IRELAND – Healthy sponsors should no longer be allowed to abandon their underfunded Irish defined benefit (DB) schemes, the OECD has argued.
Reviewing the entirety of pension provision in Ireland, the OECD recommended the introduction of compulsion to increase private pension coverage, but also called for several changes to DB provision that would strengthen the security of benefits and backed an overhaul of last year's revised minimum funding standard.
The report identified what it regarded as several weaknesses within current DB provision, including legislation allowing companies to wind up schemes "without creating a high-priority debt on the employer".
While the OECD acknowledged that the regime was recently strengthened when investment-grade companies were allowed to replace the incoming risk reserve with a binding guarantee, it said the framework could be "further strengthened".
"For example, healthy plan sponsors should not be allowed to 'walk away' from DB plans unless assets cover 90% of pension liabilities," the report said, suggesting the health of a company could be judged by its ability to generate positive net revenues.
"This funding requirement would introduce some type of guarantees for members, and it would allow at the same time some degree of risk sharing."
While considering the idea of a pension protection arrangement – similar to the security nets in place in the US and the UK – the OECD admitted that this would only work if a sponsor had the "primary obligation to fund shortfalls".
Report co-author Pablo Antolin, principal economist in the OECD's private pensions unit, acknowledged the introduction of a protection scheme was something the OECD believed Ireland should keep in mind.
However, the level of support for DB was one of the reasons he doubted such an arrangement would come about.
"It is very clear from our discussions with everybody in Ireland that even people who support DB acknowledge that DB will not be here in the future – so what is the point of implementing a pension protection fund if, in the long term, you don't think there will be DB, and, in the short term, it doesn't solve the problem?"
He added that, therefore, the best way to increase funding ratios was to be lenient in times of crisis, but "very strict when the good times come".
The OECD was further highly critical of the recently reinstated minimum funding standard, noting that it remained "undemanding" in comparison with other countries, as funds were not required to hold assets "over and above the value of their liabilities".
It also raised concerns that the standard offered a "strong incentive" for pension funds to invest in government debt, such as through sovereign annuities, while noting that the product could be used to offset risk-reserve requirements – while at the same time transferring the risk of default from any of the underlying bonds directly to members.
"An additional concern is that using a higher discount rate lowers the net present value of liabilities and may as a result hide funding problems," the report said.
The industry has previously expressed similar concerns, last year noting that the incoming risk reserve – currently 15% of assets, minus cash and euro-zone bonds – could be increased by the minister for social protection to as much as 50%.
No comments yet