Pensions funding changes ‘essential’

RADICAL changes are needed to the funding criteria for defined benefit pensions in view of recent stock market developments, an expert warned yesterday.

Mercer actuarial consultant Joyce Brennan said minor changes proposed by the Pensions Board in its discussion document were totally inadequate.

If the issue was not addressed in a more radical way it would lead to countless numbers of defined benefit plans being closed to new entrants, she said.

Responding to the Pensions Board’s consultation paper on the Funding Standard for Defined Benefit pension plans, Ms Brennan said: “the funding standard for defined benefit pension schemes needs to be fundamentally changed as it is in danger of driving more employers to close their schemes.”

The funding standard is a statutory test that defined benefit pension schemes must pass.

Pension schemes must hold enough assets to cover the benefits that would have to be paid out if the scheme were to wind up.

That posed a real dilemma because “nearly half of defined benefit schemes in Ireland currently fail the funding standard,” she said.

Employers have had to significantly increase the contributions they pay to these schemes. “We have seen increasing evidence of employers reacting by closing their schemes to new entrants, reducing benefits, increasing employee contributions or even winding up their schemes,” she said.

In Britain, 60% of defined benefit schemes have been closed to new members and Ireland faces the same dilemma if the funding issue is not tackled, she said.

Mercer recommends that instead of requiring schemes to hold enough assets to cover the benefits that would have to be paid if the scheme were to wind up, the Pensions Board should require schemes to cover the pensions that members have accrued, assuming the scheme continues.

In addition, Mercer suggests State intervention to sell annuities to schemes where the employer becomes insolvent, at terms better than insurance companies could afford.

Such a move would allow such schemes to provide an annuity to pensioners at a lower price than is available from the insurance market.

Meanwhile, the Pensions Board has successfully prosecuted the trustees of an occupational pension scheme. Dunnes Stores Pension and Life Assurance Scheme trustees failed to furnish the board, within specified time limits, with copies of documents including its annual report relating to the scheme.