“THE Pension Crisis”, “The Ticking Pensions
Time Bomb" - both phrases have been bandied about in the public domain
over the last few years to, in some way, address and describe the myriad of problems
faced by Ireland's pension sector. But these terms are too vague and all-encompassing
to have any real impact.
We need to take a more polarised view
of the issues impacting the sector. We must segment the pension sector and
assess each element individually - because each is so different in its operation
and offering and each requires a wholly different solution.
Without a doubt, the Defined Benefit
(DB) liability crisis is significantly graver than the asset crisis that preceded
it. It has also been under-hyped and undersold, at least until now.
Public and private sector comparisons
have dominated pension debate and much less attention has been given to the
fact that DB schemes in Ireland are in a much deeper crisis then they were
during the Recession, when funding was the primary issue.
Many members of these schemes are not
sufficiently aware of the reality of the situation.
Members have the simplistic yet understandable
view that because they, and their employers, have paid their contributions into
the pension plan over many years there should and will not be an issue when it
comes to collect.
What is missing is the understanding
that a major proportion of the DB pension promise is built on the contribution
that the capital markets also make over the years to the fund. Without consistent
returns from the markets, trustees struggle to make the model work - and that
is the situation we are faced with today.
Low yields and low discount rates,
leading to very high and increasing deficits, mean that the promises made by DB
schemes need to be re-evaluated in many cases.
The regulatory rules that manage the
solvency of schemes work on the premise that schemes must in theory, be able to
pay out all benefits today, rather than solely focus on their ability to pay out
promised benefits over the next 30-60 years.
So, let's put this in context - if a
first-time-buyer was to be assessed for a €300,000 mortgage application using
the same regulatory rules, they would not only need to prove that they could
meet the monthly repayments, but have €300,000 in a savings account as well. That's
not workable in the real world. Neither is the current method of regulating future
Looking back to 2008-2009, it was
very clear that to everyone that we had an asset crisis; it was very visible
and tangible. The global fix that was found at the time, quantitative easing
(QE), was not invented to solve the problems of pension funds.
In fact, pension funds have suffered enormous
collateral damage as a result of QE.
The market recovery in the last few
years has seen asset values recover, but not yields. We now have very low yields,
very low discount rates and very high levels of deficits at many pension funds.
In contrast to the asset crisis of
2008-2009, we now have a much larger liability crisis promises are significantly
In 2008-2009, the responses from
pension funds, trustees, employers and trade unions was to add significant single
and ongoing contributions, re-negotiate and reduce benefits - but these were one-off
events that can't easily be repeated.
So the challenge of fixing it this
time around is even greater.
The number of active DB schemes has
fallen from just over 1,200 at the end of 2006 to less than 500 today. The number
of active members in those schemes has dropped from 270,000 to 126,000 at the
end of last year.
We believe it is time to take a wider
look at the Defined Benefit pension structure and its associated solvency measurement,
particularly in the current unprecedented financial landscape.
DB schemes that have survived have
generally done so because of tough decisions and considerable effort and pain for
members and employers. Many employees have seen their benefits reduced. Many employers
have had to make significant increases in their contributions. It's
questionable whether they will be willing or able to agree further increases.
We have seen the recent report on the
market cost of public sector pensions. The Government doesn't have to go to the
market to purchase annuities, but neither do private sector defined benefit
schemes. Yet, we continue to assume they do when it comes to setting minimum funding
Defined Benefit pensions are crucial
to the retirement of many people, it is now time to take a wider look at how they
are measured and in particular, we need to see a more logical approach taken in
the review of the current minimum funding standard basis.
Jim Foley is the chairman of the Irish
Association of Pension Funds
Publication: Irish Independent
Date: Thursday, December 15, 2016