The priorities on pensions
WHEN IBEC – the Irish Business and Employers’ Confederation – announced some weeks ago that it was winding up its defined-benefit pension scheme for its employees, the symbolism of the decision was significant. Four out of five of the country’s private sector defined benefit – or final salary – schemes are in deficit and have failed to meet the minimum funding standard. This ensures that, where a pension scheme is wound up, members’ benefits are fully protected. Most defined-benefit schemes are closed to new members, while some would be unable to meet their obligations to members, as the law requires. Others – like AIB – have decided to wind up their defined-benefit schemes because the funding gap is too large, and cannot be bridged. However, when Ibec – an employers’ body – makes such a decision, it sets a precedent; one that others may well be encouraged to follow.
Pensions worldwide are in difficulty, not just in Ireland, and for broadly similar reasons. People are living longer, investment returns have been below average since 2007, and interest rates have declined sharply. As a result the cost of financing defined pensions has greatly increased. In Ireland, that cost has doubled over the past decade. Many pension schemes in response have struggled to meet the minimum funding standard over a number of years: employers and employees have increased their contributions to pension funds and benefits for members and retirees have been reduced. But more employers may choose like Ibec, to wind them up.
Throughout this pensions crisis, the Government has been less than supportive or sympathetic to the problems facing the industry. Last year, the Government introduced a four-year pension levy to raise some €460 million annually. That punitive (0.6 per cent) levy has cut the assets of pension funds when they could least afford it, and cut the income of retirees. The Social Welfare and Pensions Act passed some months ago obliges defined benefit pension schemes to provide an additional “risk reserve” against future economic difficulties. With so many of the funds facing basic solvency problems, Government concerns about a risk reserve are irrelevant. Uncertainty about the survival of existing pension schemes has seen some members either reduce their contributions or stop them altogether. And with tax relief on pension contributions facing a possible reduction in the December budget that would provide a further disincentive to retirement saving.
The Government’s only – and partial – solution to the pensions crisis has been the introduction of sovereign annuities to ease the funding difficulties of pension schemes. These annuities would be priced off high-yielding Irish bonds rather than their low-yielding German equivalents. Undoubtedly, these new annuities would greatly help the Government in financing its future borrowing needs. But they would also increase, and transfer greater financial risk to pension schemes and retirees: that of sovereign default. A risk that deserves more scrutiny and public debate than it has so far received.