THE GOVERNMENT has put a five-year austerity plan in place to rebalance the public finances by 2014. A no less pressing concern is the perilous financial state of the country’s defined benefit pension schemes. Some three out of four private sector company schemes are in deficit and, according to the Pensions Board in its annual report, the combined shortfall now amounts to €25 billion – a sum equivalent to one-third of the national debt. What remains unclear is how this soaring deficit can be reduced over time, given the uncertain medium-term global economic outlook.
Governments throughout the developed world are repairing their balance sheets and this adjustment will depress consumer demand, weaken economic growth and so make it harder to achieve strong investment returns. Such a prospect raises major concerns about the solvency of domestic pension funds. Contributors (both employers and employees) will be asked to pay more into their fund. And employees will find they must work longer to secure a lower than anticipated income in their retirement.
Pensions Board chief executive Brendan Kennedy has been highly critical of the investment strategies favoured by managers of Irish pension funds since 2007. In particular, he faults investment managers for an over-reliance on equities and property as their preferred asset class. This approach left pension funds heavily exposed to the fallout from the financial crisis. Mr Kennedy blames fund managers for assuming an excessive level of investment risk then and for refusing to reduce their risk profile now.
Certainly, equity investment has produced better returns than other asset classes over the longer term. Pensions are a lifetime investment and diversifying financial risk can take time, while close to the bottom of a stock market cycle is never the ideal time to make major adjustments to an investment portfolio.
With so many private sector pension schemes in financial difficulty and with members making increased contributions for reduced benefits, the Government will face increased pressure to reassess its decision to reduce tax relief on such contributions to a proposed 33 per cent rate. Minister for Social Protection Eamon Ó Cuív said this week that relief at a lower – rather than higher marginal – tax rate would not have a disincentive effect and would not discourage high earners from saving. However, Mr Ó Cuív did not set a date for the implementation of that policy. Clarity on this matter is required.