IBEC: Urgent need to reform pension rules

IBEC Director General Turlough O'Sullivan has warned that unless the funding rules governing defined benefit pension schemes are urgently reformed, a number will collapse, with benefits being severely restricted.

Mr O'Sullivan said: “It is time that the Government and the Pensions Board as the regulator, faced up to the serious difficulties that defined benefit pension schemes are facing. The current obligation on schemes to be 100% funded on a discontinuance basis is not sustainable."

According to pension industry estimates, three out of four defined benefit schemes could now fail to meet the funding standard compared to just one in four at the end of 2006.

There are 99,802 schemes with 800,398 members of which 66% are defined benefit schemes and 34% are defined contribution schemes.

“The problems facing employers are being exacerbated by poor investment returns, declining asset values and longer life expectancy. Employer contributions have had to rise significantly in recent years simply to meet the draconian discontinuance funding standard. Defined benefit pension costs are increasingly regarded as a 'bottomless pit',” said Mr Sullivan.

“The funding standard and other regulatory requirements are leading to the demise of defined benefit pensions. Employers have a responsibility to act: if they increase payments beyond what can be afforded, this threatens the viability of employment and of the business.

"In the case of defined contribution schemes the main problem is that regulation obliges the holder to purchase an annuity on retirement. In current economic circumstances this is not the best option. Regulation should be relaxed to allow the retiree to exercise flexibility in investment or to wait until the markets recover.

“Given that we are now in more difficult economic circumstances, employers will continue to examine the balance of pension costs. IBEC believes that continuing the current wind-up standard is only hastening the flight from defined benefit scheme provision.”