IRELAND - Proposed legislative changes to private sector defined benefit pensions in Ireland will push schemes toward closure to new accruals and buyout, said Martin Haugh of LCP Ireland at Lane, Clark & Peacock's Global Pensions in 2011 conference in London today.
On top of a 0.6% levy announced in March that is expected to raise more than €450m for the cash-strapped Treasury, proposed changes to the defined benefit (DB) model in Ireland would see more flexibility in defining obligations offered to schemes in return for 'core' benefits being subjected to a higher degree of certainty, either through a tougher funding standard or a risk reserve requirement.
Haugh said the authorities were "leaning toward" the risk reserve requirement "in a nod to Solvency II" and estimated that this could add 20% to the costs of running a DB scheme.
The alternative of a tougher funding standard - the minimum funding standard is already set at buyout level - could add as much as 50% to costs, he added.
Employers will have to consider increasing contributions to cover reserves or reducing benefits, he warned.
"This is what's driving de-risking in Ireland," he said. "Until now, closure to new accruals has not really been seen in Ireland, but we expect to see that change. We think this is going to push closure to new accruals and buyout in Ireland."
For a start, annuitised obligations and assets will not be subject to the 0.6% levy. But in addition, the proposals will amend the funding standard - making it more lenient for those schemes that invest in sovereign bonds or buy sovereign annuities.
Although the minimum funding standard already gives schemes buyout levels to aim for, the lion's share of schemes do not meet this standard.
But, somewhat counterintuitvely, the higher risk associated with some European sovereigns - including Ireland - could help to bring funding requirements down, or improve the relative cost of annuity solutions.
"You never know, but we don't expect much demand for Greek sovereign annuities," said Haugh. "But we think some clients could combine conventional annuities - perhaps 60-70% - with some European sovereign annuities to take advantage of those elevated yields to bring down the cost of buyout."