Changes Introduced to Defined Benefit Schemes, Winter 2011

Author:Mr Philip Smith and Declan Drislane
Profession:Arthur Cox

The Minister for Social Protection, Joan Burton, has announced changes to defined benefit pension provision. First, the existing statutory minimum funding standard (the "MFS") will be re-instated for a transitional period of three years, although the MFS will be amended to permit the purchase of sovereign annuities. Secondly, schemes failing the MFS from 2012 onwards will be required to hold a risk reserve as a protection against future volatility in the financial markets. The exact detail has yet to be established but it appears that schemes will be required to meet the new funding standard by 2022.

Additionally, changes will be introduced to the priority order on wind up. In particular, there will be a threshold of €30,000 above which pensioner benefits will not be given first priority. The statutory revaluation rate for deferred pensions will also be amended so as to ensure greater equity between deferred members and active members. Finally, the Pensions Board will have powers to wind up schemes in certain circumstances.

Existing Funding Standard

Since 2009, the Pensions Board have suspended the funding standard deadline, in an effort to allow schemes to deal with their funding deficits. The recent announcement means that the existing funding standard will be restored and underfunded schemes must meet the funding standard within three years. The Pensions Board estimates that 70% of defined benefit schemes are in deficit. Brendan Kennedy Chief Executive of the Pensions Board has stated that the first funding standard deadlines under the new regime will be no earlier than 1 July 2012, to allow "trustees adequate time to prepare funding plans".

Sovereign annuities will now be certified by the Pensions Board, and where purchased by trustees they can be used to help meet the MFS. The sovereign annuities will be linked to bonds issued by EU Member States. In the case of sovereign annuities linked to Irish bonds, these will be state-guaranteed. If trustees buy sovereign annuities and continue to pay pensions out of the fund, there is likely to be a reduction in pensioner liabilities under the MFS. Alternatively, sovereign annuities can be purchased in the pensioner's own name. It remains to be seen whether insurance companies are prepared to create the types of instrument that pensions investors need.

Reformed MFS

The MFS will then be revised to require defined benefit pension schemes to hold a risk reserve as a protection against future...

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