A number of regulatory changes aim to assist defined benefit (DB) schemes that are faced with funding pressures. These include:
- Reduction in the level of the risk reserve from 15% to 10%
The risk reserve requirement was introduced late 2012 which required schemes to maintain current asset levels at some 15% over and above current liabilities. The risk reserve requirement was intended to provide a buffer against financial volatility but it was clear that many defined benefit schemes would struggle to maintain this risk reserve as well as meeting the existing funding requirements. Consequently the reduction in the level of the risk reserve to 10% will be a welcome announcement for many schemes.
- Wider range of assets that can be used to reduce the reserving requirements
Defined benefit schemes can now use a wider range of assets to reduce the burden of the risk reserve including certain corporate bonds, bonds guaranteed by EU Member States but not necessarily issued by them and bonds issued by various bodies which are considered to be financially secure (e.g. the IMF and the European Investment Bank). Previously trustees could only reduce the impact of the risk reserve by investing in sovereign bonds and cash instruments. This change gives trustees greater flexibility by increasing their funding options.
- Changes to reflect bond yields
The Government has also proposed (but not yet implemented) a relaxation of the criteria used to value pensioner liabilities where the scheme holds sovereign bonds. The change could have a potentially significant impact on the funding standard requirement for schemes with substantial pensioner liabilities.
- Additional Pensions Board powers
With effect from 28 June 2013, the Pensions Board has been given the power to wind up a pension scheme in circumstances where a scheme is underfunded and the trustees and the employer are not in a position to adopt a funding proposal or where the trustees of a scheme fail to comply with a Pensions Board direction to restructure scheme benefits.
The risk reserve requirement was introduced at a time of severe economic downturn in Ireland when a significant proportion of defined benefit schemes were struggling to meet their existing funding requirements. For such schemes, any measure which reduces the additional burden of the risk reserve at this time is very welcome.