Pensions Board Presentation On DB Security

1. Pensions Board PresentationOn DB Security Brendan Kennedy Chief Executive Tuesday 23 September 2008 1

2. 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

3. 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

4. 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

5. Options Now • Issue • Protect members without discouraging pension provision • 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.

6. Sustaining Pensions • Issue: • Protect Members • Protect pensions (given DB model not sustainable under Article 17)‏

7. 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.

8. 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;

9. 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.

10. 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.

11. 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.

12. A Further Option? • Question: • Could a two tier funding standard protect members and pensions, given DB model not sustainable under A17?

13. 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

14. 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

15. 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

16. 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

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

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

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

20. 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??

21. Discussion