MOST PEOPLE agree the State pension alone would be insufficient to finance their retirement years. As a result, complementary private pension provision has become an accepted necessity. And today over one million people are members of occupational pension schemes or have a personal retirement savings account (PRSA). But pension funds, which invest mainly in equities, have greatly under-performed in the past two years as the global economic downturn precipitated a parallel collapse in share prices.
In 2008, the average Irish fund lost more than one third of its asset value – which means one third less to finance retirement benefits. Indeed, in the past decade pension fund returns have failed to match even the rate of inflation. As Pensions Board chief executive Brendan Kennedy said at the launch of its annual report earlier this week: “2008 was an extremely difficult year for pension savings and the retirement plans of very many individuals have been badly affected”.
The pensions industry is in deep crisis. The solvency of many defined benefit (DB) schemes – where employees are guaranteed that their pension will amount to a set percentage of their final salary – has deteriorated sharply. Just one in ten of these schemes now meets the Pension Board’s minimum funding standard, while a small number have insufficient assets to meet the liabilities of current pensioners.
If pension losses were almost unavoidable last year, Mr Kennedy contends that the investment performance of pension funds was worse than it could – or should – have been. He blames schemes both for disregarding investment risk and for making unrealistic assessments of investment returns.
Likewise, the Pensions Board is concerned at the poor performance of defined contribution (DC) schemes. Here the pension payable depends on the accumulated value of the investment fund at retirement age. However, members of such schemes may have little financial understanding of the investment choices or appreciate the risks involved. Next month that will change for the better when all members of such schemes will receive an annual estimate of their likely pension when they retire. This is a long overdue reform.
In recent months the Government has taken a number of initiatives to alleviate some of the difficulties pension funds are experiencing. They have been given extra time to bring their funds back into balance and the Pension Act has been amended to ensure that where a DB scheme is wound up, the adjustment burden is shared more equitably between pensioners and members.
However, Minister for Social and Family Affairs Mary Hanafin has ruled out introducing a pensions protection fund, describing it as too “expensive”. This would involve the State acting as part guarantor of pension funds. But with so many DB funds in serious deficit and with the Government struggling to contain a banking crisis and to control the public finances, it is not in a position to underwrite the pensions industry. Difficult choices lie ahead.