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Top 1000 Pension Funds: Heart of the matter

The latest law change focuses on reorganising Ireland’s regulatory structures, instead of delivering the promised amendments to the wind-up order, writes Jonathan Williams

Concerns about the impact of the minimum funding standard (MFS) for defined-benefit (DB) pension funds continue to unsettle the Irish pensions industry, even though the 30 June 2013 deadline for submitting funding proposals to the regulator, the Pensions Board, has passed.

Following a reinstatement and revision of the MFS in the Social Welfare and Pensions Act 2012, the industry expected the Department of Social Protection (DSP) to quickly follow with proposals to amend the distribution of scheme assets upon wind-up, a fate expected to affect more than one of the funds facing deficits as employers prove unwilling or unable to provide additional support.

However, despite the industry’s expectation – following numerous pledges from minister for social protection Joan Burton – that the government would amend the wind-up order to ensure active and deferred members were not put at a disadvantage in comparison with pensioners, nothing has materialised.

A study conducted by Mercer has yet to be published, and June’s Social Welfare and Pensions (Miscellaneous Provisions) Act 2013, which was expected to introduce the changes, instead focused on reorganising Irish regulatory bodies.

Brendan Kennedy, chief executive of the Pensions Board, will remain the head of a reconstituted Pensions Authority. A new body, the Pensions Council, will advise on regulation which the Pensions Authority will enforce. According to the government, these changes will dispel concerns over regulatory capture.

It is currently unclear who will fill the majority of the 12 vacancies on the Pensions Council. The Act allows its members the freedom to offer advice “either on its own initiative or at the minister’s request”, with four vacancies filled by the Pensions Authority, the Central Bank of Ireland, the Department of Public Expenditure and Reform and DSP.

The remaining Council members will need to possess only the “relevant skills [and] specialist knowledge”, while there are no guidelines on the balance between employee and employer representatives. However, the council has been asked to devise policy which has the consumer “at its heart”, indicating a potential shift from the traditional social partner structure.

The other miscellaneous provisions legislated for under the act mainly affect the Board, granting it the authority to wind-up DB schemes that fail to submit funding proposals.

However, as over 200 of the 300 funds expected to submit proposals by the end of June failed to do so, a question remains how often the regulator will exercise these powers, or whether they were simply granted to strengthen its position in discussing deficit situations with trustees.

Shortly after publication of the miscellaneous provisions, DSP also redrafted regulations affecting DB risk-reserve requirements. The Occupational Pension Schemes (Funding Standard Reserve) Regulations 2013 brought about some minor changes which the industry had been requesting since details of the risk reserve were first announced.

Funds were at first only permitted to offset the 15% reserve requirement, in excess of liabilities, with cash or European Union sovereign bonds. As the government was able to increase the reserve to as much as 50% without parliamentary vote, it initially led to concerns that the funds would be viewed as an easy way of shoring up Irish sovereign debt should the country’s re-entry into the capital market fare badly.

However, following May’s changes, DB funds are now required to hold a 10% reserve from 2016. Additionally, a number of issuances from state-backed institutions can be used to offset the lower reserve.

Perhaps unsurprisingly given Ireland’s status as a bailout recipient, bonds issued by the European Stability Mechanism and its two predecessors can now be included, as can IMF issuances and a number of European and international development banks.

Additionally, industry concerns over the absence of corporate bonds – and therefore an ability to employ liability-matching strategies – have been addressed, with corporate issuance now permitted, as long as the paper yields no more than a predetermined rate above German Bunds.

The coalition government also fulfilled a pledge to lower the tax relief threshold to pensions pots of €60,000 – details of which were unveiled in the 2013 budget in December, and which confirmed the end of the 0.6% pensions levy in 2014.

The possibility of a new levy remains, following a European Court of Justice ruling that found the country in breach of its duty to protect the benefits of insolvent Waterford Crystal’s pension fund.

The DSP has yet to commit to future measures, but further regulatory changes appear inevitable to guarantee a minimum 50% protection for all member benefits, with a funded pension protection arrangement possible.

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