mast image

Special Report

Impact investing

Sections

Ireland: The long haul

Related Categories

Pension funds are still missing key pieces of the regulatory puzzle, finds Jonathan Williams, despite the re-introduction of the minimum funding standard. And sponsors face lengthy recovery plans

“There has been a lot of goodwill towards defined benefit (DB) funds in Ireland,” admits Jerry Moriarty, chief executive of the Irish Association of Pension Funds (IAPF), referring to the regulatory environment pre-2012. He says this goodwill is one of the reasons the funds have not suffered from the same terminal decline seen in the UK, where fewer than one-in-six retirement funds have remained open to new accruals as of 2012.

However, the regulatory framework, that for over three years did not enforce minimum funding standard (MFS) while deficits grew in the wake of the global downturn, has now been replaced with a reinstated funding standard – one that is due to be significantly strengthened by 2016 and which appears to signal an end of this season of goodwill.

In April last year, when the minister of social protection, Joan Burton, unveiled details of the revised MFS – which will impose risk reserves able to absorb market shocks – the country was only halfway through a series of austerity measures imposed by its 2009 bailout. Already suffering under low domestic growth that damaged their profit margins, several companies closed or decided to wind up their pension funds.

It is therefore unsurprising that the new regime was criticised for the “very real risk” of failing to allow for an “orderly transition to a sound and sustainable financial position” among pension funds – this according to the Society of Actuaries in Ireland.

Unfinished framework
Ratified last spring, the Social Welfare and Pensions Act 2012 failed to introduce several measures initially promised by Burton. The treatment of deferred benefit up-rating and, particularly, Section 48 (see Section 48 changes panel) – the priority of payments to members upon wind-up – needed to be clarified. Section 48 was one of the areas of main concern for the Society of Actuaries.

Additionally, due to Ireland’s improving fiscal situation, attempts to create buyout products backed by Irish bonds, so called sovereign annuities, now look considerably less attractive.
While discussions initially focused on a yield of 6%, the rate fell below 4.5% by the beginning of 2013, diminishing the benefit in comparison with existing annuity products.

“These are by no means a panacea for the difficulties currently faced by pension schemes,” says Society of Actuaries president Paul O’Faherty, “but they will provide additional options to trustees and may play a useful role in severely distressed schemes.”

Viewing the regulatory environment as a jigsaw, Maurice Whyms, head of group pensions at Willis Ireland, notes that several pieces of the puzzle are missing.

“They obviously filled in a lot of the pieces of the jigsaw, but the three of them are still out there.” However, he says that trustees are not all holding off on filing their funding proposals due to the uncertainty. “I think it’s breaking down into a couple of camps,” he continues. “A lot of schemes are getting on with it anyway – their view being that enough of the jigsaw is there.”

The wind-up review, conducted by Mercer, is examining how the system could be reformed to remove the perceived current inequalities, whereby pensioners receive absolute priority over other members, even those just a day from retirement. Philip Shier, senior actuary at Aon Hewitt, warns that any changes would impact the “relative merits of the various possible approaches” currently under consideration by trustees as they ready their funding proposals.

Shier says it is important to allow sufficient time for any changes to be fully understood – potentially an argument for announcing the new order prior to the annual Social Welfare and Pensions Bill, traditionally in April, that would legislate for any changes.

Moriarty notes that the Pensions Board has been clear that trustees should not delay, regardless of what is forthcoming. “Trustees are in a difficult position, because if they deliberately hold back because they want to improve the situation for deferred members, you could see legal issues arising out of that,” he says, referring to the expected loss of income suffered by pensioners.

“It’s less of a tricky issue for trustees if the company holds off,” Whyms adds, although he says that once a company has ceased contributing to a fund, a trustee would usually receive “firm” advice from lawyers that they must wind up, as the market might shift to their disadvantage if they wait.

All change
However, simply because many funds are pushing ahead with funding proposals should not be taken as indication that there is satisfaction within the industry.

The Society of Actuaries, working with the IAPF, the business association IBEC and Irish Congress of Trade Unions, has submitted proposals to amend the wind-up order, with an emphasis on equality.

O’Faherty is scathing about the current arrangement. “As a result of the priority afforded to pensioners’ benefits on wind up, this means that a disproportionate burden will be borne
by active and deferred members – in some cases they will receive only a fraction of their expected benefits.”

Several large funds have calculated how the current order would leave their members out of pocket. For example, the ESB General Employees Superannuation Scheme, responsible for the retirement benefits of the country’s electricity board workers, estimated that actives and deferreds would only be left with 5% of accrued benefits.

Meanwhile, the severely underfunded multi-employer Irish Airlines Superannuation Scheme calculated only 4% of benefits would be left once pensioners had been bought out.

Burton has now confirmed that a change will indeed occur, but has yet to announce how significant any amendments will be.

The future will see further “major” reforms for the country, according to Burton. The coalition’s 2011 programme for government said it would “reform the pension system to progressively achieve universal coverage” and Burton commissioned the OECD to offer advice, tentatively due for publication in April.

In the last few weeks, Burton has again mentioned the introduction of a national savings fund, and politicians and industry alike have repeatedly referred to the UK’s government-sponsored National Employment Savings Trust as an interesting approach, coupled with an element of compulsion.

Although it is pleased that the government is clearly signalling further change, shortly after it put an end to other uncertainty by confirming the 0.6% pensions levy on scheme assets would be abolished after 2014 and introducing major changes to the tax relief system, the industry retains a negative view of the MFS.

“What is the funding standard regime about?” asks Whyms. “It is there to give people greater security. These risk reserves are threatening the security of benefits; they are not increasing it.”

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
    Size: Total CHF 600m, approx. CHF 100-300m per fund investment.
    Closing date: 2019-06-28.

Begin Your Search Here
<