Poor returns ‘not a factor’ in pensions crisis

Poor investment returns are not one of the factors that have plunged large numbers of retirement funds in the Republic into crisis, according to one industry expert.

About half the 800 defined benefit pension schemes operated by employers in the Republic are in deficit, throwing a question mark over the security of the retirement savings of more than 200,000 workers.

Poor investment returns over the last decade are regularly cited in the media as one of factors that have created this problem, along with low interest rates and the fact that people are living longer, increasing the burden on individual funds.

However, former Irish Pensions Trust (IPT) executive Alan Broxson argues that this is not the case.

Mr Broxson said at the weekend that the most recent survey showed that multi-asset managed funds, those with a mix of shares, bonds, property and cash, made an average of 5.1 per cent a year in the decade to December 31st, 2013.

He said the performance over the last five years was even better, at 11 per cent a year. Mr Broxson said figures produced by organisations such as Indecon, Aon Hewitt and Towards Watson all indicated that this was the case.

Fundamental problem
He argued that the fundamental problem was that while pension fund assets had continued growing, "the liabilities have been growing at an even faster rate".

The problems of funds, he added, were down to historically low interest rates, longevity and regulations requiring them to have a greater proportion of their assets in low-risk, low- yielding investments.

He said that low interest rates were a particular problem, as they had the effect of driving up the amounts of cash needed by funds to provide retirement incomes in the first place.

At the same time, he said increased longevity meant that retired people were drawing pensions for longer than in the past.

“That problem is not going to go away,” he added.

Return of capital
Mr Broxson pointed out that a pension was a gradual return of the capital saved while an individual was working. Lengthening the period over which the money was returned either meant that workers and employers had to inject more cash into the fund or the pensions should be reduced.

He suggested it was time to take a new approach to retirement, noting that large numbers of people who retired from full-time work in the US in their 60s continued working on a part-time basis for a few years to delay drawing down their pension.

He also pointed out that some retirees had the option of investing in approved funds that would deliver dividend income and which would not die with them.

Mr Broxson continues to act as a consultant for a number of pension funds.

He was one of the expert witnesses who gave evidence in the recent Element Six High Court case, where a group of workers sued their pension fund's trustees.