Ibec calls for reform of pension funding

THE FUNDING rules that govern defined benefit pension schemes should be urgently reformed, employers' group Ibec warned yesterday, as it emerged that Minister for Social and Family Affairs Mary Hanafin has advised the Government that a number of high-profile schemes are expected to collapse.

A memo sent by the Minister has been reported to warn that the total deficit in company schemes reaches €20 billion to €30 billion, and claims that 50 per cent of defined benefit pension schemes - the most valuable type of pension for an employee - could wind up over the next 12 months.

However, organisations such as the Irish Association of Pension Funds (IAPF), Irish Pensions Trust and Ibec have argued that it is the minimum funding legislation for pensions itself that is proving counter-productive. Rather than protecting pension savers, the cost of meeting the minimum funding standard for employers means they are more likely to close their schemes.

Defined benefit pension costs are now becoming a "bottomless pit" for employers, Ibec said.

The minimum funding standard, which is monitored by the Pensions Board, states that a company's pension scheme must at any given time have enough assets to be able to meet all of its current and future benefit promises were it to be wound up.

Companies that fail to meet the standard are obliged by the Pensions Board to put in place funding proposals through such means as higher contribution rates or a reduction in promised benefits in order to recover the deficit.

Ibec director general Turlough O'Sullivan said yesterday that it was time that the Government confronted the "serious difficulties" which defined benefit pension schemes are facing.

"The current obligation on schemes to be 100 per cent funded on a discontinuance basis is not sustainable," he said.

According to pension industry estimates, three out of four defined benefit schemes could fail to meet the funding standard, compared to just one in four at the end of 2006.

"Employer contributions have had to rise significantly in recent years simply to meet the draconian discontinuance funding standard," Mr O'Sullivan said.

Ibec also called for reform of the rules governing the choices available to defined contribution company scheme members on retirement.

At present, members of such schemes must use their pension fund to buy an annuity, meaning their retirement income is forever tied to the economic conditions that prevailed at the point at which they retired.

Ms Hanafin indicated last week that the Government was "sympathetic" with their predicament and was considering allowing them to defer purchasing an annuity.

Why are pensions in trouble?

A form of deferred pay, company pensions schemes are the most important of all employee benefits. But their existence in their current guises is under serious threat. After suffering under the weight of longer average life expectancy, defined benefit schemes have been torn apart over the past decade by lower-than-expected investment returns from the equity markets.

These schemes, which promise to pay retirees a percentage of their final salary for each year of service, have been in decline for some time. Five years ago, UK companies took one look at their escalating liabilities and raced to close their schemes to new members.

Irish companies have been slower to move, but there are signs that the current bear market will be the undoing of defined benefit schemes here.

Irish pension funds have lost 33 per cent of their value over the last 12 months, with more than 9 per cent of that decline occurring in October.

On a 10-year basis, funds are up just 1.9 per cent. With inflation averaging at 3.8 per cent over this period, this means that in real terms the value of money put into pensions during the boom years declined in real terms.

There are currently 99,800 pension schemes with 800,400 members. Two-thirds belong to defined benefit schemes. But in the private sector, most people belong to defined contribution schemes, which are riskier and less valuable to employees.

Almost 200 defined benefit schemes closed last year.