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IPE special report May 2018

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'Positive' Irish risk-reserve changes allow altered investment strategy

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  • 'Positive' Irish risk-reserve changes allow altered investment strategy

IRELAND – Allowing corporate bonds to offset the incoming Irish defined benefit (DB) risk reserve requirements can only be viewed as a positive development, LCP has said.

Discussing an expanded list of assets DB funds can use to offset the now reduced 10% risk reserve from 2016, the consultancy's partner Martin Haugh said the changes would help put trustees concerns over low yields at ease.

Under changes announced last week, funds will now be able to use certain corporate bonds and fixed income underwritten by European sovereigns – such as issuances from the IMF, central banks and European Investment Bank – to reduce the burden of the risk reserve.

To date, only sovereign debt from EU member states and cash could be used for such purposes.

Haugh told IPE the changes meant schemes would no longer be "restricted" to looking at sovereign bonds.

"Including corporate bonds is definitely a positive – probably the main positive, really," he said.

However, he warned that the changes would not be useful to all funds, especially those hoping to execute Section 50 orders, under which scheme benefit payments could be reduced.

Haugh noted that those funds would be required to undergo a 30-day consultation with members prior to any changes being submitted, and that they would not have "any ability to revise their proposals" while meeting the Pensions Board's 30 June deadline for funding proposals.

He nonetheless said some funds could see advantages as a result of the changes, such as implementing a more refunded de-risking strategy now that there was scope for fixed income outside of EU government paper.

"To that extent, they will be able to vary the de-risking strategies and may be, ultimately, able to get a better return over that period as a result of that," Haugh said.

He said other schemes would still be "forced into unfair positions" by the looming 30 June deadline, a situation that could have been avoided with greater clarity of coming changes.

The Department of Social Protection has been consulting on changes to the priority order of assets upon wind-up since last year.

It was believed that changes would be announced before the Pensions Board deadline, allowing funds to dispense benefits in a way that would not grant pensions in payment absolute priority.

However, the recent ruling in the Waterford Crystal case by the European Court of Justice casts doubt over the government's ability to implement any changes to the wind-up order.

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