Defined benefit pensions facing a crisis

FOUR out of five defined benefit pension plans are failing to meet statutory funding standards while a sixth are likely to be wound up due to difficulties.

Pension consultants Mercer said half of defined pension schemes must submit a recovery plan to the Pensions Board by June 30.

They said half of all these schemes will change their benefits or their employee contribution rate this year and one in four have either implemented or are strongly considering an increase in the required employee contribution rate, generally from 5% to between 8% and 10%, or in some cases even higher.

Nearly 15% of schemes will stop providing benefits from the defined benefit scheme for the future and will switch to a defined contribution scheme instead. This means members will receive some of their pension from a defined benefit scheme and some from a defined contribution scheme.

Mercer’s Joyce Brennan said: “You need to take a cold hard look at whether you can realistically continue to afford the costs and risks of current defined benefit pension plans.

“If change is needed, ensure that the change makes the scheme sustainable and robust for the future. Avoid tinkering around the edges and have a fundamental look at what is going to meet the needs of your business and your employees for the next 20 years.”

Mercer has called for an extension to the deadlines for funding proposals to give employers and trustees the opportunity to take into account the National Pensions Framework published last week. Several aspects of the framework, such as the increase in state retirement age, a change in the tax treatment of employee contributions, and the outline for a new type of defined benefit pension scheme, could all have a significant impact on funding plans, it said. The consultants said a key reason for the increase in the cost of defined benefit pension schemes is the dramatic increases in life expectancy.

“In the 1970s when many defined benefit pension schemes were established, the expectation was that a pension would be paid for 13 years for a man who retired at age 65. The expectation now for a man in his 20s is that he will receive pension for double that period of time,” said Mr Brennan.

Chairman of the pension committee at the Irish Brokers Association Aidan McLoughlin said the sheer cost of many defined benefit plans has resulted in such schemes being closed off by employers.

“As professional trustees to some of the leading companies we have witnessed first hand the issues facing defined benefit pension schemes and have advised both employers and employees on the options available to them.

“Now the employers and in particular the trustees are realising that a potential trap exists for the final members of the scheme and that urgent action needs to be taken to resolve this,” he said.