Pensions consultants Hewitt Associates said today at a seminar in Dublin that 90% of Defined Benefit (DB) pension plans would currently fail to meet the minimum funding test.
The Hewitt seminar, Financial Turmoil is wreaking havoc on Retirement Investment Plans - How should you react? revealed that while private pensions worldwide had lost $5.4 trillion to December 2008 (OECD), Irish pension plans have lost an estimated €30 billion during the same period. Hewitt estimates that Irish pension plans have lost €3 billion in the first quarter of 2009 alone.
These losses have led to the current Defined Benefit funding crisis which could result in the state becoming the sole provider of pensions for the majority of Defined Benefit pension fund contributors.
Kieran Barry, Managing Director, Hewitt in Ireland, said, “This failure reflects investment strategies incorporating a high level of investment in the Stock Market and the dramatic falls in these values. The failure is also due to improving life expectancy which means pensions must be paid for longer thus making them more expensive.
“From an Irish perspective, the Celtic Tiger had the effect of significantly escalating salaries thereby creating very expensive benefit promises."
While the phenomenon of pension schemes failing the funding test is not new, the current environment is a very different one according to Kathy Murphy, Director and Actuarial Practice Lead at Hewitt.
"The problem today is the scale of the deficits that exist coupled with the economic climate. This means that the old approaches of closing schemes to new employees, increasing contributions, moving to the Hybrid model will no longer solve the problem.
“Additional solutions around changes in asset investment, other non-cash financing options for employers as well as more radical restructuring and reduction of benefits - even outside the box concepts such as reducing benefits accrued to date may need to be considered. Compromise will be required from all stakeholders if Defined Benefit members are to continue to have a pension and a job and not find themselves reliant on the State," she said.
The seminar also addressed the effects of the market volatility on members of Defined Contribution Plans and the critical issues facing plan sponsors and trustees. The substantial drop in pension assets has left many Defined Contribution members who are close to retirement contemplating either delaying retirement or working part time. For those with some time to go to retirement they will have time to make up their losses. However, a 7% pa investment return achieved over the next five years will only bring asset values back to 2007 levels.
Rachael Ingle, Director at Hewitt, stresses the importance of calm and ensuring proper communication strategies are in place to provide members with comfort and information they can understand.
"A big issue is to get information to members and ensure they do not make any rash decisions. Investment is an important aspect of Defined Contribution plans as it will dictate the level of benefit a member receives on retirement. Defined Contribution plans must decide the balance between offering choice of a good range of funds and too many.
In addition, given the number of members who avail of the default funds available, extra attention is going to have to be paid to the make up of the default fund going forward. We have to accept that good default funds are going to be required if we are going to provide for a significant number of members who will not become engaged enough to make their own investment decisions," she said.
The seminar also explored initiatives and trends emerging outside of Ireland in an effort to deal with the crisis. Kevin Wesbroom, Hewitts UK Lead on Global Risk Services, addressed the accelerated move away from Defined Benefit pension provision in the UK, the liability buy out market which has yet to develop in Ireland, and the "last resort" interim reduction or suspension of pension contributions by companies in both the UK and US.
