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Pensions Board Presentation On DB Security Brendan Kennedy Chief Executive Tuesday 23 September 2008 Pensions Board Presentation On DB Security Brendan Kennedy Chief Executive Tuesday 23 September 2008 1

Story So Far Article 17 Robins judgement Funding Standard Cross border pensions Pension schemes 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 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 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 A 17 deadline Current state of schemes

Options Now Issue 1. Protect members without discouraging pension provision 2. Meet European obligations 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 I 7 to cross border schemes for Irish and non-Irish members.

Sustaining Pensions Issue: Protect Members Protect pensions (given DB model not sustainable under Article 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 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 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 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 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 Whethere is sufficient demand for these schemes from scheme sponsors.

The key issues associated with conditional indexation approaches The plans that have evolved in The key issues associated with conditional indexation approaches The plans that have evolved in the Netherlands 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, A Further Option? Question: Could a two tier funding standard protect members and pensions, given DB model not sustainable under A 17?

A Further Option? Key elements of this approach are: Basic liability calculation based on 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, 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 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 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 Key Issues Untried, Untested Requires considerable regulatory changes Technically demanding Difficult to communicate Employer guarantees Timing

Summary of Proposals A 17 FS by November Collective DB schemes on industry basis Summary of Proposals A 17 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 Alignment with GP process DB security group These suggestions Outstanding issue; Robins?

Next Steps contd. Options remain: employer guarantee PPF Govt rescue A 17: DB and Next Steps contd. Options remain: employer guarantee PPF Govt rescue A 17: DB and SAI Guidance and/ or legislate Collective DB: Green Paper / Govt / Soc partners Two Tiers: Further Work? ?

Discussion Discussion