Call for ‘creative solutions’ to pension funding

A LEADING pensions expert has called for a radically new approach to pension funding to deal with crisis.

“Irish defined benefit (DB) pension schemes are now at a tipping point and urgent action is needed to throw a lifeline to schemes,” said Michael Walsh, head of retirement practice at Mercer.

The low yield on German bonds is the latest crisis to hit the DB segment of the market while the cost of funding schemes has doubled in the past 10 years, piling huge pressure on Irish pension schemes, he said.

The latest crisis undermining DB pension plans is the low yield on German bonds and it is not sustainable to fund pensions on the basis of a yield of 3% a year or less, he said.

Without a “creative solution” he warned that more pension funds would run into serious problems.

The Society of Actuaries and the Irish Association of Pension Funds has put proposals to government to address the crisis, Mr Walsh said.

They involve insurers being allowed to sell, and pension schemes being allowed to buy, a new kind of annuity, he said.

These annuities would be linked directly to Irish Government bonds and would “be much cheaper than conventional annuities”.

The important point about such a plan is that it “would increase the chances that pension schemes can continue to operate and make good current funding deficits over time,” he said.

In the current environment the Pensions Board has extended its usual deadlines to give struggling pension schemes more time to develop plans to address their funding deficits.

But the dip in Eurozone bond markets has hit pension schemes, just as the deadlines for submitting recovery plans to the Pensions Board approach, he said.

Most pension schemes have spent many months building recovery plans, negotiating contributions and benefit changes with employers, employees and unions but these recovery plans may no longer work.

“Without time or appetite to go back to the drawing board, employers could now decide that there is no option other than to wind up,” Mr Walsh warned.

The Department of Finance is considering the proposals forwarded by the Society of Actuaries and the IAPF, but with time rapidly running out for pension schemes, this decision is needed urgently.

“Sovereign annuities are one potential solution,” he said.

If that is not acceptable to the authorities then Mercer believes an alternative to annuity purchase is needed for pension schemes that wind up, he said.

Mercer has also proposed that pension schemesthat wind up should be allowed to pay lump sums to pensioners instead of buying annuities and the money put into an Approved Retirement Fund which would provide income to the holder as needed, he said.