Regulations threaten defined pensions
Shane Whelan of University College Dublin said current regulations were stifling defined benefit pension schemes and increased the costs involved in running them.
Writing in the latest edition of the Irish Banking Review, the quarterly newsletter of the Irish Bankers’ Federation, Mr Whelan said new pensions legislation introduced last year placed an unnecessary burden on employers.
According to Mr Whelan, employers are now forced to match the assets in their funds with future pension liabilities, causing many employers to shift their investments away from stocks and shares and towards bonds to meet this requirement.
While less risky than equities, investments in bonds tend to under-perform.
This makes running a defined benefit scheme more expensive and is one of the factors behind the trend in favour of less costly defined contribution schemes.
The disadvantage of these schemes for employees is that their post-retirement income is not guaranteed. If stock markets do badly and pension fund investment returns are low, pension incomes will suffer.
“Underlying forces are operating to bring the current structure of occupational pension provision to a crisis,” Mr Whelan said. He predicted that employers would move away from defined benefit schemes if the current regulations remained in place.
Mr Whelan also said the new regulations failed to achieve their target of ensuring that employers made reasonable provision for pension liabilities and were counterproductive.
“Regulation designed to protect pension members has actually increased the long-term costs of running these schemes,” he said. “The level of guarantee now demanded is so high, and is such a financial burden on the employer, that it is unrealistic to expect companies to provide for defined pension benefits in the future.”
Pension funds have suffered over the last three years as stock markets have fallen and the value of investments has declined. Increased life expectancy has put additional pressure on schemes.
More employers are choosing to put defined contribution schemes in place, transferring to employees the risk of poor investment performance. Many employees are unaware of the distinction between defined contribution and defined benefit schemes and the potential implications for their retirement income.
