THE AVERAGE Irish pension fund lost more than one third of its value last year. Over the short and medium term the investment performance of pension funds makes for grim reading. Performance has not matched promise, because the global credit crisis has taken a heavy toll on all stock market investments.
The average pension fund has relied heavily on equity investment to generate high returns. But in recent years these returns have failed to materialise: the heavy losses of the last two years have wiped out capital gains that pension funds made in earlier years. Since 1999, as recent surveys have shown, pension fund performance has failed to match the rate of inflation. In these exceptional circumstances, the Pension Board’s decision to relax the funding rules for defined benefit pension funds is overdue recognition of the acute difficulties that pension funds face.
Recent estimates by the pension industry indicate that most defined benefit schemes were in breach of the old funding rules. An employee with a defined benefit pension can expect to receive a retirement income based on the number of years served, and on his or her final salary. Company schemes had to be fully funded to ensure that if a company fails, the assets of the pension fund are sufficient to meet its liabilities, both to members and to retirees. The difficulties created where this happens, and where the pension fund is underfunded, are best illustrated by the experience of employees, present and past, at Waterford Glass.
Last year industry estimates suggested that three out of four defined benefit schemes would fail to do so. To reduce the sizeable deficits in these pension funds, many employers and employees have made higher contributions. In some cases, defined schemes have been closed to new members.
The pensions industry regulator has, rightly, accepted the need to relax the minimum funding standard requirement. He has given pension funds more time to bring their funds back into balance. Under the old dispensation, a defined benefit scheme had to secure certification of its fully funded status every three years. If it failed, a further 10 years might be allowed to eliminate the pension deficit. Now, under revised guidelines, the Pensions Board may allow a fund more than 10 years to attain fully funded status. Given the scale of the economic downturn and the turmoil in financial markets, a much longer time horizon for private pension funds is a welcome development.