THE GOVERNMENT needs to show more urgency and bring more clarity in handling the problem of under-funding in most of the State’s private sector defined benefit pension schemes. Minister for Social Protection Éamon O Cuív had an opportunity to do so this week when he addressed a pensions conference. But he failed to allay the concerns of the pensions industry or to ease the growing fears of many pension scheme members. Most pension plans in the private sector are defined benefit, or salary based, where the income paid in retirement is generally a proportion of a worker’s final salary. But three out of four of these schemes are in deficit and the very survival of some is in question.
Despite both employers and employees making higher contributions to pension plans in recent years and despite a reduction in members’ benefits, the underfunding of these schemes has continued. In part, because pensions costs have risen as more people enjoy better health and live longer in retirement. But in large measure because the global financial crisis has greatly reduced the value of pension fund assets. These remain heavily invested in equities which have failed to recover their lost value. Accordingly, the gap between the assets and liabilities of most pension schemes has widened.
Under pensions legislation, defined benefit schemes must meet a minimum funding standard. The requirement is meant to ensure that, in event of a wind-up of the pension plan, members’ benefits are protected. At present, it would seem, just one in four pension plans meets the funding standard and passes the solvency test – a stark measure of the crisis facing the pensions industry. In response, the Government has allowed more time for pension funds to meet the funding standard. And this week, Mr Ó Cuív abandoned a November deadline for schemes in deficit to submit plans to the Pensions Board to bring these schemes back into balance, and over what time period. As yet, the Minister has set no future date for schemes to reach agreement with the board. Instead, the Government has proposed that a new defined benefit pension structure, first outlined in the National Pensions Framework earlier this year, could be introduced by next July.
The precise details of the new defined benefit arrangement remain unclear. And given the need for consultation and agreement about the new pension model – which requires legislation to give it effect – a July deadline is wholly unrealistic in the current political climate where a general election seems likely in the interim.
Over the past decade no subject has been studied more thoroughly by government to such little effect than pension provision. The most pressing problem is the huge number of defined benefit schemes in deficit. The Government’s failure to address this issue now – in the expectation that it can be more easily handled later in the context of a new defined benefit model that may not materialise – is wrong. One pensions adviser has described the Government decision as an evasion of the central problem, that “the funding standard is broken”. And it needs to be fixed, sooner not later.