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.
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
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
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
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
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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