Employers look to limit rising pension liabilities

The financial position of Irish pension schemes improved significantly last year but growing numbers of employers are looking to limit their open-ended exposure to retirement incomes for staff.

A study by benefits consultants Mercer says two-thirds of Irish defined-benefit schemes met statutory solvency requirements at the end of 2005, compared to just half the previous year.

Michael Madden, European principal with Mercer, said: "This improvement is good news and is due mainly to good investment performance and employers paying higher contributions to pension schemes."

However, he warned: "The correction in equity markets in recent weeks may have reversed some of this good progress."

Mercer said employer contributions to defined-benefit schemes - which guarantee to pay a certain retirement income based on time served and final salary - had risen from 8.8 per cent of pensionable salary in 2000 to 16.8 per cent last year.

Employees, too, are facing a growing cost burden. Eighty-two per cent of defined-benefit schemes now require employee contributions and 23 per cent of defined-benefit schemes have increased those contributions in the past three years - ranging from one to three per cent of pensionable salary.

The average employee contribution to a defined-benefit pension scheme run by their employer is now 5.3 per cent. Almost one in five employers offering such schemes expects to raise employee contributions in the next three years.

The volatility illustrated by the recent stock market setback that has wiped out a positive start to 2006 is cited by a growing number of employers looking to limit their liabilities. The Mercer survey states that 38 per cent of defined-benefit schemes have already closed to new entrants. A further 22 per cent of employers say they are planning to close their schemes to newcomers in the next three years. That would leave just 40 per cent of schemes open to new entrants and Mr Madden said the trend was only likely to continue.

The Mercer survey says over 80 per cent of employers intend to retain current benefits in such schemes for existing staff members and that in only a very few cases had employers stopped providing defined benefits for them.

Forty-one per cent of schemes have amended their investment strategy in recent years, with 38 per cent changing fund managers and 32 per cent increasing their weighting of less volatile bonds, despite the prospect of lower investment returns.