Belief in trustees
Like OPRA’s Harriet Maunsell, head of the Irish Pensions Board, Anne Maher shies away from referring to the current state of the industry as a crisis. “What we’re facing at the moment is a worrying and demanding time for pension provision rather than a crisis.”
Ireland has seen less closures of final salary schemes and fewer reports of underfunded schemes than in the UK. “it’s our understanding that Irish pension funds were probably better funded when the markets became really volatile so we didn’t see the same impact from FRS 17 over here. Neither did we see the major shift in our schemes from defined benefit to defined contribution.”
Figures published in the summer by the Irish Association for Pension Funds showed the rate of closure of defined benefit schemes was a shade over 7% over three years which is nowhere nearly as dramatic as in the UK.
But reassuring as the figures are, they ignore the introduction of the new Personal Retirement Savings Accounts (PRSA). Maher says the Irish industry is entering a new phase and one in which the new PRSA, included in the new pensions act earlier this year, could be used as an excuse to move from members out of defined benefit schemes.
As yet there’s no indication of this happening, nor is there any strong evidence that pension schemes as closing or are going to be closed down. Ireland still has twice as many defined benefit members as it does defined contribution members. In the private sector the ratio is almost half and half.
“We still have a strong DB sector but it is clearly facing a testing time now and we’d hope that employers will continue to honour their commitments and that those that do need increased contributions will see what they can do about it.”
Maher says that the continued downturn of the markets may strain some Irish pension funds’ rate of solvency. She says that some of the pension funds that passed the funding requirements the last time round might perhaps not be as likely to pass them now.
The new pensions act is also likely to add to the pressure. Prior to its introduction, funds had to report their solvency every three and a half years. Now actuaries have to make a statement in the annual report and next year’s are likely to include these figures.
Says Maher: “none of us can predict what is going to happen. The markets could rebound- they have in the previous downturns of this kind and if this happens then the problems will start to be resolved and additional contribution requirements might not be needed.”
As for the severity of the downturn in markets and any potential bounce back, Maher believes that there are three fundamental differences with previous recoveries. First if the string of corporate governance scandals in the US and the question of whether we’re over the worst.
“Markets are all about confidence and, admittedly, the adjustments have been made for each scandal. But another couple of major scandals may well crease confidence again.”
A second element is the looming prospect of a war, how long it will last, who will be involved and the consequences. Finally, and closer to home, is the state of the Irish economy. “It’s still pretty buoyant,” says Maher, “but it’s different from what we have had in the last five years.”
As for the accounting standard FRS17 which applies to Irish funds as well as those in the UK, Maher welcomes the recently-announced deferral period. There was, she says, some uncertainty surrounding the fact that the international standards were due to be introduced in 2005.
“Uncertainty is not good for pension schemes which are long term in their outlook. So we welcome the deferral and also the fact that, as far as I know, the people responsible for FRS 17 are saying they’re not backing off or changing.
Although the industry is going through a tricky period, Maher says there is no need to change the role of the regulator. “We leave a good deal of flexibility to the trustees and I still believe that that’s a good way. I think that if you’re too rigid and require too high a level of reporting to a regulatory authority you can in fact cramp the trustees very much in what they can do.
“We don’t see that as our role, we operate very much on the basis that trustees should have these responsibilities and it has served our country pretty well over many years, if it aint broke, don’t fix it and we’re not proposing any major changes at this point.”