Pension – the funding crisis
In the past 10 years there has been a switch from the established ‘Defined Benefit’ schemes (DB) to the more secure ‘Defined Contribution’ schemes (DC). The under funding crisis has affected the majority of DB schemes and a number of high profile cases hit the headlines – Bank of Ireland, Aer Lingus, ESB, Ryanair and the Irish Times.
The combination of low interest rates and volatile stock markets has caused DB funding levels to reach crisis levels. The Irish Times 13th August 2016, reported ‘that the pensions hole in Ireland has almost doubled in 2016, at the start of the year the deficit was just under €3 billion and by the end of July it had jumped to €5.7 billion’.
Irish League of Credit Union / DB Scheme
The majority of CU’s are members of the Irish League Credit Union / DB Scheme, however, recent concerns over funding of DB schemes has resulted switching to DC schemes.
The cost of the ILCU DB scheme has now risen to 30% of gross earnings (21% employer + 9% employee). The ILCU acknowledge that this is too high and it would be unrealistic to contemplate further increases in funding requirements.
From 1st September 2006, the ILCU introduced an integrated DB scheme to reduce the cost pension provision for both employee and employer. The new scheme is integrated with the state pension scheme – pensionable salary is defined as basic annual salary less 1.5 times the state pension (€ 12,132 pa).
Transfer of Engagements
Employee pension rights do not automatically transfer to the new employment because group pension schemes have more than one participating employer, as is the case with the ILCU scheme.
However where there is a pension scheme in place at the time of transfer, the TUPE legislation provides that the new employer must ensure that pension rights are protected.
It is advisable to investigate each individual case to establish the value of the fund, age, number of year’s contributions and the individual’s appetite for risk. Negotiations are required to establish what pension obligations transfer to the new employer and other issues need to be considered – PRSA arrangements, life insurance and health insurance.
- Status quo – remain in the ILCU Pensions Scheme
- Preserved benefits – to receive future income on retirement
- Transfer value to be invested in an approved DC scheme or used to purchase a ‘buy-out’ bond
The management of DB Pension Schemes is a complex issue which goes beyond the decision to provide a retirement benefit for employees.
DB schemes should be considered in the context of the risk management process:
- Market risks – Low interest rates and flat investment performance are the drivers of overall risk for DB schemes
- Financial risks – underfunding and control of payroll costs
- Actuarial risks – calculation of funding standards and forecasts