Mr. Brendan Kennedy:

I thank the Chairman. We are very happy to be here. We have supplied the committee with our opening statement. I will not go through it word for word, but I will just touch on the main points. I am the Pensions Regulator and the chief executive of the Pensions Authority. Mr. Pat O'Sullivan is our actuarial adviser and Mr. Colum Walsh is an assistant principal in our legal unit who has been working on the proposed changes to the pensions legislation on behalf of the authority.

I will start by briefly explaining who we are. The Pensions Authority was established by the Pensions Act 1990. This Act is the legislation that governs Irish pensions, so changes proposed in, for example, the current social welfare and pensions Bill, are actually amendments to the Pensions Act. This Act provided for the establishment of what was then called the Pensions Board. Our responsibilities include overseeing the operation and application of the Pensions Act, providing information and guidance on pensions to both the public and those involved in the operation of pensions, and to advise the Minister for Social Protection on matters related to pensions generally. We are therefore responsible for the regulation of trustees of occupational schemes, both for defined benefit and defined contribution schemes. Therefore, it will be our responsibility to enforce any changes that are made to legislation as a result of this Bill.

Many people do not realise how large Irish pension savings are. The total assets of Irish pension schemes total approximately €100 billion. These schemes provide for approximately 415,000 current employees and 105,000 retired members who are currently receiving pensions. Those numbers do not include pension schemes for civil and public servants, which are run on a pay-as-you-go basis and include approximately 360,000 further current employees.

The rest of my statement will deal with defined benefit schemes because that is the subject matter of the Bill. To make it clear, a defined benefit scheme is a scheme that is expressed in terms of people's earnings when they retire. For example, a person might get one eightieth of his or her annual pay for every year he or she had been working when he or she retires. A defined contribution scheme is a scheme where an agreed contribution is made by a person and their employer and, at retirement, his or her benefit is the value to which those contributions have built up. Of the €100 billion in pension schemes in Ireland, approximately €58 billion is in respect of funded defined benefit schemes. There are currently 628 of these schemes, including approximately 115,000 current employees. Both the numbers and the membership of funded defined benefit schemes are falling. The numbers have fallen in the last year. That figure of 628 was about 666 a year ago. If we look at 1992, there were 2,560 defined benefit schemes at that stage with approximately 200,000 active members. Both the numbers of schemes and the membership have been falling pretty continuously over the last 25 years. It is usual when an employer closes a defined benefit scheme that it would be replaced with a defined contribution scheme.

To speak briefly about the rules which govern defined benefit schemes, every year defined benefit schemes are required to calculate the value of the benefits they have promised. They then compare this value to the total assets of the scheme. If there are not enough assets they have to take certain steps. All this process is overseen by the Pensions Authority. This yearly assessment must be done in accordance with a set of rules, and these rules are collectively known and the funding standard. In many discussions about defined benefit schemes the phrase "the funding standard" will be heard. That is the set of rules that apply to schemes to ascertain whether they have enough money to meet the promises they have made. Where a scheme does not have enough assets the most common response is that the scheme trustees and the sponsoring employer will agree a recovery plan to eliminate the shortfall over an agreed period of time. This recovery plan is known as a funding proposal - another bit of jargon. That is the name in the legislation.

Usually a funding proposal involves additional contributions by the employer. Sometimes it may involve additional member contributions and sometimes the funding proposal may involve cuts to the benefits that have already been promised. However, those agreements are voluntary under current legislation. If no agreement can be reached and if a funding proposal cannot be signed off, the scheme may eventually be wound up. In such a case, if there is a shortfall, there is usually no obligation on the employer to make up the shortfall unless, in rare cases, the rules of the scheme oblige it to do so. It is important to point out that there have been many cases where employers have paid off some or all of the shortfall, but there is no legal obligation.

There is a reference in the letter the committee received from the Irish Business and Employers Confederation, IBEC, to a number of changes that the Pensions Authority is considering to the funding standard. I will briefly discuss those. There are three changes under consideration at present. The first is a change to the calculation of the risk reserve within the funding standard. This will make the funding standard slightly easier on schemes that have taken steps to manage carefully their investment risk. The second change is a procedural change relating to a funding proposal which is paying off or closing a deficit. Where there is a funding proposal in place and it goes off track for whatever reason, we are looking at making it simpler for the trustees and employer to agree changes to that funding proposal to restore the scheme. The third change we are considering is to examine the funding standard calculations. The funding standard calculations in respect of members who have already retired are based on how much it would cost to pay an insurance company to take over responsibility for paying those pensions. Questions have been raised about whether the current calculations reflect the actual cost that would arise if that transfer was made. There are concerns that the current funding standard calculations might overestimate that cost, so we are examining whether we can improve those calculations to make them more accurate.

I am happy to take questions.