Ireland: Attention shifts to DC as health of DB sector improves
After several large changes to Irish defined benefit regulation, bigger changes are on the horizon for the defined contribution sector, as the government seeks to boost pension coverage
Regulation in summary
• Funding levels have improved among Irish defined benefit schemes despite some funds failing to submit recovery plans two years after the deadline.
• An end to the 0.15% pensions levy, with revenue to be used to pay for any double-insolvency costs incurred as a result of the Waterford Crystal ruling.
• Members of the Pensions Council have been announced. They will review the costs and fees associated with DC funds.
• Launch of the Universal Retirement Savings Group is set to design a road map by December to help boost the level of retirement saving through auto-enrolment or compulsion.
• Formal launch of the Ireland Strategic Investment Fund will be followed by details of its investment strategy for investing in the Irish economy.
After years of regulatory change that led to the reinstatement of minimum funding standards for defined benefit (DB) pension funds, in the past year there has been noticeably less change for the Irish pensions sector.
The Pensions Authority, the revamped regulator, still had to contend with a significant minority of DB funds in breach of the funding standard nearly two years after the June 2013 deadline. In February 2015 it announced that 30 of the more than 700 DB funds had still not submitted funding proposals – but, overall, the health of the universe of legacy funds is gradually improving. Compared with levels during the crisis when 80% of funds failed minimum requirements, 59% of DB funds complied with the minimum requirements by the beginning of 2015.
A sign that things are returning to normal is that the 0.15% levy on pension assets came to an end in June 2015, with the income ostensibly earmarked to fund any instances where beneficiaries lost out because of a double insolvency of both their sponsoring company and their DB fund.
Under the Social Welfare and Pensions (No. 2) Act 2014, passed in October 2014, any beneficiary whose benefits were reduced as a result of a double insolvency – at least from the time of the collapse of Waterford Crystal in 2007 until late 2013, when new rules governing the division of assets upon wind-up were agreed – would have the shortfall made up by the Irish exchequer. Members would only be entitled to additional income from the state if they lost at least half of their entitlements, or annual payments fell below €12,000 as a result of the scheme’s closure.
The Pensions Authority also urged trustees to follow new best practice guidelines, spelling out in its DB financial management guidelines several areas that would need to be addressed regularly. The document, published in May this year after earlier consultation, set out best practice for several areas, including the collection of scheme data, governance and regular processes – such as discussion of manager performance and review of fees – that should take place at least annually or every three years.
In February, the Pensions Council was established. The body was created under the 2014 reform that resulted in the Pensions Board being renamed the Pensions Authority and stripped of responsibility to advise on policy.
The Department of Social Protection (DSP) named the new Council’s 10 members who, alongside its chairman, would consider future reform of issues including charges for members in defined contribution (DC) funds. At the same time, the DSP also announced the launch of the Universal Retirement Savings Group (URSG), responsible for agreeing a blueprint for future reform to boost pension saving, either through auto-enrolment or compulsion.
The URSG, which is due to report to deputy prime minister Joan Burton by December 2015, has already consulted with the industry on several matters, including how the proposed Universal Retirement Savings Scheme (URSS) could be designed. The Irish Association of Pension Funds has said that while compulsory saving had clear advantages, there was likely to be more political backing for a soft-compulsion system among the members of the URSG, which comprises representatives of government departments.
Further changes expected to come as the URSS is established would revolve around scale in a small and fractured Irish market. The Pensions Authority has previously spoken of its desire to see only about one hundred large-scale DC funds, and the URSG consultation document touched on the possibility of sharing investment risk among DC participants.
At the end of 2014, the Ireland Strategic Investment Fund (ISIF) was formally established to use the remainder of the National Pensions Reserve Fund’s €7.4bn in assets to stimulate the Irish economy. Under the National Treasury Management Agency (Amendment) Act 2014, ISIF cannot be asked to make any payments to the Irish exchequer before 2025.
“The Pensions Authority has urged trustees to follow new best practice guidelines, spelling out in its DB financial management guidelines several areas that would need to be addressed regularly”
In July 2015, the sovereign development fund set out its investment strategy identifying potential sectors that it could invest in to achieve its goal of a double bottom line – realising returns above the government’s borrowing cost and achieving a measurable economic impact. Those involved in establishing exact metrics for the measurement of economic impact point towards either: a permanent or temporary (construction-led) increase in unemployment; an increase in export activity of companies; or improved balance-sheet health, as potential ways of measuring how well the money has been put to use.
The fund aims to invest its assets by 2020, but is likely to begin recycling assets at that point and will act as a perpetual investor – with the exception of any drawdowns from ISIF requested by the exchequer after 2025.