IRELAND – LCP has warned that it will be "game over" for many mature pension schemes in Ireland if the country's funding standard is not re-written.
Conor Daly, partner at the consultancy's Dublin office, told the Irish Association of Pension Funds (IAPF) investment conference last week that the reinstated minimum funding standard (MFS) was "clearly" not in the best interest of defined benefit (DB) members, as it would lead to benefit reductions "more severe" than otherwise required.
His concerns about changes to Irish regulation were seconded by IAPF chief executive Jerry Moriarty, who likened the country's DB system to a house with a leaking roof, only for someone to insist that the house's windows needed replacing.
"Maybe you should concentrate on fixing the hole first and then worry about the double glazing later," he said.
"I don't think anybody is against the concept of having adequate pensions that are going to be provided."
But he added that, if the regulatory bar were set too high, the benefits would not be paid out due to scheme closures.
Daly said the strategy of using AAA-rated sovereign bonds to match a pension fund's cashflow remained "sound", but acknowledged that it was currently causing problems.
"The difficulty I have is when that theory finds its way into regulations without any account being taken of where we are in the capital markets, or any account being taken of the price of bonds," he said.
The actuary said the "singular focus" on cashflow problems would ignore a number of other risks to pension funds, and that the standard's current insistence of AAA-rated bonds would lead to surpluses under any other accounting approach.
He noted that, in theory, a mature, fully funded scheme would end up with a surplus of 60% after 10 years if you applied "reasonable assumptions" of 3% asset return.
"The issue is that any funding target that assumes trustees would be investing in AAA bonds is simply unaffordable, particularly for mature pension schemes," he said.
Daly said this would result in sponsors claiming an inability to pay, resulting in benefit cuts being applied to schemes "more severe than would otherwise be necessary".
He said there would furthermore be a number of disorderly wind-ups of schemes, despite their being "quite viable in the long run, in the absence of this very high funding target".
"You might see some opportunistic wind-ups, where sponsors simply want to exit the DB space and could use this ridiculously high target they are being required to fund as a reason to exit the DB space," he said.
"You have to ask – 'Is it in the members' best interest?' Clearly not, I'd suggest."
He discussed the use of Irish Amortising Bonds, equity-linked bonds and absolute-return bond funds as some of the methods used by trustees to improve their funding.
"My difficulty is that, any of these solutions that move you away from a long position on AAA bonds is moving you into a mismatch from the funding standard," he said.
Daly said the Pensions Board should take a "more holistic view of risk" and suggested the proportion of a fund's liability associated with pensioners should be "unhitched" from the current AAA bond approach.
"Essentially, a good chunk of the funding standard needs to be pulled out and re-written because, without it, I'm afraid, it's game over for a lot of the mature pension schemes," he said.
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