Pensions Board Presentation On DB Security Brendan Kennedy Chief Executive Tuesday 23 September

Story 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 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.  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 Now Issue 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 Pensions Issue:  Protect Members  Protect pensions (given DB model not sustainable under Article 17)‏

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 conditional indexation approaches  Moral hazard in relation to employer behaviour;  Administrative costs;  Complexity for members in understanding their entitlements;  Fairness outcomes for members; and  Whether there is sufficient demand for these schemes from scheme sponsors.

The key issues associated with conditional 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?  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 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 FS, at lower level but...  Section 50 to apply to active and deferred benefits and future indexation may be restricted

Key Issues  Untried, Untested  Requires considerable regulatory changes  Technically demanding  Difficult to communicate  Employer guarantees  Timing

Summary of Proposals  A17 FS by November  Collective DB schemes on industry basis in parallel  Two tier FS an option?

Next Steps  Alignment with GP process  DB security group  These suggestions  Outstanding issue; Robins?

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??

Discussion