IRELAND - Three-quarters of Irish defined benefit (DB) schemes were still in deficit at the end of last year, according to The Pensions Board's 2009 Annual Report.

The report said many of these deficits were substantial in spite of good investment returns for almost all schemes over last year.

It also voiced concerns about how these returns were achieved. 

Pensions Board data showed that the level of investment risk being taken was very high and pointed out that Irish pension schemes suffered serious losses between 2007 and early 2009 due to investment risk.

Brendan Kennedy, chief executive of The Pensions Board, said the lessons of the past were "clearly still not being applied today".

He added: "Investment strategies must focus on the risk as well as the return, and the situation with defined contribution schemes is similar - there is very little risk reduction in the funds in which many members are invested."

He said scheme trustees were obliged under law to invest assets in an appropriate manner, having regard to the nature and duration of the expected liabilities of the scheme.

"The data available to the board raises considerable doubts as to whether the current investment strategy for many schemes fulfils these requirements," he said.

"The great majority of trustees of DB schemes rely on professional advice - it has to be asked whether that advice takes sufficient account of the nature of the liabilities of schemes and the consequences of the risks taken."

DB schemes in deficit have to submit funding proposals to the board by November 2010.

Trustees who fail to submit a funding proposal by the revised deadline may be liable to prosecution, while the board may issue a direction to trustees to reduce scheme benefits.

Jennifer Richards, head of Standard Life Investments Ireland, said Kennedy had been giving the impression funding proposals would have to contain a "significant element of de-risking" for some time.

She said: "Pension funds could do this by selling equities and buying bonds, but this is expensive, and the return will be lower, so more financial backing by the sponsoring company will be required.

"Another idea would be to invest in absolute return funds offering an equity-style return with a bond-type risk, but these will present a challenge in preparing actuarial calculations.

"There will definitely be modifications to scheme benefits, possibly by capping pension increases at a percentage of inflation or switching from a final salary to career-average basis."
 

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