Joan Burton (Dublin West, Labour)
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My colleague, Deputy Lynch, from Cork South-Central, sought an Adjournment matter for the past two days on the problems surrounding defined benefit pension schemes and, in particular, the problems of pensioners who are coming very close to retirement age within months or years. This is an enormous issue around the country but when I was in Cork last week I had the opportunity to meet several delegations of workers in various employments, many of whom have almost 40 years of service and are now looking at a pension, under the current rules, which will be about half of the pension they might have looked forward to and expected to get three years ago.

Given the constant flow of people approaching pensionable age, once they are close to 40 years there is not a lot they can do. As they are defined benefit pension schemes, once they retire under the current regulations, as the Minister is aware, they are obliged to purchase an annuity. The Minister made a number of announcements on Wednesday when he spoke to the Irish Association of Pension Funds. He announced a longer framework for a defined benefit schemes which would allow schemes to take account of new provisions, in other words to extend the deadline, which was to have been November, to provide the restructuring and that is welcome.

However, there is still a problem for somebody who retires tomorrow as he or she has to purchase an annuity and, as the Minister is aware, the rules of most pension funds require that the annuity is purchased by reference to the highest rated bonds, which generally speaking are German bonds, with those of other European countries with very high ratings. The Minister will know the interest rates are very low at approximately 2.5% whereas the current interest rate on Irish Government bonds is much higher and is unfortunately closer to 6%. This means that one requires a very large capital sum from the pension fund to purchase an annuity at the very low rates available from German bonds.

There has been a series of proposals from a number of different organisations involved in pensions, including the Society of Actuaries, suggesting that the Minister should allow flexibility. There are several different kinds of flexibility involved. The first is not to force the new retiree to purchase the annuity immediately or to purchase all of the annuity immediately, rather to give him or her time and space. The second is to examine, as has been suggested by the Society of Actuaries, the notion of a sovereign Irish Bond which would potentially provide a much higher rate of interest. I do not think the Minister would anticipate, if such a bond was developed, issuing it at current Irish Government market interest rates but it could be at the German rate plus a percentage to reflect the fact that, for reasons of which the Government is aware, a higher risk premium is demanded for Irish debt and the purchase of same.

On the pace of pension reform in Ireland, people are terrified. They were looking forward to a reliable pension of a certain level as they moved into retirement. In many cases half of that expectation is gone and the Government shows absolutely no urgency in addressing the matter. Defined contribution schemes have seen more flexibility. A business owner or director can avail of special pension fund systems like approved retirement schemes. Again, there is quite an amount of flexibility in those schemes.

I urge the Minister to address this pressing issue immediately. In starting to address it, it is critical to provide for flexibility. We know we are in a fairly disastrous period in our economic history but we hope this will not continue forever.

Éamon Ó Cuív (Galway West, Fianna Fail)
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I thank the Deputy for raising this issue and I agree with her that it is very important. I assure her that I will be, and that I have been, directing quite an amount of attention to the matter. However, it is quite complex and it is important in the decisions we make that we look at all of the various angles.

Under the Pensions Act, defined benefit pension schemes must meet a minimum funding standard which requires that schemes maintain sufficient assets to enable them discharge their accrued liabilities in the event of the scheme winding up. At the end of 2009, there were 254,325 members in 1,212 defined benefit schemes subject to the funding standard. It is estimated that more than 75% of these schemes are in deficit. However, the full extent of the level of underfunding will not be fully apparent until all schemes carry out their next actuarial assessment and report the results to the Pensions Board. These assessments are carried out through the completion of actuarial funding certificates which evaluate the funding position of a scheme and include confirmation as to whether the funding standard is satisfied. Where schemes do not satisfy the funding standard, the sponsors or trustees must submit a funding proposal to the Pensions Board to restore full funding within a specified time period, normally three years.

The Government is acutely aware of the pressures on sponsoring employers and pension scheme trustees that have arisen from investment decisions and changing market conditions. The Government has taken a number of significant measures to ease the pressures on pension schemes since 2008. These measures include the granting of extra time for schemes to formulate funding proposals and allowing longer periods for recovery plans, up to ten years or more, subject to the agreement of the Pensions Board. The deadline for the submission of funding proposals was initially extended for six months and has been further extended on a number of occasions. The current deadline for receipt of funding proposals is the end of November 2010.

Also introduced were significant legislative changes in the Social Welfare and Pensions Act 2009 to allow for the restructuring of underfunded schemes; to ensure a more equitable distribution of assets in the event of the wind-up of a defined benefit scheme; and to strengthen the powers of the Pensions Board in ensuring that pension contributions are remitted by employers to scheme trustees. These amendments improved the level of protection that was in place for current and former scheme members who had yet to reach normal retirement age.

The 2009 Act also introduced the legislative provisions to enable the Minister for Finance to establish the pensions insolvency payments scheme to reduce the cost of purchasing pensions for trustees where the employer has become insolvent. This scheme came into effect in February 2010 and will ensure a more equitable distribution of assets following the wind up of relevant underfunded pension schemes.

The national pensions framework was launched by the Government in March 2010. As Deputy Burton knows, the framework is the Government's plan for future pension reform in Ireland and it encompasses all aspects of pensions, from social welfare to private occupational pensions and public sector pension reform. It aims to deliver security, equity, choice and clarity for the individual, the employer and the State. It also aims to increase pension coverage, particularly among low to middle income groups and to ensure that State support for pensions is equitable and sustainable. The framework is committed to examining new models for the future of defined benefit pension schemes to ensure the sustainability of this pension model.

As Members are aware, I announced yesterday that the Government is expediting the framework proposal to move to a new defined benefits model. As the Deputy knows, the framework recognised the difficulties with the current design of defined benefit schemes and proposed an alternative approach to the design. My Department will aim to introduce this new model, following legislative changes, on 1 July 2011. This is a very tight timeframe. On the basis of this decision, the pensions regulator has announced that the deadline of 30 November for the phased submission of recovery plans is being extended further. This is in order to give schemes time to consider the impact of this new model on their funding position before they are required to submit a recovery plan. The Pensions Board will shortly announce the details of this extended timeframe.

In developing the new defined benefits model we will look at issues regarding the governance of defined benefit schemes and the basis for the funding standard, including areas such as risk management, and smoothing out effects of changes in the bond markets. Strategies for transitioning schemes to this new model will also be examined. Full consultation will, of course, take place with the pensions industry, employers, trade union and other stakeholders in developing the new model.

Once this new model is introduced and schemes have been given this additional time to develop funding proposals, we do not envisage continuing to revisit the position - in other words, there will be no further extensions. These measures should not be viewed as a silver bullet. Pension schemes still have to address their liabilities, their risks and their investment strategies in order to ensure that they are properly funded and we expect them to do that. The proposal for a sovereign annuity is also being given serious consideration. However, it must be stressed that the issue is by no means straightforward and an assessment of the benefits and risks involved for all stakeholders is ongoing. I hope the Government will be in a position to make a decision on this in the near future.