IRELAND - Underfunded pension funds will have to meet new risk reserves which could add 10% to its funding requirements and will have the ability to use sovereign annuities under the proposed new funding standard.
The Pensions Board said it will re-introduce funding obligations by year-end after the Department of Social Protection announced changes to the way defined benefit schemes are funded.
The existing funding standard, which required funds to submit recovery proposals if they were not 100% funded, was removed in October 2010 as schemes were struggling to meet proposal deadlines.
The existing standard will be restored for three years, but pension funds will now face more stringent risk reserve requirements as protection against future market volatility.
The government estimates this provision could add 10% to a scheme's funding requirement, but scheme will have until 2022 to meet the necessary risk levels.
The government said pension funds that move away from investing in equities and move into bonds will receive a credit towards the funding standard, and the use of sovereign annuities will also ease the funding burden.
So-called sovereign annuities will also be created. They will link the policy payments to proceeds of Euro-denominated bonds issued by EU member states.
More details about the funding standard and the development of sovereign annuities will be released by the Pensions Board by year-end.
About 70% of Irish DB plans are currently underfunded, the Pensions Board estimates.
The statistic was backed by an Aon Hewitt survey released last week. At the time, the firm said reinstating the funding standard would help pension funds better manage their deficits. (Global Pensions; 24 October 2011)
Pensions Board chief executive Brendan Kennedy said recovery plans must strive to do away with the scheme deficit and target long-term sustainability.
He added: "Trustees should consider the future of their scheme, its long-term prospects, the range of risks it faces, and the contributions which members and the sponsoring employer are willing to make. Trustees must recognise the contribution rate, the investment policy and, where relevant, changes to the benefits structure, as being interrelated, and the best solution is one that allows the scheme to undertake appropriate investment risk to achieve long term returns without such risk endangering the benefits already accrued by members."
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