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New investment guidelines for Irish schemes 'inflexible', says Aon Hewitt

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IRELAND - Underfunded defined benefit (DB) schemes in Ireland are to be subject to investment guidelines "more prescriptive than appropriate", according to Aon Hewitt.

However, senior actuary Philip Shier, reacting to the Pensions Board's publication of statutory guidance on the new funding standard, welcomed the new regulation allowing companies with investment-grade ratings to underwrite the risk reserve, with the Board's chief executive telling IPE such guarantees might be extended beyond investment-grade corporates.

Shier nonetheless raised concerns about investment guidelines for underfunded schemes set forth by the regulator.

According to the guidance, new funding proposals due by the end of the year must "envisage that the scheme will hold assets … at the end date at least equal in value of the pensions in payment".

The guidance went on to say that the assets should only comprise cash reserves and government bonds.

"There isn't any flexibility in the wording of that for even corporate bonds, derivatives or swaps - anything like that to try and introduce a structure that may be more appropriate," Shier told IPE. "It is surprising that it is a prescriptive as that."

He added that while there was an allowance for trustees to discuss the matter directly with the regulator, the guidance was potentially "more prescriptive than appropriate", as it could lead to a situation where trustees may need to get their investment strategy approved by the Pensions Board.

In a commentary sent to clients by the consultancy, it added: "For schemes where it is intended to retain higher equity exposure (where there is a strong employer covenant) with the objective of satisfying the funding standard (and funding standard reserve, if applicable) more quickly, this may require formal employer undertakings to be given to underwrite the proposal."

However, Shier was not entirely critical of the guidance and welcomed the introduction of so-called unsecured undertakings, allowing companies with investment-grade rating to offer a written and binding guarantee in place of risk reserves that currently amount to 15% of scheme liabilities, as well as capital sufficient to offset a 0.5% reduction in interest rates.

Jerry Moriarty, chief executive and head of policy at the Irish Association of Pension Funds, said: "That is certainly one of the few aspects that is welcome. It does allow trustees to do something different."

Explaining the introduction of the unsecured undertaking to IPE, Pensions Board head Brendan Kennedy said the proposal had been part of the commitment and discussion very early on.

"So much of it is about balance," he said, "but a balance between [it] being practical to identify an unsecured undertaking that was worth the paper it was written on, but also what work was necessary for trustees and for ourselves to be happy."

He added that the guarantee could potentially be expanded beyond corporates deemed invetsment grade, saying the regulator "may explore" the possibility of including companies that were to date unrated by agencies.

Arguing that the current solution was the "most practical" in the short term, he said: "What we've been told very firmly [is] the amount of work needed to do the necessary investigation is very expensive."

Aon Hewitt's Shier said that, even with a deadline of 11 years to meet the new reserve requirements, the 15% threshold would be "substantial" for companies, with the unsecured undertaking approach allowing for flexibility if the company decided to employ cash elsewhere.

Shier, however, stressed that the unsecured undertakings rule would only be beneficial to those able to achieve investment-grade ratings, most likely excluding all smaller Irish companies.

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