Friday 19 January 2018

Defined benefit pensions 'offer no promises'

Charlie Weston

Charlie Weston

COMPANIES that offer defined benefit pensions are providing false hope to employees that there will be a decent retirement for them, a conference was told.

It would be better to abandon these final salary schemes and set up defined contribution plans instead, John Tuohy, of consultants Acuvest, said.

The defined benefit pension system offers promises to employees that many companies are in no position to keep, he said.

He said there was a need to get away from the misconception that a bad defined benefit scheme is somehow better than a defined contribution scheme, no matter how well-funded and well-managed the defined contribution scheme is.

With a defined benefit scheme people in the private sector who have 40 years' service were traditionally promised a pensions based on two-thirds of their final salary.

Mr Tuohy said: "All the talk we have heard of minimum funding standards and increasing risk reserves only applies if you are sticking with the defined benefit system, regardless of the cost.

"Instead, companies should look at providing a properly funded retirement plan for their staff that includes all the best elements of defined contribution pensions as well as the best parts of defined benefit -- low administration costs, etc."

He said it was a staggering statistic that three-quarters of defined benefit schemes in Ireland were in deficit, some chronically so.

"And in some public companies, the situation is even worse with some plcs having pension deficits larger than their stock market capitalisation."

He claimed that many defined benefit pension schemes, which offer nothing more than a promise and do not provide a guaranteed income after retirement, are operating essentially as insolvent insurance businesses.

"They are heavily tilted against younger employees, are expensive to maintain and have very significant downside risks for both the company and the employee," Mr Tuohy stated.

He said that the pension industry and companies needed to address the fallacy that achieving the Pensions Board's minimum funding standard would somehow resolve the problem that afflicts most defined benefit pension schemes.

"The minimum funding standard is merely the minimum that a company must do to comply with statutory regulations; it does not mean that funding has been put in place to meet pension benefits as they fall due.

"Companies and employees who believe that the minimum funding standard is sufficient to address the problem are not fully aware of the risks involved," he stated.

Irish Independent

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