the assumed level of future investment return.

“One solution is to revise the minimum funding standard, which does not reflect the current economic reality and is hastening the demise of otherwise viable DB schemes. If the Pensions Board does not adopt a more moderated approach to solvency, it will deprive workers and pensioners of promised benefits.”

Both IBEC and ICTU have jointly raised the issue with the Department of Finance and the Department of Social Protection, and both groups have expressed their support for a sovereign annuity, as proposed by the Society of Actuaries and the Irish Association of Pension Funds.

“A sovereign annuity would moderate the minimum funding standard by allowing pension schemes to price certain liabilities against Irish bonds rather than German bonds. In this scenario, the State would relax of the minimum funding standard to allow pension funds to provide for future liabilities by allowing them to fund pensioner annuities by purchasing Irish bonds in the future.

“The Government cannot stand by and allow draconian minimum funding standards tied to volatile market conditions to dictate short-term investment decisions that will negatively impact the long-term viability of these pension schemes,” concluded Mr McGinty.