The Government recently announced a number of regulatory changes aimed at helping pressurised defined benefit schemes. These include:
- Reduction in the level of the risk reserve from 15% to 10%The risk reserve requirement was introduced late last year and it required schemes to maintain current asset levels 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 requirementsDefined benefit schemes are now allowed to 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 will, consequently, give trustees greater flexibility by increasing their funding options.
- Changes to reflect bond yieldsThe Government have also proposed a relaxation of the basis 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.
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 reserves at this time is to be welcomed.