IRELAND - The collapse in asset values of Irish pension funds has strengthened the arguments for pay-as-you-go (PAYG) financed pensions rather than funded ones, according to a senior finance lecturer at Dublin's Trinity College.
Jim Stewart revealed his support for the first pillar at the University of Warwick's workshop ‘Pensions and the Crisis: who bears the risk?'.
In 2008, Irish pension funds netted real losses of -37.5% according to OECD figures - higher than the losses of pension funds in any other country. This was due to the heavy 76-77% investment in risky asset classes such as equities, on which "unsustainable returns were promised," claimed Stewart.
He said this combined with the lack of a pension protection fund, one-man DC schemes and close to half of the Irish population not belonging to a pension fund puts a question mark over occupational pension schemes.
"Irish pension funds never fully recovered from the dot.com bubble to start with," argued Stewart. "Following the recent financial crisis, over 90% of Irish DB plans are in deficit and employers are closing them at great speed, with the state now having to provide annuities to members where the employer is insolvent."
"Pension funds are also likely to keep equities at a lower level, meaning that future returns will be substantially reduced and nearer the rate on long-term government debt. As other assets of the household sector, such as aggregate wealth, also fell, retirees will again become very dependent on the state in the near future," he added.
"This in turn reduces the argument for funding versus PAYG first pillar financing although the demographic outlook remains uncertain."
Ireland's replacement rate is 50%, of which 30% should stem from its social security system and 20% from occupational pensions.
But while they may remain in deficit, Irish managed pension funds returned an average of 0.5% in June on the Hewitt Managed Fund Index, resulting in an overall positive 5.8% yield for the first six months of the year for the sector, according to Hewitt Associates (See earlier IPE article: Irish managed funds post fourth consecutive gain).