The death of defined benefit (DB) funds has, in some form, been prophesied for decades, but the latest threat of closure - stemming from the publication of statutory guidelines on Ireland’s new funding standard - may well prove to be a real and insurmountable threat to final salary schemes in the country.
Ireland’s DB schemes are undoubtedly troubled, with 80% failing to meet minimum funding requirements, not helped by the volatile markets and falling bond yields.
The question surrounding the Pensions Board’s release of new statutory guidance - coming as part of the reinstatement of the funding standard - was therefore whether they would aid a resurgent market or simply assist in a managed decline.
Sadly, the industry seems to view the latter as most likely, with Aon Hewitt remarking on new, increasingly prescriptive investment guidelines that would allow only for a de-risking strategy exposed to government bonds and cash, effectively locking in the deficits.
“It’s really forcing people to make a decision whether these schemes are sustainable,”
says one senior industry figure, who regards
the investment guidelines as “restrictive”.
“For a lot of schemes, the danger is they will say ‘We can’t put ourselves on the hook for another 10 years’.”
The 10-year period - in fact, 11 years to 2023 - is the period over which DB schemes may seek to return to full funding, while also being asked to amass significant new reserves that, admittedly, can be offset through exposure to either euro-zone bonds or sovereign annuities.
The regulator’s chief executive, Brendan Kennedy, defends its new guidance, as well as its supposed emphasis on de-risking.
“We would see it as matching rather than de-risking,” he says, saying that Irish funds have previously been “very high risk”, with fewer matching assets than international counterparts.
While the tools are available, the opinion is nonetheless that they will help in a transition away from DB, with the matching assets useful as funds consider winding down or buying out part of their liabilities.
Martin Haugh, partner at LCP, reiterates that the limited relief offered through certain sovereign bonds, as well as the risk reserve due in 2016, are likely to lead to closures and wind-ups of funds prior to the deadline.
Others note that the government could set a trend by deciding the fate of its own DB funds.
“One of the interesting things is that the longest-surviving defined benefit plans tend to be in state-owned or partially state-owned companies, including the banks,” says Edward Whitehouse, head of pensions policy analysis at the OECD and part of the organisation’s team leading a review of Irish pension policy.
“In part, it is going to be up to what government decides it wants to do,” he adds.
One response has already come after Allied Irish Banks - in which the government owns a 99.8% stake thanks to its recapitalisation - announced that, as part of wide-ranging cost cutting measures, all its employees will transition from DB schemes to defined contribution arrangements.
Juan Yermo, head of the OECD’s private pensions unit, meanwhile predicts that Ireland’s shift to DC could be “even faster” than the one that occurred in the UK.
However, evidence that the government is turning its back on DB is hardly conclusive, with a new career-average arrangement for state employees announced last year.
Kennedy meanwhile seems hopeful DB funds will continue, even if not in their current form.
“We would certainly encourage schemes to consider a greater reliance on discretionary benefits, on taking some of the guarantees off the liability side,” he says.