The re-instatement of the funding standard, as well as an overhaul to increase capital buffers, come at a time when pension funds in Ireland have yet to recover from the recession. Jonathan Williams examines how the industry views the reinstatement and how funds can de-risk

With the re-introduction of the funding standard, Ireland's pension funds face an end to the reprieve granted them in 2009 by the country's regulator. They now face the not insubstantial task of reaching full funding in three years.

Additionally, trustees who, for the most part, oversee funds failing the current funding arrangements, will soon learn details of a new funding standard being proposed by the department of social protection.

Legislation outlining the new proposals is expected by most within the industry to be unveiled by the end of the first quarter of 2012. The Pensions Board is likely to unveil exact details before then. So far very little is known, with the regulator opting not to discuss the matter publicly until it can announce precisely what has been agreed.

So far, official pronouncements are limited to what was discussed by Joan Burton, minister for social protection, at an Irish Association of Pension Funds (IAPF) conference in October, promising a reforming and strengthening of the existing regulations.

The expectation is that pension funds will be asked to build up an increased capital buffer, a "quite substantial" increase over the current reserve according to Anne Maher, independent trustee and former chief executive of the Pensions Board, able to absorb a decline in the stock market of between 15% and 20%, as well as a fall in interest rates of 0.5%. Maher estimates that, depending on investment strategy and exposure to risk assets, it could double a scheme's capital reserves.

Critics have already derided similar proposals as "unsustainable", while the IAPF's director of policy admitted they looked similar to ones for Solvency II.

At the time, the Board's current chief executive Brendan Kennedy was far from upbeat about the situation facing Ireland, noting that it remained "serious". He added that the suspension of the funding standard was a "pragmatic decision" to allow the industry to address growing deficits - a situation that does not appear to have changed, with 70% still estimated to be underfunded.

Additionally, it is likely schemes will not need to submit any funding proposals until the beginning of July after the proposals for the updated standard have been released.
Jim Foley, group pensions director at Eircom, says he presides over one of the "minority" of DB schemes currently able to fulfill the current funding standard. "However, the new reserve holding may prove challenging in the medium term," he says.

Philip Shier of Aon Hewitt admits that the current environment is hard for schemes globally, not simply those based in Ireland. The senior actuary says: "It is not prudent to continue saying ‘Oh well, when we get back to normal, everything will be alright.'"

He says that the reinstatement means the industry is no longer deferring the issue.
Shier, who also sits on the European Insurance and Occupational Authority's stakeholder group highlights the introduction of sovereign annuities as the most significant step for pension funds -- with schemes most at risk often those with the highest number of pensions in payment.

"If they consider it reasonable to secure those benefits by means of sovereign annuities, or holding sovereign bonds or however they decide to do it, it will give them significant easing on the liability side of the funding standard balance sheet."

This could be as high as 30%, he estimates, dependent on how insurers price annuities in the long run. However, the annuities - more cost-effective as they consist of government debt from all European Union states, rather than linking annuities to AAA euro-zone debt - pose problems for trustees as they allow for the default of one or more countries, with benefit costs reverting to the fund.

Maher notes that this, coupled with proposed reforms to the priority of benefits upon winding up a scheme, remove a certainty normally granted to pensioners.

"Sovereign annuities could be used to reduce your costs, but you would be transferring risk to the pensioner - that is something trustees would have to think very carefully about," she admits.

She adds that the question of how much risk can reasonably be transferred to members is one that needs to be addressed ahead of time, with the Pensions Board now certifying all providers of sovereign annuities.

However, Kennedy stresses that the Board has "no role" in assessing the creditworthiness of the bonds, transferring further responsibilities to trustees.

The possibility of a growing buy-in market may interest certain providers, but on the terms of the sovereign annuities, trustees will be left with significant due diligence duties before they can decide in favour or against any risk transfer deals, regardless of how it may improve their long-term funding and chances of survival.