Cantillon

Inside the world of business

 

Unfortunate paradox of pension policy highlighted

YESTERDAY’S conference on pensions hosted by employer and business group Ibec highlighted an inherent paradox of the Government’s recent changes to pension provision. By introducing more stringent standards in order to ensure the future sustainability of pension schemes, new rules may have the effect of forcing some pension schemes to wind up.

As Ibec rightly pointed out, the changes are being introduced at one of the worst times for pension schemes, which are already under severe pressure. About 80 per cent of defined benefit schemes are in deficit, according to the Pensions Board.

While Ibec presents cogent arguments to justify the employer position – after all, companies will bear the brunt of any changes to pension provision – there are flaws in its arguments. Its contention that the current funding standard, predicated on whether a pension scheme would be able to meet its liabilities if wound up immediately, is based on a hypothetical scenario is itself questionable. While Ibec points out that schemes are “not built to wind up tomorrow”, the reality is that the current economic and pensions crisis means many companies are considering winding up defined benefit schemes, with some not having sufficient assets to pay existing members.

Similarly, while Ibec criticises the current system, which values liabilities on the basis of annuity prices (currently at historic highs), pointing out that most healthy schemes do not need to buy annuities, it fails to suggest a serious alternative.

Nonetheless, Ibec’s critique of the Government’s current pension policy contains worthwhile and sophisticated points. Its suggestion that the 11-year timeframe for companies to clear their deficits is “arbitrary” and that the time granted should be proportionate to the maturity of the scheme is noteworthy. Similarly its criticism of the current scenario whereby existing pensioners take precedent over active and deferred members in the event of a wind-up of a pension scheme is one that is shared by many.

It is in the Government’s interest to take note of the objections. After all, if occupational schemes cannot provide for the pensions of workers, that task will fall back on the State.

The unremitting focus on cutting healthcare costs could see Europe losing investment and jobs in the pharma sector, the European Council was warned yesterday. Writing to EU leaders ahead of the summit, the president of the European Federation of Pharmaceutical Industries and Associations, Andrew Whitty, said a short-term focus on cost-cutting was undermining sales and creating medicine shortages for patients, as reported in the Financial Times.

Sanofi, Pfizer, GlaxoSmithKline, AstraZeneca, Novartis and Merck Serono have all cut back facilities and staffing in Europe in recent months, while shifting research investment to locations including Boston and Shanghai.

Whitty, chief executive of GlaxoSmithKline, one of Europe’s largest drug makers, said the pharmaceutical sector had shown its willingness to help governments struggling with funding problems.

He estimated it had absorbed price cuts and discounts in Greece, Ireland, Italy, Portugal and Spain totalling more than €7 billion for 2010-2011, or more than 8 per cent of turnover in those markets.

Whitty’s comments come just days after the Irish Pharmaceutical Healthcare Association – the local industry group – and the Department of Health reached a truce over a block on access by new, approved drugs to market here.