Defined benefit pension requirements ‘putting pressure on employers’

THE strict solvency requirements for defined benefit pension schemes are putting severe pressure on employers to close existing retirement plans for their workers.

Under the Pensions Act, funds must be capable of meeting their commitments at all times.

Mercer Human Resources Consulting warned yesterday that such a requirement was too onerous a burden on firms. The solvency test has become increasingly difficult to meet since the 2000/2001 stock market crash that left many pension plans seriously under-funded.

In today's difficult trading environment, Mercer said a revised solvency test "is urgently needed" to stop companies opting out of defined benefit retirement packages for their workers.

Mercer, one of the largest pension advisors in the country, said the current solvency demands are making the situation intolerable for some companies.

To ease the burden it suggests the solvency test be amended so that it covers benefits to a specified limit.

By taking that line, greater protection would be afforded existing employees, said Anne Kershaw, senior retirement consultant, Mercer.

In the event of a scheme winding up, that approach would give existing workers a higher priority than is currently the case.

"Currently, high-earning pensioners receive an annuity for their full pension in the event of a scheme winding up before any assets are allocated to current employees," she said.

In a new discussion paper Solvency, Some New Ideas Mercer suggests another solution to easing the burden would be to break the link to annuity costs. Schemes are currently obliged to cover the cost of purchasing an annuity for pensioners.

But because insurers take a prudent view of life expectancy in pricing annuities, that makes the cost to employers of covering them significantly more expensive than is the case in reality, said Mercer.

Mercer also raises the possibility of the State acting as an annuity provider in the event of a scheme winding up.

If a scheme winds up due to insolvency, pensioners could be given a State guaranteed pension, said Mercer.

Another possibility is the establishment of a mutual fund to which all schemes would contribute and which they could draw down if their funds got into difficulties.

Mercer has put its ideas on its website www.mercerHR.ie and asked employers, trustees and members to vote for the option they think makes best sense in today's climate of uncertainty.