The Consumers' Association of Ireland is concerned about the manner in which the pensions industry is being regulated, following information it received from staff in the financial sector about actions undertaken by the industry regulator. Approximately 50,000 workers are employed in financial services.

In 1998, the Pensions Board sought legislative change in the prudential management of large pension schemes, specifically for the financial services sector. This move followed a period of years during which pension schemes engaged in the practice of self-investment, in apparent breach, we believe, of pensions legislation introduced by the Minister for Social Welfare - Occupational Pension Schemes (funding standard) Regulations, 1993.

A leading principle for pension schemes is that the assets of the scheme, held by the trustees on behalf of employees, are segregated from the assets of the employer. Not to do so could create an unacceptable level of default risk to employees in the event of the employer running into serious financial difficulties. In such an event, if the pension assets also form part of the balance sheet of the employer, a worker could be out of a job, and out of a pension scheme.

The Pensions Board lobbied the Government in 1998 to allow the rules on self-investment to be changed so that occupational pension schemes in the financial services sector could be invested in unit-linked funds and cash deposits held by the sponsoring employer.

These are, typically, life insurance companies, banks and asset management groups.

On December 23rd, 1998, the Minister for Finance, Mr McCreevy, and the Minister for Social, Community and Family Affairs, Mr Ahern, signed an amendment to the 1993 regulation which specifically allows the financial services sector to invest their staff pension schemes in their own funds. This loops the assets back on to their balance sheets.

Conversely, divesting funds of staff pension holdings affects balance sheet values, a sensitive issue during life office takeovers.

The request for amendment came from the Irish Insurance Federation (IIF), whose members comprise Ireland's life offices.

An IIF circular to members earlier this year stated: "In late 1998 the Pensions Board advised the IIF that their interpretation of restriction on self-investment contained in the occupational pension schemes (funding standard) regulations 1993 would prohibit a life insurance staff pension scheme from investing in the life office's own managed funds or policies. The application of this interpretation was a matter of grave concern to many member companies and the IIF made a submission to the Pensions Board. Following this, regulations came into force shortly before Christmas 1998 which removed the restriction, although the Pensions Board has indicated their intention to revisit this topic at some stage in the future`.

In an industry circular dated January 18th, 1998, the Pensions Board confirmed the change in legislation. But the Pensions Board went on to state: "While the amending regulations have been made with the objective of reflecting the original policy intention, the board feels that the regulatory treatment to apply in the longer term to schemes in the financial sector in relation to self-investment needs to be reviewed; inter alia, some of the views received during the consultation process favoured a somewhat more restrictive approach to self-investment in the case of schemes in the financial services sector than applies to schemes generally".

CAI understands that the IIF argued that the imposition of the 1993 standard would lead to widescale divestment from managed funds, potentially threatening the Irish market. Counter-arguments that such divestment could be phased in over a number of years in order to prevent this effect were, apparently, unsuccessful.

There has been no public discussion about the changes negotiated by the Pensions Board with the Government, outside of documents lodged in the Government Publications Office in February.

Under the recently introduced Investor Compensation Scheme, investors in Irish unit-linked funds and bank deposits can be compensated only to a maximum of €20,000 per investor in the event of default of an Irish financial institution. At best, staff pension investment is likely to constitute one investor, and at worst may fall outside of the scheme.

CAI is calling on the Ministers, Mr McCreevy and Mr Ahern, to revoke the occupational pension schemes (funding standard) (amendment) (No. 2) regulations, 1998. Instead, a more restrictive definition of self-investment should apply to the financial services sector. The level of self-investment embedded in the industry needs to be examined by Government and the results made public. Financial firms engaged in non-segregated investment of their staff pension schemes should be required to wash out the default risk to which they are exposing their own employees.

Eddie Hobbs is the finance spokesman for the Consumers' Association of Ireland