Pensions Board PresentationPensions Board PresentationOn On

DB SecurityDB Security

Brendan Kennedy

Chief Executive

Tuesday 23 September 2008

1

Story So FarStory So Far Article 17 Robins judgement Funding Standard Cross border pensions Pension schemes -v- financial institutions Security, cost, voluntarism – tradeoffs DB Security Group Green Paper

Recent DevelopmentsRecent Developments Stock markets / credit crunch

Deficit fears / pressure on funding standard / threats to

security

EU Consultation on Solvency and Pensions launched

French Presidency and Solvency

Recent Developments contd.Recent Developments contd. Market Development – Allianz Strength of promise -v- strength of pension Increased pressure and momentum Future of DB? Windows of opportunity closing

Green Paper A17 deadline Current state of schemes

Options NowOptions NowIssue

1. Protect members without discouraging pension provision

2. Meet European obligations

Proposal Funding Standard to be amended in advance of EU

consultation in November to apply Article I7 to cross border schemes for Irish and non-Irish members.

Sustaining PensionsSustaining Pensions

Issue:

Protect Members

Protect pensions

(given DB model not sustainable under Article 17)

Sustaining Pensions contd.Sustaining Pensions contd.Proposal:

Collective risk-sharing

Either increase normal pension age for future accruals in line with life expectancy- hybrid schemes - cash balance schemes or Dutch model

Average salary, annual indexation based on health of the scheme, fixed contribution so neither nominal nor indexation benefits are guaranteed.

Key Elements of Dutch Approach

It gives the employer complete control over costs, as the contribution rate is fixed;

Based on this contribution, benefits are calculated as in a DB scheme;

If the scheme is underfunded, revaluation and indexation can be withheld;

Key Elements of Dutch Approach

If funding levels drop too low to allow payment of basic benefits, the scheme can either increase normal pension age or reduce basic benefits; and

Risks are shared between scheme members – unlike in pure DC arrangements

The approach allows for economies of scale given that the scheme is industry-wide. This also facilitates professional administration by third parties.

The key issues associated with The key issues associated with conditional indexation approachesconditional indexation approaches

Moral hazard in relation to employer behaviour;Administrative costs;Complexity for members in understanding their

entitlements;Fairness outcomes for members; andWhether there is sufficient demand for these

schemes from scheme sponsors.

The key issues associated with The key issues associated with conditional indexation approachesconditional indexation approaches

The plans that have evolved in the Netherlands offer a promising offer a promising way to balance risk between employers, active workers and retirees and merit further consideration as an option to support pension provision and risk management in Ireland.

A Further Option?Question:

Could a two tier funding standard protect members and pensions, given DB model not sustainable under A17?

A Further Option?

Key elements of this approach are:

Basic liability calculation based on bond rates. No allowance for excess equity returns

An additional risk reserve could be based on the schemes' asset/liability matched position

A Further Option?A Further Option?

If on annual test, assets fall below 105% of basic liability, solvency must be restored within a year. If not, benefit accrual would be forbidden and Section 50 restrictions imposed

If assets fall below the additional reserve, a three year restoration plan must be implemented

Limited DB schemes also Subject to Limited DB schemes also Subject to FS, at lower level but...FS, at lower level but...

Recovery periods of up to 10 years

Recovery plans simplified and self certified and no allowance for excess equity returns and would include stability margin

Schemes obliged to buy annuities for pensions in payment

Limited DB schemes also Subject to Limited DB schemes also Subject to FS, at lower level but...FS, at lower level but...

Section 50 to apply to active and deferred benefits and future indexation may be restricted

Key IssuesKey Issues

Untried, UntestedRequires considerable regulatory changesTechnically demandingDifficult to communicateEmployer guaranteesTiming

Summary of Proposals A17 FS by November Collective DB schemes on industry basis in

parallel Two tier FS an option?

Next StepsNext Steps Alignment with GP process

DB security groupThese suggestionsOutstanding issue; Robins?

Next Steps contd.Next Steps contd. Options remain:

employer guarantee PPF Govt rescue

A17: DB and SAI Guidance and/ or legislate Collective DB: Green Paper / Govt / Soc partners Two Tiers: Further Work??

DiscussionDiscussion