Protect defined-benefit pension schemes - or pay the price
Defined benefit (DB) pension schemes have often been seen as the gold-plated pensions, a guaranteed pay-out at retirement. However, many members or former members find, at least in the private sector, this isn't always the case. The "guarantee" is only valid if the money is there.
Because DB schemes promise a certain level of benefits there are many regulations about how they are funded. People living longer and low interest rates made regulations much tougher. Over the last 10 years, the number of DB schemes in Ireland fell from 1,232 to 482 and the number of employees in them from 270,000 to 125,000.
The financial crisis in 2007/8 put pressure on schemes as assets fell significantly, and 90pc no longer met the regulator's minimum funding standard. Rules were changed in 2010 to allow schemes to restructure. This usually involved members having benefits reduced and employers committing to continue funding the scheme. Those underfunded schemes had to agree a recovery plan with the regulator, usually over a 10-year period.
In the meantime, assets have generally risen but the valuation of liabilities has risen at a faster pace. So, schemes that took steps to ensure sustainability found themselves under further pressure because of the unprecedented level of bond yields we are experiencing. Pensions in payment are valued on annuity prices, which have never been more expensive, despite the fact pension schemes generally don't buy annuities but pay pensions from funds they have built up.
This has left employers facing calls for additional funding. This volatility of funding, also reflected on the employer's balance sheet, is causing them to consider winding up the scheme. In Ireland we don't protect members in this situation. In the UK a deficit becomes a legal debt on a solvent employer, and would have to be paid to the scheme before it was wound up. This was one of the proposals put to the Government by the IAPF and Society of Actuaries in Ireland in 2008 but not implemented.
Pensions aren't about rules and numbers. They are about people. People join them, pay into them and expect their pension at retirement. It can be the difference between enjoying and enduring retirement. We need to ensure DB schemes can be sustained and those with the ability to pay out pensions over the long-term aren't restricted by rules that focus on conditions today.
Jerry Moriarty is chief executive of the IAPF which represents Irish pension savers