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Defined benefit pension schemes in deficit need solutions, but all they have been provided with by the government and the Pensions Board are impossible choices say Mercer, pension and investment experts.
The Pensions Board today published new funding rules for defined benefit pension schemes. The main features are:
- Schemes will normally be given until 2023 to clear existing deficits
- A risk reserve will be required with effect from 1 January 2016
- Where schemes hold sovereign annuities or sovereign bonds, they will be allowed credit for these in their funding standard calculations.
Commenting on the new rules, Michael Madden, a partner in Mercer, said: “While we welcome the fact that employers and trustees finally have clarity on what pension schemes have to do after a long period with effectively no funding regulations in place, the new rules will unfortunately add to the stress being experienced by most pension schemes instead of relieving it.” He also noted that, “having taken nearly four years to decide on this structure, the authorities have not been so accommodating to employers and trustees, giving them only 6 months in most cases to do the work necessary to implement the new rules.”
Mr Madden added: “The new requirement for a risk reserve, in particular, will add to the funding burden and some employers, regrettably, will simply not be able to cope with it. We fear that some schemes that might otherwise have been able to continue will now be forced to wind up, with poor outcomes for members.”
Mr Madden said that a risk reserve was a good idea in theory, as it would provide a cushion against potential poor experience in the future. “The problem with it, though, is that employers in Ireland do not have to have a pension scheme in the first place, and secondly, if they have a deficit, they have no statutory obligation to eliminate it. If, in addition to funding deficits, they also have to finance a risk reserve that may be 10%-20% of scheme liabilities, they may walk away from their scheme altogether. If this happens, scheme members may end up with lower benefits than they were expecting to receive. This cannot be in members’ best interests.”
The other main measure announced by the Board is a lowering of the reserves that need to be held if a scheme invests in sovereign annuities or sovereign bonds. The principle here is that rather than measuring pension liabilities by reference to the low yields prevailing on German bonds and those of other “safe haven” countries, which is what happens at present, trustees can use higher-yielding bonds such as those issued by the Irish government to measure their liabilities.
The catch is that, should the Irish government default on its debt, pension scheme members can have their benefits reduced. Many pension scheme trustees would not be comfortable to pass on this default risk to pensioners. So, for many schemes, sovereign annuities or sovereign bonds will not be a realistic source of relief.
Mr Madden observed: “Over the coming months, as trustees grapple with their funding problems, many will feel that government has unfairly passed the buck to them by failing to legislate effectively and leaving them with impossible choices. The fear is that these new rules will actually accelerate the demise of defined benefit pension schemes rather than trying to help employers maintain them in difficult circumstances.”
Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and investment management. Mercer’s 20,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges. For more information, visit www.mercer.com