Irish Pensions Bill could give minister 'blank cheque', Aon Hewitt warns
IRELAND - New provisions to increase the minimum funding standard for defined benefit (DB) schemes almost threefold without a vote in Ireland's parliament could grant the Department of Social Protection a "blank cheque", Aon Hewitt has said.
The publication of the Social Welfare and Pensions Bill last week revealed the minister for social protection, currently Joan Burton TD, would be allowed to adjust the minimum funding standard by ministerial decree.
Currently set at 15% of scheme liabilities, Burton or a successor could increase it to as much as 50%.
Philip Shier, senior actuary at Aon Hewitt, noted his surprise at the proposal, telling IPE that a firm figure in legislation would have been preferable.
"It is almost giving a blank cheque to the minister," he added. "If the policy was such that it needed to be changed, it would be brought through the Dáil in the normal way, rather than a minister making an order on a issue that is pretty fundamental."
He said it was not "practical" to require a pension scheme to hold 50% reserves at short notice.
Martin Haugh, partner at LCP, meanwhile said that, with the exception of the new powers granted to the minister, the draft legislation contained few surprised, noting that guidance from the country's Pensions Board would be needed.
"We've had calls from clients today thinking this was it," he said. "To be honest, we are in no better a position to act than we were last week.
"We now know there is some enabling legislation - the devil in these things is always in the detail."
Haugh said he viewed the powers granted to the minister to adjust the minimum funding and risk buffer to absorb yield fluctuations as a method for the government to make changes without the need for legislation, trying to provide for the possibility of "extreme" fluctuations.
He added that he saw no problems in maintaining the current regulatory approach for having a fixed date to measure liabilities, rather than averaging out yields over several months as recently allowed by the Dutch pensions regulator.
"There is no right or wrong in this one," he said. "A point in time always carried the risk of 'spikes', but averaging presented its own issues.
"For example, averaging during a period of rising yields would increase liabilities when compared with a point estimate."
Shier agreed, stressing that the market environment was less important than the regulatory response to any drastic fluctuations in yields.
"If, as seen in the Netherlands, they automatically have to take that into account and cut the benefits, it is clearly an inappropriate response," he said.
He said the bill did make provisions for a "catch-all" clause, allowing the Pensions Board to determine when an underfunded scheme would be exempted from submitting a funding proposal.
"It's reasonable to do the measure at a date, as long as you don't automatically kick into having to react, allowing some flexibility in response," he added.
However, Haugh was unsure how the country's underfunded defined benefit schemes would eventually react to the new rules.
Echoing previous comments, he said: "It will force many [sponsors] to revisit the commitment to their schemes, and, inevitably, some will close as a result."