Proposal could see pension costs rise by 50%

INCREASES OF as much as 50 per cent in the cost of pensions are proposed under a consultation paper produced by Government officials and the regulator.

It also outlines a design for a “new defined benefit model” which will provide lower benefits and feature greater reserves to allow for market volatility – specifically a 20 per cent fall in equity values, a 1 per cent fall in interest rates and a 0.5 per cent rise in inflation.

The measures are targeted specifically at private sector defined benefit occupational schemes.

Industry sources claim the measures, if implemented, will effectively mean the demise in the private sector of such schemes, which promise to pay a certain level of income in retirement based on final salary and years of service.

Unfunded public sector schemes which deliver the same promise are not affected by the proposal.

The report confirms that approximately three-quarters of all defined benefit (DB) schemes do not have sufficient assets to meet the current funding standard, which requires funds to have sufficient resources to meet all obligations if they were wound up immediately.

Funding of defined benefit schemes has been undermined by poor investment returns over the past decade and increasing longevity. “By the end of November 2010, approximately 640 such schemes out of a total of 1,212 were due to submit recovery plans to the Pensions Board for approval,” the paper states.

The paper says Irish defined benefit schemes have traditionally relied on employers to fund scheme deficits through increased contributions. “For many DB schemes, employer contributions are now at or above the maximum amount that is sustainable in the present economic climate,” it says.

The call for higher funding or reduced benefits comes at a time when existing tax relief on pension contributions is being eroded.

Proposals for a levy on pension funds to raise €1.9 billion over the next four years to fund the Government’s jobs initiative, confirmed in the Finance Bill published yesterday, means these recovery plans face further amendment involving increased contributions or reduced benefits.

The consultation paper was produced by the Implementation Group of the National Pensions Framework, which is composed of representatives of the Department of Social Protection, the Pensions Board, the Department of Finance, the Department of the Taoiseach, the Office of the Revenue Commissioners and the Department of Enterprise, Jobs and Innovation.

The consultation period is scheduled to close today.