The security of defined-benefit pension schemes has received many column inches over the past weeks. It led to the Taoiseach commenting in the Dáil last Tuesday that the Minister for Social Protection had asked the Pension Authority to report back to him with an assessment of the current overall position on defined-benefit schemes.
The assessment will be very straightforward.
The legislative position in Ireland for defined-benefit pension schemes is such that the actions of any employer that walks away from its pension funding obligations are perfectly logical from a financial perspective, notwithstanding that the result for many pensioners in those pension schemes is very difficult.
The issue gained prominence in 2004, when the UK pension regime was changed to prevent similar outcomes for UK pension schemes. Various options were considered in an Irish context during the 2008 financial crisis, when the view of the then minister for social and family affairs was reported as being that the odds were against the government establishing a pension protection scheme, saying that such a scheme had proved very expensive in the UK.
Employer covenant
In 2008, the Society of Actuaries presented a report to the Irish Association of Pension Funds, highlighting that the security of active members’ benefits is still largely dependent on the employer covenant, that is, the willingness and ability of employers to support the pension schemes on which scheme members relied for their pension income in retirement. That presentation noted that the current system overpromises and underfunds, and exposes members (especially current employees) to far greater risks than are commonly understood.
The issues which existed in 2008 were never addressed. The pension headlines over recent weeks are only remarkable due to the very articulate nature of certain of the impacted individuals. Their ability to communicate with the general public and to highlight the issues is very striking.
Eight years ago it was proposed that there would be consideration of the introduction of debt on employer legislation and a protection fund. These steps would have provided protection for the members of Irish defined-benefit pension schemes. Cost is a consideration, but there is a clearly visible cost now for having failed to take those steps.
So what will an assessment of the position of defined-benefit schemes show? Behind all the data, it will show that we have an inflexible funding system. The current system requires employers to resolve all funding challenges by 2023, but where they are unable to or decide not to, the legislation allows them to walk away from their pension funding commitments. Our pension funding system places excessive pressure on employers but carries no sanction on employers – a very dangerous mismatch. It continues to cause some employers who would otherwise have met their obligations to the current and former employees to renege on the promises they made.
No protection
We do need regulation, but regulation needs to be there to protect those who participate in the defined-benefit pension system. Regulation at present is doing the opposite.
What would a better regulatory system look like? Very simply, we need to acknowledge the role of the employer. The present system completely ignores the employer, and tests only for the level of assets available in the complete absence of any employer. This is unrealistic and is proving very unhelpful.
The regulatory system should allow for the covenant of the employer to be considered in the funding of pension arrangements, which would then provide the funding flexibility required to deliver the pension promises made. Longer funding periods would be the result – and an acceptable result. Debt on the employers should be introduced where an employer simply walks away from a pension arrangement.
In truth, most employers where it was achievable or necessary for them to simply walk away from their pension funding commitments have done so by now. Businesses will ebb and flow, and pension promises are challenging to deliver – but the regulatory environment should be supportive. Today it is not.
Munro O'Dwyer is a partner with PwC