Seán Fleming (Laois-Offaly, Fianna Fail)
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To ask the Minister for Social Protection in relation to defined benefit pensions schemes if he will reconsider the minimum funding standard and the changes proposed to deal with pension matters by her Department in view of the fact that any change in the rules could contribute to the winding up of pension funds rather than providing long term security for those funds; and if she will make a statement on the matter. [46781/12]

Joan Burton (Dublin West, Labour)
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The Funding Standard provides a benchmark against which the “health” of a scheme can be tested. The existence of the Funding Standard itself is not the central issue in relation to whether a scheme is properly funded. Rather the responsibility rests with the employer and the trustees for ensuring that the scheme is properly funded and managed. However, the Funding Standard does provide the regulatory mechanism for ensuring that a scheme can live up to the “promised” level of pension benefits.

The Pensions Regulator suspended the Funding Standard four years ago, following the downturn in the financial market, to give trustees/employers an opportunity to assess the impact on pension funds and to enable them time to develop responses to the challenge. The re-introduction of the Funding Standard was delayed on a number of occasions pending changes to legislation which were designed to help trustees respond to the funding challenges facing pension schemes. Among the measures introduced during that time was provision for sovereign annuities and a requirement for schemes to hold a risk reserve A sovereign annuity provides an option to trustees to purchase annuities at less cost than traditional annuities. Sovereign annuity products are now available and it is expected that the range of products will grow over the coming months.

The requirement for a risk reserve is being introduced from 2016, to provide a level of protection for scheme members against future volatility in financial markets. It is accepted that the requirement for a risk reserve presents an added challenge for schemes. However, guidance issued by the regulator identifies options which the scheme can consider in meeting this requirement by 2023. It is estimated that the requirement for a risk reserve will add 8% to the liabilities of a scheme.

The Pensions Board recently announced that the timeframe for pension schemes to submit funding proposals has been extended to 30 June 2013. This extension will give schemes additional time to help them address the issues they are facing. It should be noted that the changes to the Funding Standard are being implemented over the next 11 years, not immediately. This is the longest recovery period generally allowed in any European country. The fundamental problem facing pension schemes is that pensions have become significantly more expensive, because of increasing life expectancy and lower than expected investment returns which are reflected in increased annuity rates. The recent facility to purchase sovereign annuities will enable a higher rate of return to apply, but only in the case of those schemes which actually purchase the bonds/annuities.

While it is acknowledged that increased annuity rates are causing significant problems for pension schemes, this reflects the real cost of benefits. If the Funding Standard is changed in such a way that understates the cost of the benefits (by using prescribed non-market rates, or by using sovereign bond rates without a corresponding commitment to buying sovereign annuities on wind-up), then the members may be misled about the ability of the scheme to meet its obligations, and the on-going funding of the scheme will not be enough to close the deficit. This would be likely to make things worse, as future benefits would accrue at a faster rate than they were being paid for. Overall, the changes made to the regulatory structure for defined benefit schemes are intended to bring increased stability to pension promises in the future and lessen schemes’ exposure to risks.