DB funding deadline extended

By Niall Murphy, Wednesday, 13th October 2010 | 0 comments
At the IAPF Annual Benefits Conference this morning Eamon O’ Cuiv, Minister for Social Protection announced the extension of the end November 2010 deadline for submission of funding proposals for underfunded DB schemes to the Pensions Board to an undefined date.
 
He also indicated that he would be working to push through legislation by July 2011 to introduce a new DB model as outlined in the National Pensions Framework (see below extract).
 
The proposal to overhaul DB legislation and introduce a new model by July 2011 is very ambitious, not least because of the sketchy nature of what was outlined in the Framework. In reality the extension of funding proposals and proposed introduction of a new model will mean most DB schemes will now take more time before determining how to restructure to eliminate their pensions’ deficits. The news of the extension was greeted positively by practitioners on the basis that, had the deadline remained intact along with current funding requirements, many viable DB schemes may have had no choice but to significantly reduce benefits or even wind up.  
 
Extract from National Pensions Framework on future DB Model
 
5.6.2 Future of DB Provision
The Government recognises that there are significant problems with the typical current design for funded DB schemes. This design has proven to be too inflexible to deal with recent investment losses and with increasing life expectancy and, as a result, increasing numbers of employers are considering the sustainability of their DB schemes. DB schemes are very beneficial for individuals due to the certainty they can provide and the fact that individuals are not required to make investment decisions.
For these reasons, it is hoped that the measures introduced to support DB schemes recently will ensure the survival of this type of pension provision.
However, it is recognised that in some circumstances, more significant re-structuring may be necessary in order to secure the viability of a scheme. Changes to schemes are, of course, a matter for negotiation at scheme level between employees, unions, trustees and employers.
 
However, the Government considers that where trustees are considering a radical restructuring of a scheme, the design set out below might be appropriate: 
  • Fixed contribution rates for members and employers;
  • Because contribution rates are fixed, benefits must be flexible in the event of investment losses or other adverse experience; and
  • The benefit design must accommodate increases in life expectancy. 
One possible way in which DB schemes could be re-structured is outlined in  5.1.
 
Such a structure could also offer a potential solution to overcome the structural difficulties currently associated with existing DB schemes. It would seek to address the drawbacks of the current approach while avoiding the excessive risk to which members of defined contribution schemes can be exposed. The re-structured scheme would consist of core benefits which would have to be guaranteed and non-core benefits, which would be flexible depending on economic conditions. This is not a hybrid scheme in the traditional sense as the non-core benefits would have to be secured in years of good returns, unlike hybrid schemes which only guarantee the DB element.
 
In reviewing the funding standard, consideration will be given to only applying the funding standard to core benefits where this type of design has been adopted.
 
5.1
Possible Outline of a Re-structured DB Scheme
 
Key Features
  • Fixed contribution rates for members and employers;
  • Flexible benefits (in the event of investment losses or other adverse experience);
  • Increases in life expectancy accommodated in benefit design; 
Benefit Level and Re-valuations
Benefits would be expressed in current money.
Each year, all benefits (current employees, former employees, retired members and other beneficiaries) would be re-valued equally, but only to the extent that the scheme could afford it.
 
In years of negative investment returns, little or no revaluations would be granted, while, in years of positive returns, trustees would seek to provide the revaluation that had not been paid in previous years. In setting the revaluation each year, trustees would be obliged to demonstrate that the rate declared was sustainable and consistent with the long-term viability of the scheme.
The promised level of benefits would be significantly lower than under a typical current DB scheme but on the other hand, they would be provided to a greater degree of certainty.
 
Contribution Rates
Contribution rates would be calculated on a basis intended to revalue benefits in line with inflation, before and after retirement. However, only these core benefits granted plus revaluations to date would be guaranteed, and this would be underpinned by regulation.
 
Benefits of this approach

This suggested approach provides employers with certainty and predictability in their pension contributions. It also provides scheme members with a clearer understanding of the benefits that their scheme will provide them, and gives them a clearer basis for retirement planning.

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