As expected, the Social Welfare and Pensions Act 2012 went through the Oireachtas quite quickly and it became law on 1st May 2012. This means that the primary legislation governing how defined benefit (DB) pension schemes must deal with their funding challenges is now in place. 

Summary of Main Provisions

• DB schemes will be required to hold a risk reserve in addition to covering minimum funding standard (MFS) liabilities.  The risk reserve is calculated as:
     

DB schemes must start reporting on their ability to meet the risk reserve from 1 June 2012 onwards (any actuarial funding certificate submitted with an effective date on or after this date must be accompanied by a new funding standard reserve certificate).  If a scheme does not meet the funding standard and risk reserve requirement at the first measurement date on or after 1 January 2016, a funding proposal must be submitted to the Pensions Board that is designed to put the scheme in a position to meet the combined requirements within 3 years or over such longer period as the Pensions Board may allow (likely to be 11 years in reality).
     

• Additional powers are granted to the Minister and the Pensions Board, such as the power to determine the actuarial basis for calculating MFS liabilities, the power to issue guidelines regarding the requirements for funding proposals and the power to take more wide-ranging action where a scheme fails to meet the MFS or the risk reserve requirement.

Changes in Final Legislation

The final Act contains some technical differences that were overlooked in the original Bill as follows:

• The Act confirms that any DC assets within a DB scheme (e.g., AVCs, transfers-in or DC assets in hybrid schemes) are excluded from the risk reserve requirement.
     
• The Act contains a provision that allows revaluation of preserved benefits of leavers to be negative if price inflation is negative; previously, revaluation could not be less than zero.  Also, the Minister is given the power to specify any rate of revaluation by regulation.

Detailed Pensions Board Guidance

As previously reported, the Act sets out the basic requirements, but we must await detailed guidance from the Pensions Board - this is expected to be published shortly.  This guidance will include the timelines for submitting funding proposals and other technical guidance (particularly where Section 50 benefit reductions are required), the period over which the risk reserve can be funded and the allowance that can be made to MFS liability calculations when trustees invest in sovereign bonds or plan to buy sovereign annuities.