Friday 18 October 2019

Will INM pension decision spell more closures for schemes?

With costs soaring, other companies may shut down their defined benefit funds

INM chief executive Robert Pitt and chairman Leslie Buckley
INM chief executive Robert Pitt and chairman Leslie Buckley

Dan White and Dearbhail McDonald

Independent News and Media's decision to stop contributing to its defined-benefit pension fund could be followed by other companies as plunging bond yields have sent liabilities soaring.

Last week's extraordinary general meeting of INM, publishers of this newspaper, was overshadowed by protests from current and former employees angry at changes to the company's defined-benefit (DB) scheme.

The decision to no longer contribute to the company's DB scheme, which is nursing a €23m deficit, is one that will effectively lead to its closure.

The company and trustees are locked in talks to discuss proposals which have been put by the company to the trustees.

But the closure in all but name of the DB scheme means that current and former INM employees who had deferred their pensions will receive far lower pensions than they had previously expected after reaching retirement age.

Members of INM's DB scheme already agreed to cuts in benefits of up to 40pc in 2013 when restructuring of the pension fund took place.

Without extra funding, plans to wind up the schemes would have seen future pensioners lose 30pc of their expected retirement income.

The controversy has been aggravated by the fact that INM is solvent and is expected to have up to €86m at its disposal by the end of this year.

The company's rude health was highlighted by Michael Doorly, chairman of the pension fund trustees - and INM company secretary - when he wrote last month to INM chief financial officer Ryan Preston.

In the letter, Doorly complained that there was "no legal or moral justification" for the closure of the scheme given the current financial position of the company.

"We are dismayed that the company is now reneging on the agreement it freely entered into with the Trustees and the Pension Authority as recently as 2013," wrote Doorly.

The potential impact on DB members was laid bare at last week's highly charged egm which was convened to separately pass two motions enabling a capital reduction and share cancellation - relating to the write-off of €1.1bn of historic losses for INM.

The resolutions were aimed at cleaning up INM's balance sheet, allowing the group to resume paying dividends for the first time since the financial crisis.

The resolutions were carried overwhelmingly by investors, including businessman Denis O'Brien (29.88pc stake) and Dermot Desmond, a 15pc shareholder in INM via his IIU Nominees vehicle.

But not before shareholders who are members of the defined benefit scheme voiced their anger.

The anger was palpable and understandable. But with the majority of DB pension schemes in Ireland in deficit and frozen to new entrants - some 750 defined benefit schemes have been shut down in the last 10 years - is INM the canary in the coalmine that could lead to more closures?

And will pension shortfalls lead to dividend cuts for Irish companies with otherwise healthy balance sheets?

Widening deficits in DB schemes in the UK (the deficit of DB schemes of Britain's 350 largest listed companies reached a record £189bn last August) is already threatening corporate dividends there.

It is also harder to walk away from pension black holes across the Irish Sea.

In the UK, a defined benefit deficit becomes a legal debt on a solvent employer and that debt has to be paid to the scheme before the company is wound up. In Ireland, the most trustees can expect is to be consulted by the company about the shortfall.

Like many DB schemes, INM is nursing a significant deficit. Record low interest rates are the main culprit for the failure to resolve the DB woes of INM and other companies A member of a traditional company DB pension scheme, where the employer guarantees their post-retirement income, who is now in their mid-forties can expect to be receiving a pension from that scheme into their mid-eighties or perhaps even into their nineties.

So how does one value payments that don't have to be made until the 2050s or 2060s?

Actuaries use what they call a discount rate, basically a kind of negative interest rate, to put a present value on these future payments. This discount rate is linked to long-term bond yields. The combination of very low long-term bond yields, longer life expectancies and tighter regulation of pension funds has proved lethal to employer-guaranteed defined benefit schemes.

"No new defined benefit schemes have been set up in the last 10 years," says Jerry Moriarty, chief executive of the Irish Association of Pension Funds. "There will not be any new ones. 90pc of existing DB schemes are closed to new members. As a concept defined benefit is dying out. The question is whether there is an orderly wind-down or something more disorderly".

With Irish companies obliged to carry pension fund deficits on their balance sheets, will INM's example be followed by others?

INM's capital restructuring plan must be approved by the High Court. Social Protection Minister Leo Varadkar has also promised to hold discussions with the Attorney General to see if he can intervene in the public interest.

But with no UK-style prohibition on solvent companies, others may be tempted to follow suit.

Once again, disagreements over how to value future pension liabilities have been exposed.

Under current regulations, future liabilities are valued on the basis of the fund being able to meet those liabilities if it were wound up today. But what if the fund was not being wound up today? "We need to move to cash flows over time when valuing pension liabilities. That could fix problems like INM", says Moriarty.

The INM affair highlights many of the problems facing Irish pensions.

Despite a rapidly-ageing population only 47pc of all workers are making any provision for their retirement - strip out public sector workers and the proportion falls to a third.

Even those of us who are saving for our retirement aren't saving enough with recently-published figures from the OECD showing that the total assets of funded Irish pension schemes were the equivalent of just 56pc of GDP.

This compares to 205pc in Denmark, 178pc in the Netherlands, 132pc in the United States and 97pc in the UK.

Meanwhile, successive Irish governments have ignored the 2006 Pensions Board report that recommended compulsory pension contributions for all workers on the Australian model where employers must pay 9.5pc of their workers' earnings to an approved scheme.

And that isn't even the half of it.

Bad and all as things are in the private sector, the pensions situation in the public sector is much, much worse.

The Department of Public Expenditure calculated that the present value of unfunded future public service (civil service, teachers, nurses, guards etc.) pensions stood at €98bn at the end of 2012.

Even this huge sum is dwarfed by the cost of state contributory and non-contributory pensions with the Comptroller & Auditor General having estimated the shortfall in the social insurance fund at a scarcely comprehensible €324bn.

This puts the combined present value of the Irish state's future pension liabilities at a massive €422bn. That's more than twice the current official national debt of "only" just over €200bn. Taking the value of future pensions liabilities onto the state balance sheet would push the national debt up to close on 300pc of GDP.

With the number of over-65s set to almost treble to 1.4 million by 2046 how can future governments make their pension sums add up?

The answer, of course, is that they can't.

This means that in future we will all have to work longer - probably well into our seventies - and that, when we do eventually retire, we will receive far lower pensions than we had expected.

INM could almost certainly prove to be merely the tip of an extremely large and expensive pensions iceberg.

Sunday Indo Business

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