Contributory plans signal future direction

PRIVATE and semi State occupational pension plans come in two forms - defined benefit and defined contributions and as the 1996 Pensions Board report shows, defined contributions schemes have established themselves as the pension scheme of the future.

As the tables show, there was a significant increase in the number of defined contribution as opposed to defined benefit schemes registered with the Pensions Board in 1995. Their numbers have risen steadily since 1993, the last year these figures were available.

Under a defined contribution scheme, the value of the pension fund is directly related to the investment value of the contributions, whereas under a defined benefit scheme, the pension is related to the size of the employee's salary upon retirement and years of service. The defined contribution system is the preferred method of new employers because they are no longer obliged to meet a specific pension value target, regardless of the strength or weakness of investment markets on retirement day.

Since 1993 the number of registered defined benefit schemes has declined by 462 while the numbers of defined contribution schemes has increased by 10,608. As the membership table shows, far more workers are still represented by defined benefits rather than defined contributions schemes. According to the Pensions Board, the majority of new defined contribution pension plans have either single or small numbers of workers represented. But with only 40 per cent of the private working population (as opposed to civil servants or the self employed) contributing to any kind of a pension, defined contribution schemes could ultimately dominate.

The implications of the rise in defined contribution schemes is very significant, especially in light of increasing deficiencies in State benefits. If employees are no longer guaranteed an occupational pension that reflects the years worked and the size of their final salary, greater provisions will need to be made to ensure adequate funding of a pension fund which relies on investment performance. Not only will the size of the annual pension contribution need to be examined carefully to ensure the highest allowable level of funding; the fund managers and their asset investment mix will also require careful scrutiny.

Finally, workers who move from job to job, take career breaks and then resume work, or who join a company later in their working life need to seriously look at the possibility of taking out a personal pension top up in the form of an Additional Voluntary Contribution. A member of a defined benefit plan in similar circumstances also needs to consider an AVC.

One of the most important roles of the Pensions Board is to encourage greater disclosure of information to members from pension fund trustees and to police the funding standards of schemes. Last year 1,327 written and telephone inquiry/complaints were received by the office and the table shows that the majority were about funding standards and information disclosure.