AMONG THE world’s developed economies, no country performed worse than Ireland last year in an important area of investment: pensions. Irish pension funds lost one-third of their value when, on average, the industrialised world’s pension schemes fell by one-fifth. The Organisation for Economic Co-operation and Development (OECD) estimated last week that in 2008, $5,400 billion (€3,290 billion) was wiped off the value of pension funds in member countries. However in the first six months of this year, the recovery in equity markets has meant global pension schemes – including Ireland’s – have made positive returns.
The difference in relative performance of the various funds is partly explained by the make-up of their investment portfolios. In December 2007, Irish pension funds held two-thirds of their assets in equities. And because shares were the asset class hardest hit by the collapse in global financial markets, Irish funds fared badly. Since then, Irish pension funds have adjusted their asset allocations and reduced their exposure to equities. By doing so they have lowered their investment risk but they have also limited their potential investment return.
In Ireland, half the country’s workforce has made no private pension arrangements. In retirement, many will rely on the flat rate State pension as their sole form of income support and will experience a sharp drop in their standard of living. The State pension amounts to one-third of the average industrial wage and, given the parlous state of the public finances, any improvement seems unlikely for some time. For those investing in a private pension to supplement their State pension, the outlook is scarcely encouraging. Many of the defined benefit schemes, where pensions are based on an employee’s final salary and length of service, are closed to new members. Most of these schemes are in breach of the minimum funding standard requirement and some risk being wound up.
The report of the McCarthy group on public spending highlighted the sizeable gap between pension payments in the private and public sectors, and stressed the need for reform. Its advice was similar to that given by the OECD a year ago. It recommended that public sector pension increases, which are indexed to public sector earnings, should be changed. Instead pension adjustments should follow the practice in private defined benefit schemes where increases are indexed to prices rather than wages. The December budget should reveal whether the OECD’s advice has been heeded.