Cantillon: The risky business of pension investments

Low interest rates are hurting pension schemes by pushing up the cost of providing retirement income for members. The Pensions Regulator, Brendan Kennedy (inset), has issued a stark warning in his annual review that this is leading trustees to take on higher-risk investments, to allow them to assume that there will be enough money in the years ahead to meet the level of retirement income expected by their members.

In some cases these riskier strategies, which generally involve taking on a relatively high level of equity investment, will pay off. But Kennedy would prefer defined benefit scheme trustees to put more cash into bonds, which are lower risk and more directly match the liabilities they face to their retired members and those about to retire.

He warns that many trustees are, in effect, avoiding the reality, which is that higher contributions or lower benefits – or both – are required and that ignoring this is “unlikely to be consistent with their obligations are trustees”.

This comment, and the threat it opens up for trustees and employers, may well lead more schemes to be wound up in the next couple of years.

Kennedy says he remains very concerned about the vulnerability of many remaining defined benefit schemes, “even those that meet the [minimum funding] standard.”

Most defined benefit schemes are now closed to new members and many are frozen for existing members, but they still represent some €50 billion in assets and will be big players in providing retirement income for years to come. The retirement income of those in defined contribution schemes is also threatened, of course, even if, by their nature, these schemes will disappoint rather than collapse.

The Pensions Regulator plans more face-to-face contact with trustees to explain these issues but, given the scale of the problem, this will be no easy task. The new regime under the Pensions Authority, established in 2014, is making some ground in getting more schemes to be compliant and tackling breaches of the law. But the big issue of affording decent retirement income for the roughly half of the working population remains, never mind the the other half who have no private pensions arrangements.