Concerns over defined benefit pensions

The Pensions Board annual report highlighted concerns about the ability of defined pension schemes to meet their funding obligations.

The warning came just days after Independent News and Media (INM) announced that it would have to cut the payments from its defined benefit pension scheme by 46% as the scheme is insolvent.

The INM announcement is just the latest in a long line of defined benefit schemes which have become insolvent with estimates as high as 80% of the schemes maybe under water. High-profile schemes with large deficits include AIB with an €800m funding hole and Bank of Ireland with a €1.2bn. Aviva and Permanent TSB are winding down their defined benefit schemes.

The Pensions Board’s chief executive, Brendan Kennedy, said that they still had concerns that a number of schemes were not reaching the funding standard and would not be able to pay their workers when they reached retirement.

“We continue to have concerns about the understanding that some defined benefit trustees have of their role and responsibilities. The task of trustees is to manage the scheme to ensure as far as possible that members and beneficiaries receive the benefits promised under the scheme rules. This requires trustees to understand the finances of their scheme and the risks that it faces, and to manage the scheme to mitigate these risks. This is especially important for investment risks, which are in effect borne disproportionately by the younger members of the scheme,” he said.

The report found that there were nearly 190,000 people who were members of defined benefit schemes which were compliant with the funding standard for defined benefit schemes, However, 340,000 people are in defined benefit schemes that are excluded from the funding standard.

“Without an adequate standard, there is a substantial risk that by the time that younger members retire, the scheme assets will have been exhausted in paying the benefits of those who retired before them; the longer that schemes put off meeting the standard, the greater is this risk,” said Mr Kennedy.

As problems with defined benefit schemes increase, younger workers have been moving towards defined contribution schemes, but these too are not without risk according to the board’s report.

“The most important issues in defined contribution are investment risks and losses, contribution inadequacy and costs, and the board’s work will comprise a mix of proposed additional regulation, contributor information and trustee guidance,” said Mr Kennedy.