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Ireland: Crisis spurs change

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Nyree Stewart assesses regulatory changes to Ireland's pension system

The impact of the financial crisis on the funding levels of defined benefit (DB) schemes and the state of the Irish economy has resulted in a number of changes to the pensions landscape.

In February 2009 the government initiated a series of changes when it announced €4bn of the €19bn National Pension Reserve Fund (NPRF) and €3bn in pre-funding from the government would be used to recapitalise Bank of Ireland and Allied Irish Banks (AIB) in return for preference shares with a fixed rate 8% dividend.

This resulted in the NPRF holding 36.1% of its total assets in the ‘directed investments' and an allocation of just 5.8% in bonds as it was forced to liquidate its government bond investments along with some equities.

In a further effort to shore up the economy the government used the Financial Emergency Measures in the Public Interest Bill 2009 to introduce a new "pension levy" for public sector workers to help pay for the scheme.

The average 7.5% levy on a worker's total earnings, effective from 1 March 2009, was designed to create savings of around €1.35bn, although following concerns raised by trade unions and opposition political parties the levy was amended in a supplementary budget in April to limit the impact on low earners.

Meanwhile the introduction of the Financial Measures (Miscellaneous Provisions) Bill 2009 in June allowed for the transfer of assets from 14 university and state body pension schemes to the NPRF, which are then used to offset the annual government contributions to the fund.

In contrast private sector pension schemes have been given greater flexibility around funding standards and winding-up priorities after the Pensions Board confirmed around 90% of schemes failed to meet the funding standard in 2008.

In response to the impact of market volatility on funding levels the Pensions Board agreed at the end of 2008 to a six-month extension for schemes to file funding proposals to repair deficits, but in May 2009 the board confirmed the deadline had been extended to "within two years of the effective date of the actuarial statement or certificate", following the introduction of the 2009 Social Welfare and Pensions Act.

The Act, passed by the Oireachtas in April 2009, included the establishment of a Pensions Insolvency Payment Scheme (PIPS) and changes to wind-up priorities so pensioners do not receive increases until deferred and active members have received benefits.

Legislation also allowed DB schemes to seek approval from the Pensions Board to alter the accrued benefits of members when restructuring a scheme, although the Irish Association of Pension Funds (IAPF) suggested that, while some schemes are probably looking at the idea, no one has yet received approval as the process is quite lengthy and requires both legal and actuarial advice.

The introduction of PIPS, however, was criticised for not providing enough protection - schemes are only eligible for assistance if the employer is insolvent and the scheme is winding up - however, in June 2009 the Department of Enterprise, Trade and Employment released details of further pension policy measures as part of a social partnership agreement.

It confirmed schemes in ‘double insolvency' situations - where there is an insolvent employer and a significant shortfall - will be eligible for a Pension Insolvency Minimum Guarantee Scheme (PIMS), which provides a state top-up to certain levels.

PIMS will receive €100m of funding from the government every year for three years, with top-ups for existing scheme pensioners capped at 100% of their entitlement or €12,000 a year - whichever is less - and for active and deferred members the cap is the lower of either 50% of accrued entitlements or the equivalent of €6,000 a year.

Despite the recent changes the industry is still awaiting a decision on wider pension reforms in the government's response to the Green Paper on Pensions, which was originally scheduled for the end of 2008 but is now expected shortly.

In addition the Commission on Taxation is finalising its report into the current system of tax relief and in particular ways it can be used to encourage long-term saving for retirement, which is expected to be presented to the cabinet in September, with the expectation one area of focus will be a potential cap on the tax-free lump sum available at retirement.
 

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