PENSIONS BOARD chief executive Brendan Kennedy, in presenting its annual report last week, said the position of the Irish pensions industry “remains serious”. But that was to understate its perilous financial condition.
Three out of four defined benefit occupational pension schemes in the private sector are in deficit and more may follow as pressure mounts from two quarters. First from the Pensions Board, which is trying to impose a tougher minimum funding standard on funds at a time when they are least able to bear that burden. And second from Government, via its punitive levy on pension savings. This has greatly added to the financial difficulties of defined benefit schemes, where a pension is linked to an employee’s salary, and where the risk falls on the employer to make up any pension fund shortfall that arises. The temporary (four-year) pension levy will almost certainly see payments to retirees reduced with contributions from employers and employees raised. However, it could also prove to be a tipping point, accelerating the closure of defined benefit schemes as private sector employers, faced with soaring deficits, find them less affordable.
The problems of the pensions industry are easily stated. As those in retirement enjoy better health and live longer, the cost of pension provision has greatly increased. At the same time, the investment returns achieved by pension funds over the past decade have been poor, partly because of an over-reliance on equity investment. Stocks have performed badly in volatile equity markets. Against that bleak financial background, the attitude of both Pensions Board and Government is difficult to fathom.
Mr Kennedy has said the Government did not consult the board on the pension levy issue and accepts that it was a matter for government alone to decide. Neverthless, the legislation that defines the board’s functions requires it to advise the Minister for Social Protection on various matters which include those relating to pensions generally. Indeed, the Pension Board’s own mission statement commits it “to promote the security and protection of occupational schemes”. In that regard, the board’s silence on the pension levy is as hard to understand as its concern to increase the funding standard when 75 per cent of the funds affected are in deficit.
The reluctance of the Pensions Board to offer any public view on the pension levy is mirrored in a similar attitude to the guidelines it will publish shortly on a new sovereign annuity scheme. This will allow Irish pension funds to increase their holdings of Irish government bonds – should they choose to do so – via annuities issued by insurance companies. The funds would benefit from the high yield such bonds currently offer, greatly easing their funding difficulties. But that very high yield also reflects the financial market’s harsh judgment on the likelihood of Ireland defaulting on its debt. Clearly, that would make it a high-risk investment for pension funds, a decision that prudent fund trustees must take, but without benefit of any public guidance from those well placed to offer it – the Pensions Board.