4 out of 5 Irish defined benefit pension schemes are underfunded
22nd November 2012: With tax relief on pension contributions facing a possible reduction in this December’s budget and the majority of Irish defined benefit (DB) plans already in technical deficit, never has the pensions industry faced into such uncertainty.
This morning, over 150 representatives from Ireland’s Pensions and Finance sectors were briefed by Michael Wolfe and Liam Connellan, Partners, Pensions Group, William Fry, on the future of DB schemes, the implications of the newly reintroduced Funding Standard and the benefits of defined contribution (DC) schemes.
Speaking about the future of DB schemes in Ireland, Michael Wolfe said: “Defined benefit schemes are facing significant challenges following the reintroduction of the Funding Standard*. Now, with four of every five Irish DB plans underfunded, a number of Irish employees find themselves in a scheme with insufficient assets to pay out the expected pension obligations. With effect from June 2013, the Funding Standard also requires DB schemes to hold a risk reserve in addition to covering minimum funding standard liabilities. In line with the Standard these underfunded DB schemes must put a plan in place to make good their funding deficits, restructure their schemes or, as with the recent case of the IBEC scheme, simply wind up, if the cost of maintaining the scheme is unsustainable.”
Liam Connellan added: “While most DB schemes are closed to new members, they will not disappear overnight. In light of announcements made by the Independent News & Media Group, Arnotts and AIB, who intend to wind up their respective DB schemes, it seems certain that DC plans are now the preferred option for most employers going forward. With the Government likely to cut tax reliefs on pension contributions in next month’s budget, a number of Irish workers who are committed to DC schemes could find themselves in a worsened financial position.”
“When paying into a DC scheme, employees are exposed to the risk of the value of their investments. However the combined impact of increased interest rates, people living longer and below average returns on investments since 2007 has meant that the pensions industry, both in Ireland and globally, is experiencing very turbulent and uncertain times. The reality of the situation is that members of underfunded DB schemes, once thought of as guarantees, may not receive the pension and benefits they are expecting at retirement.”
Michael Wolfe also cited the importance of the Element Six case which, due for hearing in the Commercial Court in February 2013, is among the first of its kind. Here members of the scheme are claiming damages of up to €50m against the scheme trustees for breach of trust. If successful, the members will have set an Irish precedent on the ground rules for employers and trustees that would be a watershed in Irish pensions for years to come.
*Through the enactment, on 1 May 2012, of the Social Welfare & Pensions Bill 2012
For further information, please contact:
Aidan McLaughlin, Fleishman-Hillard, 01-6188425 / 085 749 0484
Sinead Hennebry, William Fry, 01-4896429 / 086-6027930
