IRELAND - Pension funds in Ireland will soon be required to hold risk reserves able to counteract market volatility in addition to fulfilling minimum funding requirements, the government has said.
The Social Welfare and Pensions Bill published today finally shed light on the long-delayed revision to the funding standard, which minister for social protection Joan Burton first announced last year.
The Department for Social Protection said the changes would ensure pension funds could fulfil their pensions "promise" and aimed to improve scheme sustainability.
Burton added: "Many trustees and sponsors have been working to enhance the sustainability of their schemes and making difficult decisions in that regard.
"The re-introduction of the Funding Standard will require all schemes to examine their position closely, and it is hoped that the vast majority will be able to develop realistic proposals to rectify their funding positions."
Schemes will have until the beginning of 2016 to comply with the new risk buffer regulations.
"The measure will allow pension schemes a long lead-in time to develop the required level of risk reserve," the department noted in its memorandum on the bill.
It added that the level of reserve would be "linked" to the level of investment risk undertaken by the scheme and implied that funds would have until 2222 to comply fully with the risk reserve regulations.
Detailing the new funding regulations, the memorandum said the reserve would be the aggregate of two amounts - the first of which was 15% of the funding standard liabilities, less the value of all European Union bonds and cash held.
"The other is the amount by which the Funding Standard liabilities would increase on the effective date of the certificate if there was a one-half per cent fall in interest rates," it said.
The Bill would grant a minister power to revise the percentage schemes would be required to hold in reserve, with the draft published stating it would never rise higher than half of all liabilities, while reserve stipulated for interest rate fluctuations would be set at 0.5% initial level and rise no higher than 5%.
Burton said of the changes: "Mechanisms such as giving credit under the funding standard to schemes that reduce their equity risk and/or purchase sovereign annuities, on which the Pensions Board recently published industry guidance, will assist schemes meet their funding requirement."
She added that some funds would be able to take account of a sponsor covenant in the calculations.
She concluded: "The introduction of a risk reserve is intended to change how DB schemes are structured, to bring increased stability to DB pension provision and lessen their exposure to risks."
The new funding standard was previously expected to be similar to Solvency II, itself heavily criticised as it was expected to lead to a reduction in equity investment from pension funds.