Sections

Irish funds may have to consider the 'unthinkable'

Related images

  • Irish funds may have to consider the 'unthinkable'

IRELAND - Attain Consulting has warned more 'radical' solutions to underfunding in Irish pension schemes may be needed, including the "unthinkable' action of changing accrued benefits.

In an analysis of measures to help defined benefit (DB) schemes "in crisis", the consulting firm argued the first step is for managers, scheme members and union representatives to understand the issues and what may be needed to solve them.

However, Attain said with an estimated 90% of DB schemes 'technically insolvent', only a minority of companies will be able to meet the additional funding caused by the crisis and warned "for the majority, it simply won't be possible to find an answer without a shared solution".

Shortfalls were addressed in the past through measures such as additional employer and/or employee contributions; closing the scheme to new members or changing benefits for future service.

But the firm argues in many cases these solutions "may not be enough anymore either because of the extent of the deficits or because they have already been implemented for previous deficits". 
 
Instead it claimed, "more radical solutions may be needed including the previously ‘unthinkable' - changing pension benefits that have already accrued".

The firm suggested this option could include reducing the amount of accrued benefits; freezing pensionable salaries for a period of years; reducing the level of pension increases or raising the retirement age.

It admitted reducing benefits "raises a number of questions and practical issues" - such as how it will be done and the implications of pension legislation - but warned "however unpalatable any of these options may seem, they may be preferable to doing nothing in which case active and deferred members could end up with greatly reduced benefits because the pension scheme is wound up instead".

Attain suggested "achieving agreement on any of the changes required" would involve consultation with an "informed membership and their representatives" as there could be other variations of combinations of solutions that would work better.

It added: "The only way to establish if these types of flexibilities exist is to engage the membership and ask the hard questions." However, it suggested trustees should also set up review mechanisms so "a portion of benefits foregone may be restored or the level of contributions may be reduced" if market conditions improve significantly.

Attain concluded: "The pension challenges faced by companies and trustees are very difficult and may lead to choices having to be made which, although unpopular, are ultimately in the best interests of members if the result is a sustainable pension scheme and sponsoring employer."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2467

    Asset class: Search for a broker (mainly ETFs).
    Asset region: Global.
    Size: 250m.
    Closing date: 2018-08-28.

  • DS-2468

    Closing date: 2018-08-24.

  • QN-2469

    Asset class: All/Large Cap Equities.
    Asset region: Global Emerging Markets.
    Size: USD 500m.
    Closing date: 2018-09-04.

Begin Your Search Here