TENS of thousands of Irish workers could see their pensions wiped out in the next six months, according to a confidential briefing document sent to the government within the last week.
A number of high-profile pension schemes are expected to collapse as the total pension deficit reaches €20bn to €30bn, says the alarming memorandum sent by the minister for social and family affairs, Mary Hanafin, and seen by the Sunday Tribune.
It is estimated that defined-benefit pension schemes, where employers carry the investment risk, have lost a third of their value in the last 12 months amounting to €20bn. Investment losses are also serious for members of defined-contribution schemes who bear all the investment risks.
The memo discloses that "there is a particular concern for pensioners and those approaching pension age in the event of the wind-up of significantly under-funded schemes. This could be particularly difficult for pensioners in a mature scheme where a large number of pensioners are being paid directly from scheme funds."
Around 250,000 employees and 90,000 pensioners are in defined-benefit schemes. These figures do not include public sector workers. Those in defined-contribution schemes are also at risk although the age profile is likely to be younger.
The minister spelled out in blunt terms to her cabinet colleagues that:
? The total deficit is estimated to be in the region of €20bn to €30bn. The scale of the pension liabilities are three times the level of capital the Irish banks are believed to require.
? There are likely to be public collapses of schemes within the next six months.
? More than 90% of defined-benefit schemes – the most common type of pension scheme in Ireland – are expected to be in deficit when they report on their solvency to the Pensions Board.
? Industry estimates suggest 50% of schemes will wind-up within 12 months.
The memo points out that because of budgetary restraints, the government would find it "impossible… to make good any deficits either directly or indirectly, no matter how strong the pressure might be".
"In the event of a major scheme winding-up in the short-term, the government potential to respond is extremely limited. However, it must be recognised that in the worst-case scenario, a scheme may not have sufficient funds to pay existing pensioners, even apart from the funds required to meet the accrued benefits of current employees."
About 100,000 company pension schemes are currently in operation in Ireland and about two-thirds of these are defined-benefit schemes. These schemes deliver pensions based on final salary and are typically provided by employers who bear the investment risk.
The other scheme is 'Defined Contribution' where the contribution rate is fixed and the final pension is determined by the investment returns on the money invested. The employee carries the risk with these pensions.
In recent years there has been a significant move away from Defined Benefit schemes to Defined Contribution, but most pensioners and those reaching pension age have Defined Benefit.
The government has been warned that "barring some unexpected short-term investment recovery, it is likely the benefits promised to date by Defined Benefit schemes will not be fully paid.
"The investment losses will also be serious for members of Defined Contribution schemes who bear all the investment risks," stated the memo. "Best practice would dictate that pension administrators should ensure that a person's fund is protected as they near retirement, by switching assets to more conservative investments.
However, there is anecdotal evidence that this practice is not generally applied and as a result Defined Contribution members have been exposed to more risk than they might realise."
In one of the most striking revelations in the memo it is stated that as there is such a large number of occupational schemes – over 1,400 Defined Benefit and 100,000 Defined Contribution –
"the Pensions Board cannot have an ongoing supervisory relationship with any but a handful of the largest or most troubled schemes."
Options being considered for the longterm framework of pensions include introducing a statuatory employer guarantee whereby the employer would be legally liable for shortfalls in a Defined Benefit scheme, establishing a reserve fund, remodeling of the defined benefits scheme and developing supplementary pensions as second tier payments on top of the state pension.
Conor: great article.
Of course a major problem is the order of priority if there is a wind up of a scheme. So pensioners are paid in full before any of the other members...so if you are 64 you could get nothing whilst people who had just become pensioners at 65 are paid in full.
The Government has been made aware of the issue but has done nothing to date. Clearly benefits should be paid in some sort of proportion to stop his arising. The Society of Actuaries has also highlighted this issue.