IRELAND – The pension plans of more than 400,000 workers are under threat due to high annuity costs, which are “crippling” Irish pension schemes, says the Irish Association of Pension Funds (IAPF).
The IAPF - with the backing of trade unions and employer bodies - has called on the Irish Government to reduce pension costs, address the “unreasonable benchmark” for the funding standard imposed by the Pensions Act, and institute alternatives to the current annuity requirement.
“If we are serious about increasing the number of people who have pensions we need to make the pensions regime more attractive to those who currently are not saving sufficient amounts for their retirement – this means broadening choice rather than forcing employees to spend their retirement saving on just one option,” said IAPF vice-chairman Patrick Burke in a statement.
“The current funding standard is unrealistic and is operating against the interests of pension scheme members it is supposed to protect. In effect, its unrealistic funding requirements are driving employers away from defined benefit schemes to defined contribution schemes which are far less beneficial to employees,” said IAPF chairman Joe Byrne.
Open market annuities - some 30% higher than the real economic cost of pensions - are currently a regulatory requirement in Ireland rather than an option for everyone except proprietary directors and the self-employed.
“Annuities are a secure method of providing retirement income – but that level of security comes at a really high price, particularly with current market conditions,” said Burke.
The funding standard – which the IAPF accused of taking a short term view in an investment industry that is more long term based - requires DB schemes to hold enough assets to purchase annuities for pensioners if the scheme were to be wound up immediately.
DB schemes are still suffering the effects of low interest rates, poor investment returns between 2001 and 2003 and increased longevity. This means that more than half the schemes are “technically insolvent”, said IAPF.
“We are not suggesting that that annuities should be provided at economic cost in the private sector as private sector providers would not be able to cope with short or medium term volatility. However, we believe that the State can provide annuities at rates much more closely aligned to the economic cost and without any negative impact on the Exchequer,” said Burke.
This “real economic cost of pensions” should then be substituted as the proper benchmark for the funding standard, the statement explained.
“Indeed the Revenue would benefit because there would be less tax forgone if companies did not have to unrealistically inflate pension scheme contributions,” said Burke.
The IAPF is holding its annual Benefits Conference tomorrow in Dublin. EU commissioner Charlie McCreevy and the Minister for Social and Family Affairs Seamus Brennan will both be speaking on challenges facing the pensions industry.