State under fire for use of pension fund

THE Government’s decision to use the National Pension Reserve Fund to recapitalise the banks has been severely criticised by the OECD.

The report, on private pensions and policy responses to the financial and economic crisis, also shows that Irish private pension funds lost 35% last year — more than similar funds in any of the other 37 developed nations surveyed.

A separate report, from the human resources consultants Hewitt Associates, estimates that as much as 90% of defined benefit pensions were failing the minimum funding test and would be unable to pay out unless they were overhauled.

The schemes lost e30 billion last year and another e3bn so far this year has been wiped off their value. Even if they averaged a 7% annual return over each of the next five years, asset values would only return to their 2007 level, the consultants told clients at a seminar in Dublin yesterday. The report from the OECD was very critical of the Government using e10bn from the Pension Reserve Fund to aid the country’s banks.

“We do not believe it’s a good use of this money. It should have been the last option to be used only if the entire economy is collapsing and there is nothing else left. But it was the first thing they did,” said the report’s co-author Mr Antolin.

He added the Government argues it will put back the money, but it would need to do so with whatever interest it would earn over the period it has been used elsewhere. Losses from Irish private pensions funds topped the list of 37 countries surveyed because on average they were more exposed to equities than similar funds elsewhere, according to Mr Antolin.

The report praised the two-year extension given to anybody about to retire in Ireland and so giving them greater flexibility in the timing of buying an annuity.

On defined benefit pensions, Kieran Barry, managing director of Hewitt Associates Ireland, said the old approaches of closing schemes to new employees, increasing contributions and moving to a hybrid model will not solve the problem.

Kathy Murphy, director and actuarial practice lead at Hewitt, said additional solutions around changes in asset investment, non-cash financing options for employers and radical restructuring and reduction of benefits may need to be considered.

Ciaran Phelan, director of financial services at the IBA, said Waterford Crystal, SR Technics and Bord na Mona simply represented the tip of the iceberg in unrecoverable, under-funded defined benefit pension schemes.

“Trustees and employers need to be absolutely honest with the members of these schemes and communicate to them exactly how much money has actually been accrued on their behalf at this stage and what remedies would need to be taken to ensure that they receive their promised pension in retirement,” he said.