The Irish pension scene is certainly feeling somewhat bruised if not battered, as many of its proud aspirations are coming apart. Schemes have come under increasing challenges from funding and international accounting standards.
“These have been compounded by the increase in liabilities caused not by any change in the numbers of scheme participants, but due to continuing falling bond yields,” says Frank Flynn, chief pensions manager of the e2.8bn Bank of Ireland Staff Pension Fund in Dublin. The end result is a challenge to the continuation of DB schemes.
Recent figures from consultancy Mercer confirm the difficult situation. It found that the typical Irish DB fund dipped to just under a 70% asset to liability ratio. In the period from the beginning of 2000 to mid-2005, the typical fund’s ratio has fallen from 130% to under 70%, its lowest point ever.
While the financial conditions are not of the industry’s making, one problem currently hitting funds was made in Ireland by the authorities that, as a result the European pensions directive, introduced a funding standard relating to market buy-out factors.
“This is a more challenging standard than anywhere else,” Flynn points out. Certainly, employers’ sponsorship of the DB schemes will be tested as well as it affecting the international competitiveness of Irish companies because of additional pension costs.
And the aspirations of the National Pensions Policy Initiative have received a setback. Some five years ago it announced the intention to increase the pensions coverage by employers, by requiring them to introduce pensions plans or provide a Personal Retirement Savings Account (PRSA) for employees. The Irish regulator, the Pensions Board, is now to target the 30,000 employers who appear not to have complied.
This failure by employers could buttress the case for compulsory occupational pensions. The relevant government minister has asked the Pensions Board to bring forward its report on coverage to the end of September 2005, rather than in 2006, to review the options.
One fund that has been involved in the debate on compulsion is the Construction Federation Operatives Pension Scheme (CFOPS), the industry-wide scheme for those working in the construction industry, which is unique among Irish funds in that membership is compulsory for all in the industry at the operative level. The Pensions Board has commissioned Mercer to do a report on the workings of this scheme for background on the forthcoming debate on compulsion. “They want to see how well compulsory schemes work,” says Pat Ferguson, general manager of the €650m scheme.
A big challenge coming up for CFOPS is the complete restructuring of the scheme on the benefits side. “Up to now it has been a hybrid DB scheme, and while it will still have hybrid DB elements it is moving more to a defined contribution approach,” Ferguson says. The move is not because of funding issues, which is driving other DB sponsors to look at DC. “Our reasons are completely different to why others are changing.” CFOPS needs to make its scheme less complicated than it is currently, he says.
Pension funds returns so far this year have been encouraging. Ferguson says he is pleased with the CFOPS’ results, with the scheme returning around 9% in the first half of 2005. “We would be very pleased with this if it continues.”
An Post Superanuation Scheme for postal services has benefited from the upswing producing returns of up to 9% in the half year. “It has been quite positive,” says Paul Dolan, secretary of the €1.6bn fund. The return has been mainly due to the equity portfolio.
The fund is currently facing a deficit, but its position is not anyway as critical as that facing the typical Irish fund. “In comparison with other funds, we do not think we are in a difficult situation.” Dolan attributes this to having a well-diversified portfolio.
At Bank of Ireland, Flynn says that last year and this have been better years. “The improvement in the equity returns still does not match the growth in liabilities.” The valuation the fund undertook last year produced a surplus on a market value basis, which still remains and the fund meets the minimum funding standards. But the year-end FRS17 disclosure records a deficit.
Dolan is hopeful that expected interest rate increases will help on the liability side, though any increases will hit the value of the bond portfolio at the same time. As he puts it: “There has to be a breakeven point on the graph beyond which you achieve a reduction in the deficit position.”
But Flynn questions whether the low rates of interest are on the move. “It could be up to two years before we would see a significant improvement,” he says. “There is an increased demand for bonds from pension funds and corporates seeking outlets for their cash. Until these factors work through, bond yields will stay low.”
For Dolan and his team at An Post, the next few months are going to be hectic as they face the challenges of restructuring the fund’s approach from a number of balanced to specialist managers, with a view to reducing portfolio risk and increasing returns. “The remodeling means we will have two EAFE managers and a small global cap manager, in addition to real estate.” The new managers could be in place by early October.
Bank of Ireland’s Flynn says: “Next year is big for us as we are pursuing an integrated pension fund strategy, covering governance, benefits and fund structures.” This is to be implemented on a group-wide basis.
The EU pensions directive is interesting funds in different ways. For Flynn it could fit in with the new strategy: “It does provide the opportunity to establish a cross-border scheme, perhaps in conjunction with a common contractual fund vehicle.”
At An Post it is a different story. “We were once a civil service scheme, but no longer are, so it now looks as if we will have to produce a funding certificate for this year. This will be yearly thereafter.” But he is not unduly concerned: “We are in reasonably good shape compared with other funds.”
At CFOPS, Ferguson comments: “There could be some opportunities for cross-border pensions, but that is in the future.”