Defined benefit pension schemes improving, says survey

A survey released today revealed that the financial position of defined benefit pension schemes in Ireland has improved significantly in the past year.

However, Mercer Human Resource Consulting the survey also shows that defined benefit pension schemes continue to be a costly burden for employers, with many companies actively reviewing options for the future.

Around 500,000 employees are members of defined benefit pension schemes in Ireland, and as a result generally expect to receive pension benefits related to service and salary at or around the time of retirement.

About half of these are public sector employees whose benefits are guaranteed by the State. The remainder, mostly private sector workers, rely heavily on the support of sponsoring employers.

The main findings of the survey included the following:

Two-thirds of defined benefit schemes currently meeting statutory solvency test, up from 50% a year ago.

Employer contribution rates have doubled over last few years, with the average contribution rate now at 17%, compared to just less than 9% in 2000.

Employees are also paying more, with 23% of schemes reporting an increase in the last three years and a further 18% either imminent or expecting increase in next three years.

Extra contributions are ranging from 1% to 3% of pensionable salary.

Nearly 40% of schemes are now closed to new entrants, and this is expected to rise to 60% over next three years.

Only a minority of schemes are reducing benefits for existing employees or closing down completely.

Investment in bonds is increasing as employers seek to reduce risk.

"We believe that this trend of increasing the amount of bonds held has been caused by companies aiming to limit volatility in the contribution rate and the solvency level going forward," said Michael Madden, European principal with Mercer.

"Some companies are willing to forego the possibility of extra returns in return for reduced risk."