Warning of future shock in defined benefit pensions

Workers under 45 who contribute to a defined benefit pension scheme could be left with nothing by the time they retire, according to a pensions expert.

Clear Financial’s Micheal Bradley said a number of defined benefit pension schemes are likely to be declared insolvent.

Mr Bradley warned that, due to the structure of these schemes, employees could be left with no money in their funds when they come to retire as those who have retired before them may have drained the pension pot dry.

“None of the money contributed by individual employees to defined benefit schemes is ring-fenced in the name of that employee,” said Mr Bradley. “What this ultimately means is that, in a wind-up situation, the rules dictate that younger members are discriminated against while those in and approaching retirement receive their funds first.”

Mr Bradley took the example of an employee who has been a member of a defined benefit pension scheme for 20 years. The company’s scheme is now insolvent. For the 20 years, he has contributed 5% of his gross salary to the scheme. The employee believes he has a pension fund worth €100,000.

The employee, he outlines, has only recently discovered the contributions he has being paying into the scheme have not been ring-fenced in an account for him, but have effectively been used to pay the monthly pensions of those employees already retired. When he does retire he discovers there is only €40,000 in his fund.

He urged people to find out the level of solvency in their schemes.