Threats posed by defined benefit schemes

DEFINED benefit (DB) pension schemes can pose the single biggest threat to a company's long term future, said Liam Quigley, senior consultant with Mercer.

Such plans have the potential to derail a company when they reach 20% to 30% of the market capitalisation of a business, he told those attending the group's annual conference.

However, Mr Quigley said better investment products have emerged that can help trustees and sponsors to control the investment risk.

Mercer's latest 2008 Defined Benefit Survey shows the shift away from DB plans continues, with 55% of current defined benefit schemes now closed to future joiners. Those that are closing are the smaller sized plans, Mercer found.

It also found employer contribution rates have doubled over the last eight years, with an average contribution rate now of 18% while employee contribution rates have also increased to an average of 5.5%.

Approximately 10% of schemes have increased employee contributions since Mercer’s last survey in 2006.

It also found that funding standard difficulties remain, with one third of schemes failing the funding standard under the Pensions Act at their latest measurement date, and these are expected to be worse at present, given recent market falls.

Meanwhile, in a separate development Aidan Clifford, ACCA Ireland advisory services manager called for a change in the rigorous way the accounting standard on Irish pensions is applied.

“Forcing companies to recognise unreliably calculated pension deficits has led to many entities closing their defined benefit pension schemes. The accounting standard on pensions is driving business decisions rather than its more proper role of just recording the decisions”, he said.

Calling for greater flexibility, Mr Clifford said that defined benefit pensions gave greater certainty to an employee’s pension entitlements, relieving them of the risk of stock market fluctuations and the possibility of a life of poverty in retirement.

“This is one occasion where a change in an accounting standard might halt the trend of closing defined benefit pension schemes,” Mr Clifford said.