Jerome Reilly: Penny begins to drop on pension funds black hole
Thousands are being robbed blind and many believe the state watchdog is not helping, writes Jerome Reilly
It is private sector workers in their 50s who are being hung out to dry on the double because of the pensions crisis. Not only will they lose most, if not all, of their contributions to defined benefit (DB) pensions schemes, but they will retire at a time when the State pension age has been ramped up to 68 years.
Yet it is only now as the crisis reaches endgame that tens of thousands of people are beginning to realise they face an old age of penury.
More than 197,000 people are paying into 993 different defined benefit schemes.
The Pensions Board estimates that about 70 per cent of DB pension schemes (700 schemes) are not fully funded.
For many, even those who have been giving a sizeable chunk of their monthly salary to a DB pension fund for 30 years or more, pensions can be difficult to understand.
It's this complexity which means private sector workers, struggling to make ends meet, don't yet realise they have been robbed blind.
Dozens of pension funds are in the process of winding up. This is because they have insufficient money to meet all their commitments.
Those in their 50s and early 60s and even on the cusp of retirement will fare worst.
They have paid in most, and so have most to lose. And they are too old to recover the lost ground -- to make adequate alternative provisions to a defined contribution scheme which they have entered in the last few months or will enter in the months ahead as their defined benefit schemes are wound up.
Those who are already pensioners in defined benefit schemes, or who are now in some kind of income continuance scheme because of a long-term illness will be looked after first when the dwindling pot of money that is left is divided. Those who are still working will be left with nothing or next to nothing depending on how far in the red their scheme has fallen.
The fairness of this regime is beginning to be questioned.
Aidan McLoughlin, managing director of Independent Trustee Company, said: "None of the money contributed by individual employees or their employer to DB schemes is ring-fenced in the name of any one employee.
"What this ultimately means is that in a wind-up situation, pension rules dictate that the entitlements of retired members can sometimes soak up all available funds resulting in a situation whereby there are little or no monies remaining to pay current workers any pension when they retire even if they're only months away from 65," he said.
Mr McLoughlin carried out an illuminating exercise to see what happens to a defined benefit scheme in trouble -- a scheme that is about 60 per cent funded, has liabilities of €10.2m and assets of €6m.
In this example, the scheme has 62 members altogether -- 17 already retired and 45 deferred, either current employees or people that accrued pension benefit, but now work somewhere else. Due to the failure of the employer company, the scheme has been forced to wind up. It's a reasonably typical scenario.
Mr McLoughlin said: "When the fund is wound up, those 17 members already retired are entitled to receive 100 per cent of their benefits and their future pensions need to be fully funded before any consideration is given to the other employees. On that basis €4.9m (or 80 per cent ) of the €6m is immediately allocated to these 17 individuals. The 45 deferred workers have accrued €3m in benefit entitlements, but will have to share the remaining €1.1m of the fund. This is sufficient to pay them 28 per cent of their accrued entitlements."
Mr McLoughlin continued: "In our example, the division of the pension fund is based on current legislation which states that retired members must be fully satisfied before anyone else's benefits are considered. While this sounds straightforward, in this instance it may result in a situation where a 66 year old received his full entitlement, while his 64-year-old colleague with whom he worked for 40 years will only receive just over a quarter of his benefits."
This grim scenario is difficult news to deliver to members who will rightly seek answers on why they are treated so differently.
It can be argued that younger people have the time to make up for this shortfall. However, that simply isn't the case for those close to retirement. It's conceivable that some members may have contributed more over the years than they will receive following the wind-up; in effect, their contributions have subsidised their retired colleagues, said Mr McLoughlin.
The range of companies and agencies whose defined benefit schemes are in trouble is staggering -- many of them blue chip enterprises where management and employees have met all their pension commitments. In some cases, companies have exceeded their statutory commitments pumping in millions, during hard times, to enable pensions schemes to struggle on.
Throughout the summer, with little fanfare, companies ceased DB schemes.
In early August it was reported that Aviva, ironically one of the State's largest pension providers, told staff it planned to close its defined benefit scheme which had a deficit at that time of €295m.
During the same month AIB, now State-controlled, agreed to transfer loans with a face value of €1.1bn earmarked for disposal under its deleveraging programme into their defined pension scheme to help ease a deficit of €763m at the end of 2011.
Independent News & Media which publishes this newspaper also has major problems in its pension scheme which has a €163m deficit. A range of options is still being considered.
Ibec, the business lobby, has announced the closure of its DB scheme. Arnotts is in a similar situation.
The Pensions Board has now given firms and trustees more time to come up with plans to restructure their schemes. They have until next June to come up with a workable solution rather than December 31, or next May in some cases. The U-turn was forced. Employers and pensions trustee argued that they needed more time.
Many believe that the Pensions Board is part of the problem rather than the solution. Jerry Moriarty, of the Irish Association of Pension Funds, who had called for the deadline to be delayed, said there was now also a need for an easing of the new rules that require schemes that are being restructured to put aside 10 to 20 per cent of the liability as a "risk reserve". Most European countries were moving away from this, he said.
It was the Pensions Board, the State regulator for company pensions, which has insisted on introducing the tough, new rules forcing schemes to put aside more reserves and to invest in bonds which many trustees and employers believe has set the bar too high.
Fergus Whelan of Ictu argued last week that the insistence of the Pensions Board in imposing artificially high valuations on pensioner liabilities was making many defined benefit schemes untenable. A less stringent regime which does not have the worst case scenario as its starting point would give pension schemes time to work their way out of the financial cul de sac.
"Extending the deadline will help, but only if the political system decides regulation should aim to protect pensions rather than regulate them out of existence," Mr Whelan added.