Trends in occupational pension schemes

The latest annual report by Ireland’s Pensions Board, published in July 2008, describes recent trends in occupational pension schemes available to workers in Ireland. The study indicates that the total number of workers in both defined benefit (DB) and defined contribution (DC) pension schemes rose slightly in 2007. However, the number of private sector workers in DB schemes declined in 2007, with only one in every seven workers covered.

About Pensions Board

Ireland’s Pensions Board is a statutory body set up under the Pensions Act 1990. It regulates occupational pension schemes and Personal Retirement Savings Accounts (PRSAs) in Ireland as part of its statutory role to monitor and supervise operation of the Pensions Act. It also advises the Minister for Social and Family Affairs on pension matters generally.

Types of pension schemes

Although many of the new pension schemes being introduced in Ireland in recent times are defined contribution (DC) schemes, such schemes still account for only about a third of all pension scheme members. According to the 2007 annual report of the Pensions Board, the exact proportion of DC pension schemes on 31 December 2007 was 34%, up slightly from 32% in the previous year. The data is based on occupational pension schemes registered with the Pensions Board. The board’s intention is to provide an indication of trends in Ireland’s pension schemes.

A defined benefit (DB) pension scheme gives members a guaranteed pension based on their service and their salary. A DB scheme collects a proportion of income from the employee and employer and pays out a portion of income on retirement. Typically, an employee reaching 65 years of age after 40 years of service and contributions can look forward to between two and three fifths of their final year’s income as a pension – or a maximum of two thirds of the final salary. In contrast, a DC scheme is typically one in which both the employer and the employee make regular payments (premiums) to a retirement fund for the employee. However, the value of DC schemes depends on the performance of financial markets. A hybrid scheme also exists, combining both DC and DB schemes.

Previous EIRO contributions have covered pan-European occupational pension arrangements (TN0404101S), as well as high-profile pension trends and agreements in major Irish companies, notably the banks (IE0711039I, IE0705049I). In particular, a number of innovative ‘third way’ pension agreements have been introduced in Ireland.

Decline in private sector DB schemes

While the Pensions Board estimates that there are still 530,933 members of DB schemes in Ireland, it is worth noting that over half of these, 282,714, are members of the public service superannuation scheme – in other words, they are public sector workers entitled to a guaranteed state DB scheme. This leaves only 248,219 workers in private sector DB schemes – or one in every seven private sector workers in Ireland.

Also included in this 248,219 figure is the construction industry pension scheme, which currently has about 85,000 members. Although this is technically a hybrid pension scheme, containing elements of both DB and DC schemes, for the purposes of these figures it is usually counted as a DB scheme.

Given the current downturn in the construction industry, with many of the job losses taking place since December 2007, it will be interesting to see if the figures for DB schemes in the 2008 report, due in 2009, are significantly affected as a result.

Funding standard

Another positive finding of the Pensions Board report is the number of DB schemes which meet the minimum funding standard. However, this number may end up being reversed by outside environmental factors, particularly given the ongoing turbulence in international financial markets. In most cases, the Pensions Board insists that a company with a deficit in its pension scheme should take action to eliminate that deficit within 10 years. By the end of 2007, the number of DB schemes that met the minimum funding standard had increased from 70% to 81% over a 12-month period. While equity market declines had already begun by this point, further declines in the first half of 2008 could see a decrease in the number of schemes meeting the minimum funding standard by the end of 2008. At the same time, average funding by employers of those DB pensions that still remain open has increased since the early 2000s.

Of the 90 schemes that failed to satisfy the funding standard in 2007, some 75 of these have funding proposals in place, 49 of which have been approved for a period of longer than three years.

Personal Retirement Savings Account contracts

The number of PRSA contracts and the assets invested in them continue to rise. The total number of PRSA contracts at the end of 2007 amounted to 130,709, up from 95,045 contracts in 2006.

Faster still was the growth in assets held in PRSAs, amounting to €1.25 billion in 2007. This increase in assets of more than 50% in just 12 months occurred despite the decline in equity markets in the latter half of 2007.

Supervisory role

Meanwhile, in its supervisory capacity, the Pensions Board carried out a review of its supervisory priorities. From 2007, it is basing these priorities on a hierarchy as follows:

• scheme or PRSA assets or contributions being misappropriated;

• benefit entitlements being calculated incorrectly;

• DB schemes being funded inadequately;

• inappropriate investment of pension assets;

• insufficient information provided to pension scheme members.

The board has also appointed two supervisory teams, one focusing on DB schemes and the other on DC schemes.

As far as investigations are concerned, in 2007 the board initiated 59 investigations into issues concerning occupational pension schemes, 36 of which related to DB schemes and 23 to DC schemes. At the end of the year, 65 open investigations had been initiated, compared with 74 investigations at the end of 2006.

Tony Dobbins, IRN Publishing