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IPE special report May 2018

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Irish government criticised for 'extraordinary' DB funding changes

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  • Irish government criticised for 'extraordinary' DB funding changes

IRELAND – Changes to Irish defined benefit (DB) regulation a month before schemes are due to submit funding proposals have been heavily criticised, with consultancy LCP calling for the deadline to be pushed back a third time.

Minister for social protection Joan Burton yesterday announced that risk reserve requirements, effective from 2016, would be lowered from 15% to 10% of a scheme's liabilities.

She also said the list of assets funds can use to offset the requirements would be expanded, with regulation now allowing investment in certain corporate bonds and issuances backed by EU countries – such as the European Stability Mechanism and the European Investment Bank.

Acknowledging that the recent OECD review of the Irish pension system labelled the revised funding standard as "undemanding", Burton said she nonetheless recognised schemes were often in deficit and that recovery required careful management.

"Employers, unions and trustees have been making strenuous efforts to protect the viability of their schemes, and I want to support them in every way possible," she said.

Seemingly warning DB funds against missing the 30 June deadline for filing funding proposals, she added: "I expect all defined benefit schemes to submit their proposals to the Pensions Board.

"Compliance with the regulatory structure is essential for the future sustainability of defined benefit schemes and increased security of members' benefits."

While consultancy LCP said any changes that reduced the additional burden of risk requirements should be welcomed, it remained critical of the Department of Social Protection's (DSP) decision to keep the 30 June deadline.

It noted that many trustees would want to re-examine funding proposals in light of the changes.

"In this context and given the importance of the issue to defined benefit scheme members, it seems extraordinary that the 30 June 2013 deadline for the submission of funding plans has been retained," the consultancy added.

"LCP would urge the minister to reconsider this deadline to allow trustees to funding plans to be agreed on a measured basis."

Jerry Moriarty, chief executive of the Irish Association of Pension Funds, echoed the consultancy's sentiments, adding that the timing of the changes was "not very helpful".

He told IPE the changes would require "more work to be done" on already drafted funding proposals and that the revised list of prescribed assets – holdings trustees can use to offset the risk reserve and until now limited to cash and EU sovereign bonds – could have been published sooner.

"If it changes what you were planning to do, say, in terms of reducing benefits, then you are back into consultation with members again," he said.

The industry was first asked to advise on an expanded list of assets late autumn.

At the time, LCP indicated that corporate bonds could be included in an expanded list, while comments from the Pensions Board's Pat O'Sullivan in March suggested the DSP was considering allowing infrastructure bonds to be included.

The expanded list of assets now allows for non-sovereign bonds underwritten by an EU member state to offset the risk reserve.

As a result, schemes can now hold bonds issued by the European Stability Mechanism and its two predecessor funds, the IMF, the International Finance Corporation, the International Bank for Reconstruction and Development, the bank's European namesake, the European Investment Bank and EU central banks.

Additionally, corporate bonds within a spread of specific German bunds – the 2023 bund for corporate paper with maturities of less than 10 years and the 2042 bund for those maturing in more than 10 years – will also be permissible.

Corporate issuances expiring in less than a decade will be allowed a spread of 3%, whereas a 4% spread will be permitted for the longer-dated corporate paper.

LCP saw the revised list as a positive, noting that regulation rating AAA-rated corporate bonds as riskier than Greek sovereign debt could have resulted in "unsuitable" investment strategies.

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