Schemes fail on funding rules

Four out of 10 defined benefit pension schemes failed to meet their statutory funding requirements in 2004, according to the Pensions Board's annual report.

Out of the 596 occupational schemes that submitted actuarial funding certificates to the board, 240 did not meet the minimum funding standard, which is designed to protect members in the event schemes are wound up.

The 240 schemes have made funding proposals to the board. In order to satisfy the minimum funding rules, employers must either increase their contributions, ask employees to increase their rate of contribution, reduce the promised benefits or a combination of these options. Recent figures from the Pensions Board relating to the first five months of 2005 show that a further 126 schemes or 51 per cent of the schemes who have submitted funding certificates this year are also failing to meet the minimum standard.

Since September 2003, pension schemes can apply to the Pensions Board for an extension of up to 10 years in which they can get their funding back on track. By the end of May 2005, the board had granted over 140 applications for an extension.

Defined benefit pension schemes are the most valuable type of pension for workers, as they guarantee that members will receive a pension based on a percentage of their salary for each year of service. The biggest risk for employees is that the schemes will become insolvent.

But it is also feared that the strict funding standard combined with new accounting regulations has pushed employers into closing defined benefit schemes to new members or winding up the schemes completely in order to control costs.

The Pensions Board's annual report shows that there are now twice as many people in defined contribution pensions as there are in defined benefit pensions. Employers typically contribute much less to these schemes.

Membership of both types of occupational pension schemes increased marginally in 2004, however 142 defined benefit schemes were wound up or frozen. By the end of 2004, over 46,000 people had opened Personal Retirement Savings Accounts (PRSAs).

Anne Maher, the Pensions Board's chief executive, said the board was now following up on a substantial number of employers who are suspected to be breaking the law by failing to give employees who are excluded from occupational schemes access to a PRSA.

The board carried out 284 random audits on employers last year. It received 61 reports from whistleblowers in relation to PRSAs. It prosecuted four employers or scheme trustees in 2004 and a further eight this year.