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News : Irish Economy Last Updated: Jul 5, 2012 - 9:30 AM

Irish Economy: Government to seize €433m from decimated private pension funds in 2012; Up to €900m taken in 2011/2012
By Finfacts Team
Jul 4, 2012 - 10:07 AM

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Irish Economy: The Government is set to seize €433m from decimated private pension funds in 2012 and together with the €463m seized in 2011, the total is close to €900m in 2 years and there are 2 further years of a so-called levy. While the unfunded public staff pensions remain unreformed (the annual cash cost is moving towards €3bn and in 2009, the Comptroller & Auditor General estimated the accrued cost at €129bn), the Pensions Board said last month that 80% of Irish defined benefit schemes are in deficit. The end of guaranteed payouts on occupational pensions is drawing close and the average return on an Irish Managed Fund in 2012 is ZERO.

Irish group pension managed fund returns over the ten years to May 2012, have been a derisory 2.2% per annum on average - - just above the Irish inflation rate of 2.0% per annum over the same time horizon. Less than half of the current managed funds outperformed inflation over this period.

About 38,000 people left private occupational pension schemes in 2011, the Pensions Board said last month. According to its annual report [pdf], the total number of active members in occupational pension schemes in April this year was 771,878, a decline of 38,083 members over 2010 levels.

Meanwhile, at the end of last year, an extra 7,400 people were signed up to public-sector pensions compared with 2010, despite a staff embargo, according to Joan Burton, Social Protection minister. This took the total who have a pension in the public sector to 335,551 for this year, according to the Pensions Board.

There are 993 defined benefit schemes in Ireland covering 200,000 employees, 200,000 former employees who have not retired, and 85,000 pensioners.

How can a civil servant in a bankrupt state retire at the age of 57 with a lump sum payment of €428,011, a special top-up of €142,670 (for senior civil servants who retire early) and an annual pension of €142,670?

According to Fionán O'Sullivan, director, IFG Corporate Pensions, “As per Finance (No. 2) Act, 2011 a Stamp Duty of 0.6% will be imposed on pension scheme assets for 4 years from 2011 to 2014 and the calculation date of payment is June 30th. In practice, insurers have encashed units at June 30th and will pay the levy in early July. However, while this is the second year of the levy, there is still a great deal of uncertainty throughout the industry as to how trustees are going to deal with the impact of the levy.

In an Irish Association of Pension Funds Survey on Defined Benefit (DB) pension funds earlier this year it was found that 35% of respondents had not yet agreed how the levy would be dealt with. Another 35% said that they had/would reduce benefits and a further 20% said it would be built into the funding proposal. Just 10% said that employers would pay the cost of the levy”.

According to IFG Corporate Pensions team’s calculations:

1. Irish Pension assets at 31 December 2011 = €72.3bn (source: IAPF 2011 Pension Investment Survey)

2. 2012 YTD growth for average Irish Managed Fund = about 0%

3. Therefore €72.8bn growth to 30 June 2012 was zero

4. No information could be obtained on total contributions into Irish pension funds in a given year (2011 or 2012). However, within IFG the Corporate Pension clients contribute about 10% p/a of the total AUM.

5. If it is assumed that Irish DC and DB pensions contributed 5% of Irish pension funds AUM in the first 6 months of 2012, then IFG estimate €3.6bn (10% of €72.3bn divide by 2 = €3.6bn) was contributed into Irish pension funds in the first 6-months of 2012.

6. As a result IFG estimates the current value at 30 June 2012 of all Irish Pension funds is €75.9bn

7. Based on IFG Corporate Pension’s calculation with the above estimated numbers therefore the 0.6% levy will equate to €433m (2011 figure was €463m), however, on the whole IFG Corporate Pensions do not believe the levy take for 2012 won’t change too much compared to last year’s

O'Sullivan continued, “Trustees in virtually all DB plans will be obliged to reduce all pension benefits where the employer is not meeting the pensions levy. For active members and ex-employees who still have entitlements in a scheme (deferred members) their future benefits have been/will be reduced. Pensions in payment for current pensioners will also be reduced. With regard to pensions in payment, schemes can either:

  • Reduce the pensions by a small amount for the remainder of the member’s life, often 0.6% pa, or;
  • Reduce just the pension payable in the year the levy applies - this means a much greater short term reduction is applied. This may be approximately 10% of the pension in payment.

The key difference between the two approaches is that one reduction is for life whilst the other is an annual reduction. Under the second approach once the levy is paid the pension will increase to its previous pre-levy reduction level.

An approach adopted by some Trustees where schemes provide pensions which increase is to reduce the level of pension increases to reflect the levy. Thus members instead of getting say 3% increases in 2012 may receive a 2.4% increase. The net effect being to apply a 0.6% reduction for the levy. Some of our own large DB clients have recently cut increases in pensions in this manner”.

The pension levy applies to all occupational pension schemes, personal retirement bonds, PRSAs and personal pensions, except for schemes in wind up where the employer is insolvent. ARFs, annuities and unfunded public sector schemes are exempt.

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