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News : Irish Last Updated: Dec 17, 2009 - 5:31:42 PM

Majority of Irish Defined Benefit Pension Schemes which guarantee final benefit are insolvent
By Finfacts Team
Dec 17, 2009 - 3:07:31 PM

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Pensions coverage in Ireland is not a political issue because politicians and the rest of the public sector have an excellent scheme. The recently retired governor of the Central Bank has retired on a pension of €245,000 and unless the existing system is changed in future, he will get any increase to match the salary adjustment of the current incumbent. However, there was an exception in last week's Budget when salaries were cut; there was no corresponding reduction in pensions. A general private sector scheme would have a very high funding rate to emulate such a scheme.

The majority of Irish Defined Benefit  Pension Schemes, which guarantee final benefit are insolvent, according to a report published Thursday.

While investment returns have been strong over the past six months, the recovery has not been sufficient to lift most defined benefit schemes out of deficit, according to pensions consultants Mercer, on the publication of Mercer’s Defined Benefit Survey, 2009.

Mercer says most employers and trustees are keen to know what actions are being taken for other schemes, but very few schemes have actually submitted funding proposals to the Pensions Board. Around 10% of schemes were due to finalise their plans by the end of this year, but the Pensions Board has now extended this deadline to the end of June 2010. The bulk of schemes have until the end of next year to finalise their plans.

“2010 will be a significant milestone for Irish defined benefit pension schemes, as employers and trustees reach conclusions as to how to address scheme deficits; the scale of the deficits will trigger significant structural changes to many schemes,” says Aisling Kennedy, Senior Consultant, Mercer.

In compiling the 2009 Defined Benefit Survey, Mercer reviewed approximately 200 organisations and a number of emerging trends have been identified.

  • Over half of the defined benefit pension schemes surveyed state at this stage that they expect to maintain their current benefit structures, with the employer making higher contributions to fund the deficit. However, Mercer expects that this might change over the course of next year, as employers come to terms with the scale of the costs involved.

  • Of the remainder, approximately 25% of the schemes surveyed are planning to increase member contributions. As the cost of providing pensions has increased dramatically, it is not surprising that employers are asking employees to share the extra cost.
  • Approximately 25% of employers are considering changes to future benefits. One in five is considering stopping any further benefits being earned in the defined benefit scheme., so employees will continue to have a defined benefit pension for past service, but will be in a defined contribution scheme, or some form of hybrid scheme, going forward.
  • Around one in seven schemes is considering a change to benefits that members have already earned. This will require an application to the Pensions Board under Section 50 of the Pensions Act. As the criteria laid down by the Board for such applications are demanding, and may prove prohibitive, it is unlikely that a reduction in benefits already earned will be made in all cases where it is under consideration.
  • Finally, in around one in seven cases, the wind-up of the scheme is either planned or is being considered.

Mercer says a key decision for employers and trustees is the term over which the deficit is to be eliminated. The survey found that a third of schemes are planning to eliminate the deficit in less than 10 years, another third intend to formulate a 10 year plan, and less than 10% plan to apply to the Pensions Board for a period of more than 10 years over which to fund the deficit. The remainder has not yet reached a conclusion on this issue.

Commenting on the survey, Kennedy said: “
The financial crisis in global markets has resulted in a severe set back for the funding of defined benefit pension schemes. Higher life expectancy has also increased the cost of pension provision. Employers and trustees are working on measures to fund deficits and to put pension schemes on a sustainable footing. This may require changes to benefits and/or higher contributions from scheme members. At this juncture, a change to the system of tax relief on pension contributions would be a further blow that could significantly undermine the prospects for recovery.”

It should be noted that the majority of Irish private sector workers have no occupational pension scheme and generally new entrants to private sector schemes, are not given any guarantee of return.

The average annual return on managed funds over the past 10 years was 0.5% - - while prices have only fallen in the past 10 years.

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