80% of pensions remain underfunded - survey

Eighty per cent of Irish pension funds fail to meet the minimum funding requirements, according to a survey by employee benefit consultants Mercer.

Funds have been stretched by a cumulative three-year fall of around 16 per cent in the value of assets together with with a 15 per cent rise in liabilities as salaries rise faster than expected and bond yields fall to historic lows.

However, Mercer said defined benefit plans trustees and sponsors were continuing to adopt a long-term strategy despite the "concentration of regulators and the accounting profession on short-term metrics".

Mercer spoke to 250 trustees and plan sponsors in what it says is the largest survey of its kind to date in the Irish market.

It shows that defined contribution schemes continue to be chronically underfunded with respondents estimating that contribution levels should be around 20 per cent of salary compared with the 10 per cent level at present.

Pensions consultants fear that without a concerted campaign of education and communication, members of defined contribution schemes will face an impoverished retirement. While the first generation of defined contribution schemes is unlikely to mature for about 20 years, Mercer warns that rectifying funding adequacy will become prohibitively onerous as retirement nears.

Disillusionment with the performance of fund managers is reflected in the 87 per cent of respondents who believe managers "hug" benchmarks rather than trying to achieve maximum performance.

Mr Tom Murphy, head of Mercer Investment Consulting, suggests this may explain the move to passive management in the Irish market in recent years.

It also notes a rise in the number of funds using specialist managers, rather than simply putting money into balanced managed funds.

However, Mercer stressed that, while specialist management can assist funds in bettering performance even allowing for its greater cost, 90 per cent of fund returns and risk depend on basic asset allocation between stocks, bonds, property and cash.