The Pensions Board has published new Funding Standard Guidance for defined benefit pension schemes. This, coupled with the Social Welfare and Pensions Act 2012, constitutes the new funding and regulatory regime for defined benefit pension schemes in Ireland.
The current statutory minimum funding standard (MFS) which was suspended since 2008 has now been restored.
A risk reserve has been introduced into the funding standard, designed to protect the scheme against the volatility of certain investments. This acts as a buffer and is not part of the MFS or solvency liabilities of a scheme.
This funding standard reserve (FSR) is 15% of the scheme's liabilities, calculated on an MFS basis, less the scheme's holdings of EU government bonds or cash, plus the net increase in the scheme's liabilities as compared to its assets which would result from a 0.5% drop in interest rates.
The requirement to satisfy the FSR arises from 1 January 2016 but actuaries must certify whether or not the scheme satisfies the FSR in addition to the MFS from 1 June 2012. It is estimated that the FSR may increase the funding cost of schemes by 10-15%.
Non cash options for satisfying the FSR include the use of a contingent asset or an undertaking provided by the sponsoring employer to make a payment to the scheme if certain events arise, such as a scheme wind up.
Schemes can now get full credit for matching pensioner liabilities by purchasing sovereign annuities subject to compliance with statutory requirements. The difference between a traditional annuity and a sovereign annuity is that under a sovereign annuity the agreed payments can be reduced if there is an event of non-performance in relation to bonds to which the annuity is referenced. Where a scheme holds EU sovereign bonds and pending the development of an active sovereign annuity market, the reduction in pensioner liabilities could, subject to certain conditions, be up to 20%.