Fund managers propose solution to benefits crisis
Published 28/09/2010 | 05:00
PRESSURE on company pension schemes to cut the benefits of members could be eased if a proposals put to the Government by actuaries and pension fund managers are accepted.
Retirement benefits are set to be cut in many of the defined benefit schemes that are seeking clearance from the Pensions Board -- the regulator for the pensions sector -- to make changes.
Seven out of 10 defined benefit pension schemes are in deficit, a spokesman for the board confirmed.
The value of the deficits in these schemes has been estimated at up to €30bn by the board.
The Society of Actuaries and the Irish Association of Pension Fund Managers have proposed to the Government that state or sovereign annuities be created as a means to ease the deficits.
A sovereign annuity would allow a pension fund to assess its solvency (that is, its ability to pay pension obligations in the event of wind-up) based on the interest rates that Irish state bonds are trading at.
Under Pensions Board rules, all defined benefit schemes have to meet a minimum funding standard. This is a check to see if a scheme can pay out its pensions in the event that the scheme has to be wound up.
At the moment schemes assess their solvency by referring to annuity costs (an annuity is a product you buy when retiring that pays an income for the rest of your life).
Annuities sold in the Irish market are priced off German 10-year bonds, which have fallen by 100 basis points in the past year to 2.26pc.
In contrast, Irish 10-year bonds were trading at 6.48pc yesterday afternoon.
This means annuities issued by commercial insurers are more expensive than if their price was based on Irish sovereign bonds. This is because life companies buy German and French bonds to fund the cost of providing an annuity.
The actuaries and the fund manager association have proposed that the Government change the law to allow annuity prices to, at least in part, reflect Irish state bond rates.
This would be done by allowing commercial insurers to buy Irish bonds to back up an annual. This could cut the cost of annuities by up to 20pc.
The Society of Actuaries said in a circular earlier this month: "If introduced, sovereign annuities would have the potential to make a very significant impact on funding proposals and on benefits available in the event of scheme wind-up."
However, pensions legislation would need to be rewritten to allow the life company providing the annuity to cut the pension payment if there was a default by the Irish State.
This would in effect mean that the risk of default passes from the scheme to the pensioner.
A spokeswoman for the Department of Finance said the Department of Social Protection was set to bring proposals on a sovereign annuity scheme to the Cabinet soon.