STEEP FALLS on the world's stock markets have not just hit individual shareholders. Pension funds, which rely mainly on equities to produce investment returns to finance pension payments, have recorded huge declines also.
As a result, many pension schemes are facing funding difficulties. By the end of September, Irish pension funds had lost an average of a quarter of their value over the previous 12 months. And October has seen further significant declines. Some 800,000 Irish workers are members of private pension schemes - relying on payment from these schemes and from the flat rate State pension to provide their income in retirement.
Private pension provision comes in two forms. In the most common - a defined benefit (DB) occupational scheme - the pension is based on the final salary of the employee, and the employer carries the financial risk of higher funding costs. In a defined contribution (DC) or money purchase scheme, the pension is based on the investment value of the fund at retirement where the proceeds are used to buy an annuity. The individual carries all the investment risk.
IBEC director Brendan McGinty warned last week that unless funding rules for DB schemes are modified, some would collapse. Estimates by the pension industry, he says, suggest that three out of four DB schemes could fail to meet the funding standard under the Pensions Act. That compares with one in four two years ago. In consequence, half of current DB schemes are now closed to new staff members while one quarter of the schemes have modified pension benefits in recent years. In addition both employer and employee contributions have greatly increased. The average employer contribution is now double the rate that applied eight years ago.
The contrast between pension provision in the private and public sector is stark. The painful and expensive adjustment under way in the private sector has yet to be matched in the case of public service pensions which are also DB schemes, are financed from general tax revenue and provide retirement payments indexed to public service pay rates. So far the Government has ignored a recent OECD recommendation that this should change, with pension payments no longer indexed to wages.
However, the growing disparity between the respective costs and benefits of private and public service pensions is clearly inequitable. And in these straightened times, the differential is neither politically defensible nor - for the taxpayers who must pay - economically sustainable.