Queen Elizabeth having tea with fellow pensioners.

Mercer in its Pre-Budget 2009 Submission has called on the Government to consider increasing the limits for individual pension contributions for Irish Defined Contribution (DC) pension plans and Personal Retirement Savings Accounts (PRSA). On Tuesday, business lobby group IBEC, warned that unless the funding rules governing defined benefit pension schemes are urgently reformed a number will collapse, with benefits being severely restricted.

Mercer says Irish mortality has improved in recent years, and as a result life expectancy has increased significantly. Further significant increases are expected based on recent trends in mortality rates. The Central Statistics Office recently published Population and Labour Force Projections for the period 2011-2041; on the basis set out in the CSO Projections, life expectancy for a man aged 65 is projected to increase from 21 years in 2008 to 26 years in 2048. A woman aged 65 in 2008 can expect to live a further 23 years, and this is projected to increase by a further year per decade over the next 40 years.

Aisling Kennedy, Senior Consultant in Mercer's retirement business said: “Higher life expectancy has a direct impact on the cost of funding for a pension payable from age 65. At the same time, the recent wave of global stock market declines has eroded accumulated pension savings. The average pension managed fund has lost almost a quarter of its value over the first nine months of 2008. Individuals who are members of DC pension schemes or are saving for their pension through a PRSA now have a great deal of lost ground to make up.”

Currently, an individual aged under 30 can contribute only 15% of earnings to a pension fund, while those in their thirties can contribute 20% of earnings. However, for a 25 year old, the estimated contribution needed to fund a pension similar to a typical defined benefit scheme (i.e. a pension of two-thirds of pensionable earnings at age 65, a spouse's pension of 50% of the member's pension, and inflation protection for the pension once in payment up to a limit of 3% per annum) is of the order of 30% of pensionable earnings. The current contribution limits rise with age i.e. individuals can contribute 25% of earnings in their forties, 35% in their fifties and 40% of earnings once they reach age 60.

Kennedy noted: “The current contribution limits are discriminatory against individuals who are making personal pension provision on a DC or PRSA basis. Even if an individual contributes at the maximum rate throughout a forty-year period from age 25 to age 65, the projected pension available to him or her at age 65 is less than two thirds of earnings (allowing for provision for a spouse's pension and increases to pensions in payment). In addition, many people will encounter periods during which they are not in a position to make significant pension contributions, for example a period of unemployment or a period during which the cost of supporting dependants is high.”

Speaking at the opening of the IBEC Human Resources Summit, in Dublin on Tuesday IBEC Director Brendan McGinty warned that unless the funding rules governing defined benefit pension schemes are urgently reformed a number will collapse, with benefits being severely restricted.

McGinty said:“It is time that the Government and the Pensions Board as the regulator, faced up to the serious difficulties that defined benefit pension schemes are facing. The current obligation on schemes to be 100% funded on a discontinuance basis is not sustainable."

According to pension industry estimates, three out of four defined benefit schemes could now fail to meet the funding standard compared to just one in four at the end of 2006. Currently there are 99,802 schemes with 800,398 members of which 66% are defined benefit schemes and 34% are defined contribution schemes.

“The problems facing employers is being exacerbated by poor investment returns, declining asset values and longer life expectancy. Employer contributions have had to rise significantly in recent years simply to meet the draconian discontinuance funding standard. Defined benefit pension costs are increasingly regarded as a ‘bottomless pit',” said McGinty.

“The funding standard and other regulatory requirements are leading to the demise of defined benefit pensions. Employers have a responsibility to act: if they increase payments beyond what can be afforded, this threatens the viability of employment and of the business.

“Given that we are now in more difficult economic circumstances, employers will continue to examine the balance of pension costs. IBEC believes that continuing the current wind-up standard is only hastening the flight from defined benefit scheme provision.”

IBEC has proposed that where a company scheme has a difficulty meeting the actuarial funding requirement and where the sponsor employer is prepared to offer to sustain the scheme in the event that a short-fall occurs, then that employer covenant should be accepted by the Regulator, without the need for further immediate funding. IBEC has raised the issue as part of its response to the Green Paper on pensions.