Page 14 - IrishPensions Spring Edition
Basic HTML Version
Irish Pensions Magazine Spring 2013
14
benefit” which may have for example no indexation
2
• DB-DC conversion schemes – i.e. where the DB
benefit converts to DC at the point of leaving
service, death or retirement eliminating longevity
risk
• Fluctuating pension – where benefits above the
core benefits can decrease in payment if necessary
The DA from existing DC models suggested by the
DWP paper are:
• DC with bonuses on top of a minimum return – i.e.
with profits’ funds
• Deferred annuity purchase schemes
• Targeted/managed DC i.e. where the projected
outcome is regularly reviewed, and the asset
allocation, contributions or ambition benefit are
varied to realign the projection with the flight-path
• and the ‘new’ ideas are:
• DC with guarantees - either a mutualised
guarantee; an insurance based guarantee or an
employer-sponsored “smoothing fund” guarantee.
• Collective DC – in which the target ambition benefit
is paid if the collective funding still supports it but
if not benefits and indexation are reduced rather
than contributions increased
How does this compare to the Dutch version
of DA?
Dutch DB is already DA (using the UK definitions).
The existing Dutch DB system involves conditional
increases and in extreme circumstances conditional
benefits (i.e. it is the “Core DB” solution above) but
contributions must also be increased. The conditional
benefits have, in the past, been sufficient to protect
schemes from having to make reductions in benefits in
payment. The current economic circumstances mean
that for many schemes this is no longer the case.
In Dutch “Collective DC” the contributions are fixed
and any funding deficit is met by benefit/indexation
adjustments. The latest Dutch proposals involve other
flexibilities such as a life expectancy based retirement
age.
It is notable that none of these operational or proposed
Dutch DA structures would appear to meet the full set
of UK aspirations since uncertainty over retirement
age and benefit conditionality mean that members
cannot be certain about their final pension outcome.
Is DA achievable or a part of an Irish solution?
The UK government intends to investigate what
barriers exist to using DA schemes. Answers will not
be difficult to find. DA from DB options risk onerous
DB regulation; DA from DC is more expensive than
ordinary DC but the greater certainty of benefit is
not transparent. Given that the existing DA options
are not widely used, it would appear that legislative
change will be necessary to promote the new DA
designs. There is no reason to suppose that Ireland
is substantively different from the UK in this regard.
In theory, DA solutions deliver more stable pension
outcomes than pure DC schemes with less risk than
final salary DB. The challenge is that DC offerings
are already well-developed and are marketed as the
cheapest and easiest solution for employers. DC
has many failings but it has a cost control simplicity
for “once bitten, twice shy” employers nervous about
pension complexity and regulation. That is a lot of
inertia for a new design to overcome in a voluntary
pension market-place.
DA’s grey outcomes might be a more traditional
pension colour than this season’s stark black and
white but DA schemes run a real risk of being just
another passing pensions fashion unless they receive
a significant boost from legislators and policy-makers.
1 Reinvigorating workplace pensions, November 2012 – available
on line at
2 NB UK DB pension benefits accruing after 6 April 1997 must
include an element of indexation in payment so no indexation on
part of a DB benefit would be lighter regulation.
Article Author
Philip Smith
Partner
Arthur Cox
Expert Opinion
DATE FOR YOUR DIARY!
IAPF BENEFITS SEMINAR
& AGM
30th May 2013
Radisson Blu Royal Hotel,
Golden Lane, Dublin
4.40pm – 6.00pm
Further Details at -
