The year 2013 looks like it will be remembered as one that marked a profound change in defined benefit (DB) pension provision in Ireland. The pace of DB scheme closure in Ireland was previously slower than in the rest of the world as employers, trustees, trade unions and members worked to try and restructure schemes to make them more sustainable.
However, that pace of closure stepped up dramatically with the regulator estimating in October that almost 25% of all DB schemes would wind up in 2013.
At the beginning of the year there were 993 private sector defined benefit schemes with just under 190,000 active members. By October this had reduced to 820, according to figures presented at the IAPF Annual Benefits Conference by Pensions Board CEO Brendan Kennedy. He expected the figure to be 750 by the end of the year. And, of the schemes that remain, only 11% are open to new members with another 38% closed to all future accrual.
So why the sudden rush to catch up with the rest of the world? There are probably a number of factors. One, undoubtedly, was the reintroduction of the requirement for schemes that didn’t meet the Minimum Funding Standard to submit recovery plans (funding proposals) to the Pensions Board by the end of June.
This requirement had been suspended since the outset of the financial crisis. The requirement to put together a proposal would have focused the minds of employers and trustees with some deciding it wasn’t going to be possible.
Tightening of regulation would also have played a part. The government had announced in 2012 that schemes would be required to hold additional reserves where they were investing in risky assets. Risky assets were initially deemed to be anything other than cash and euro-zone sovereign bonds. While the requirements do not become effective until 2016, they do need to be taken into account for any funding proposals that run beyond that date.
As almost all do, they are therefore having an effect already. Some trustees feel as if they are being forced to invest in sovereign bonds at a time where those that are perceived to carry the least risk are also giving a very small return. This has the effect of forcing schemes to increase the contributions required or reduce the benefits. In some cases this makes the scheme unsustainable and has led to wind-ups.
Wind-ups can be particularly harsh on active and deferred members as pensioners have a priority on the assets and annuities must be purchased for them before any remaining assets are redistributed to the remaining members. And, with no pension protection fund, this can mean active and deferred members receiving very little or indeed none of their benefits.
All parties have been agreed that this is not fair or equitable yet it has taken a long time for it to be changed. The matter was adjudicated on in the European Court of Justice in the Hogan case in April and the Court ruled the Irish Government was in breach of the Insolvency Directive and did not protect the pensions of employees in an insolvency situation. This was similar to the previous judgment given in the Robins case against the UK.
The government is currently enacting legislation that deals with this situation and that also allows for a reduction in pensions and redistribution of assets on wind-ups and restructuring. However, the proposals are relatively modest and, with the number of wind-ups already in progress, it is likely to be too little too late.
There are a number of high profile cases currently playing out in the courts and labour relations system in Ireland. Members suing trustees, trustees suing employers, strikes and threatened strikes. It will be interesting to see how these are resolved in 2014.
The government had also asked the OECD to carry out a review of the Irish pensions system and this was published in April. It was a very wide ranging review and it remains to be seen how much will ever be implemented. The government has already indicated that elements will not be enacted such as the proposal to only allow solvent employers to wind up DB schemes if they are at least 90% funded.
The intention in relation to other proposals, such as the approach to mandatory savings, is unclear. While the government has committed to introducing an auto-enrolment system with an opt-out option, as in the UK, the OECD stated that a mandatory system was a preferable option. A significant amount of work remains to be done to scope out the range of workers to be included and how it would actually work.
Whatever system is introduced, it must have the confidence of participants and governance structures will be crucial in this regard. The experience of the National Pensions Reserve Fund will be foremost in people’s mind. A fund of €25bn intended to cater for the future increasing costs of public sector and first pillar pensions was used to recapitalise the banks, despite legislation that was meant to ensure the funds could not be drawn on. The €5bn or so that remains is currently being earmarked for stimulus projects.
The government also dealt a further blow to private sector pension provision in its budget in 2013 when, despite consistent assurance to the contrary, it announced it was extending the temporary levy on pension savings past 2014. The levy, which was brought in at 0.6% of assets in 2011, will actually increase to 0.75% in 2014 and decrease to 0.15% thereafter.
The government is forecasting income of €675m next year on top of the €1.5bn that has already been raided from people’s retirement savings, at a time when it is supposedly trying to encourage retirement saving.
This highlights one of the big challenges for the pensions sector right across Europe, how to get politicians and policymakers to focus on the long-term, particularly when they have so many short-term and immediate issues to deal with. Pension funds should be seen as part of a long-term solution that will save countries significant amounts in the future.
So while Ireland begins to show tentative signs of economic improvement, it is clear there are still a lot of unresolved issues in the pensions sector. This year will reveal a lot more about the direction we are travelling in and hopefully it will be a more positive one.