PENSION FUNDS may be granted more flexibility in funding retirement income, the Minister for Social Protection said yesterday.
Addressing the Irish Association of Pension Funds’ annual conference, Éamon Ó Cuív said the proposal was receiving “thorough consideration” by his department, although no decision has yet been made.
The Irish Association of Pension Funds and the Society of Actuaries in Ireland have been lobbying Government to allow the use of sovereign annuities – essentially availing of higher interest rates of Irish government bonds to reduce the overall cost of providing pensions to retired private sector workers.
At present, pension funds are obliged to use only the return on long-term German government debt in calculating their adherence to the minimum funding standard (MFS).
The standard lays down the minimum level of assets that a defined-benefit scheme must hold to meet its obligations to members. While most of those obligations relate to people still in employment, some of whom will not retire for many years, the MFS states that a fund must hold sufficient assets to buy an annuity today to meet the accrued benefits of members in the event of the scheme being wound up.
In assessing the cost of that annuity, they must use the yield on long-term German bonds. However, the historically low yield of such bonds is ratcheting up the cost. As of last night, the yield on German bunds was 2.3 per cent, while equivalent Irish 10-year bonds were offering a 6.4 per cent yield.
Mr Ó Cuív said he was not yet able to tell the industry whether the proposal would be accepted by Government but promised to inform pension funds as soon as possible.
Rachel Ingle, chairwoman of the benefits committee, welcomed the Minister’s comments but said a decision on sovereign annuities was required urgently to ease pressure on pension funds.
However, another senior industry source said there was still considerable doubt on whether the change would be allowed, saying practical market sensitive issues remain to be overcome. Chief among these is how to address in any legislation the theoretical possibility of a sovereign default.
