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Pensions Update: Defined Benefit Pensions - Here to Stay or On the Way Out?

04/07/2018 Posted by | Comments(0)

The Irish Association of Pension Funds (IAPF) recently published the results of its 2018 survey on Defined Benefit (DB) pension schemes in Ireland (Survey). We have become accustomed to reading and hearing about the demise of, and difficulties with, DB pension schemes. In fact, the Irish Government recently published a roadmap for pension reform in Ireland, in which it identified that almost 1 in 4 DB schemes do not have the funds to provide for the benefits promised if wound up.

Statistics

Recent Pensions Authority statistics on DB schemes indicate that there are 611 continuing DB schemes with approximately €64 billion in assets in Ireland. 65 companies operating schemes with 60,000 members and holding approximately €20 billion worth of assets participated in the Survey which shows that only 6% of respondents had fully wound up their DB schemes. It is notable, but not surprising, that the majority of Survey respondents operate DB plans which are closed to new entrants with the majority of closed DB schemes being replaced by Defined Contribution (DC) schemes. The DB schemes that are being retained have generally been altered in an effort by sponsoring employers to restructure benefits and limit risk and costs.    

Key findings of the survey

The Survey confirmed that:

  • 20% of respondents have a DB scheme which remains open to new entrants and continues future accrual of benefits
  • 74% of respondents have DB schemes which are closed to new members with half of those also closed to future accrual of benefits

When the future accrual of benefits is ceased in a DB scheme, members’ benefits are effectively frozen at a given date with their final pensionable pay often being set as at that date for the calculation of benefits. Essentially this means that affected scheme members will not receive as large a benefit at retirement as they might otherwise have done had they continued to accrue/grow their benefit entitlement within the DB scheme. Other measures taken in relation to continuing DB schemes include increasing normal retirement age, reducing future benefit accrual, undertaking investment de-risking initiatives and not awarding discretionary pension increases.   

DC schemes are the overwhelming choice for companies seeking to replace their DB schemes.   

Contribution structures in replacement DC schemes

88% of responses indicated that where DB schemes have closed, they have been replaced with a DC scheme. The Survey shows that nearly half of all respondents who operate DC schemes use a “matching” contribution structure where an employer will match the contributions of the employee to the scheme up to a specified maximum rate. Survey participants mostly limited this to a maximum employer contribution of up to 15% of employee salary. Respondents indicate that 38% of DC schemes are operated on a level or fixed contribution system with the remainder operating service related, age-related or grade/salary related contribution structures. In excess of 60% of replacement DC schemes had a minimum employer contribution rate of 6% or greater and maximum contribution rates exceed 10% in half of the cases.   

DC schemes have traditionally not been regarded as attractive as DB schemes to employees due to investment risk and lack of any guaranteed retirement fund or level of income.  However, as DB schemes decline and the employment landscape itself is changing dramatically, DC schemes with generous employer contribution levels may increasingly be regarded as a premium retirement savings offering.

Conclusion

The Survey highlights some positive news indicating that, where possible, companies are retaining their DB schemes. This may seem surprising given the more usual coverage on the closure, underfunding or wind up of DB schemes. While changing from a DB scheme to a DC scheme is generally a difficult transition, the Survey indicates that employees affected by such changes often benefit from higher employer contribution rates for former DB members in DC schemes. 

It will be interesting to see how trends develop in these existing schemes in the future with the roll out of Government plans for pension reform in the coming months and years. 

 

Read the original article here

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