IRELAND – A proposal to introduce a form of smoothing for Irish defined benefit (DB) funding calculations could be part of the solution for the country's schemes, according to the Irish Association of Pension Funds (IAPF).
Opposition party Fianna Fáil published a raft of proposals aimed at easing the pressure on DB schemes in Ireland – many of which are burdened by large deficits – including an idea to mitigate the impact of the funding requirement.
The party's spokesman on social protection Willie O'Dea suggested in a paper that schemes could use a government-set benchmark, which did not track shorter-term market movement.
Local DB schemes were under pressure, he said, because of the economic crisis, falling bond yields in Germany and France, the revision of the minimum funding standard and fund de-risking requirements at a time of such low bond yields, he says.
Some schemes are closing as a result, said O'Dea.
"The critical factor is that DB schemes are closing in a manner which gives rise to significant loss of benefits for employees and pensioners," he said. "This is avoidable and action is needed immediately to rectify this situation."
The IAPF's chief executive and director of policy Jerry Moriarty said he could see the attraction in the notion of introducing a government-set benchmark not based on shorter-term market movements.
"The way the funding standard is currently set is based on what actually happens in a wind-up," he said. "If you're using smoothing, you're giving the impression a scheme has a certain level of funding."
But as things stand, this would not change the course of events if the scheme were in fact to be wound up, he said.
"It's a solution, but I don't think it's a complete solution," Moriarty said.
On the other hand, if the priority wind-up order of schemes were altered, there would be much more clarity for the members, he added. Under the current order, payment to pensioners receive absolute priority over active and deferred members.
The Fianna Fáil paper has also proposed changes to the priority order on the winding-up of a DB pension scheme, an area the government has repeatedly pledged to address.
Moriarty said the IAPF believed that when schemes fold, there should be a core level of benefit that is given protection, and other options should also be available, such as the provision of a capital fund that could be transferred to a drawdown product.
"That provides a better balance of protection for the active and deferred scheme members," he said.
The proposal echoes some put forward by the Society of Actuaries in Ireland, backed by employer organisation IBEC, the IAPF, union SIPTU and union umbrella group ICTU.
Fianna Fáil also suggested that the benchmark for calculating DB pension liabilities could be linked to the bond market of the country of location of the relevant employees.
O'Dea said the cost of benefits has risen by 40% in the last three years as a result of the benchmark having been moved to a mix of French and German bond yields, away from Irish bonds.
Moriarty said the proposals were not very different from plans put forward by the IAPF in the past, noting that the use of French and German government bond yields for liability calculation its far too expensive at the moment, given the low yields on those instruments.
"Finding a mechanism away from that would be helpful," he said.