Trustees advised to consider short-term activity
IRELAND - The Pensions Board has argued trustees need to think more about sustainability and the impact of short-term events on long-term promises if defined benefit (DB) schemes are to be a “viable alternative” to defined contribution (DC) funds.
In a speech at the Irish Association of Pension Fund’s (IAPF) investment conference Brendan Kennedy, chief executive of the Pensions Board, said the current financial conditions combined with increasing life expectancy and weaker employer covenants mean trustees and employers “are being forced into a fundamental rethink of their DB scheme and specifically a rethink about what they can afford”.
Kennedy rejected arguments suggesting it is “too early” to start the process because the markets could recover, and warned, “operating on the basis that a recovery is inevitable or even likely is not responsible scheme management”.
He also spoke against pension schemes continuing the tradition of assuming equities will outperform other forms of investment, as “recent experience has shown us that there can be very long periods over which equities do not outperform, and in fact expose the investor to very serious short-term losses”.
“I do not think that it is appropriate, when considering the affordability of scheme benefits, to assume that future equity outperformance is a given,” said Kennedy, adding: “Any assessment of scheme affordability that assumes that this additional equity return is inevitable is not a realistic or sustainable assessment of the scheme.”
He also highlighted the importance of the investment strategy, in terms of funding and sustainability, as although it was “disappointing that I should feel the need to have to say it”, he revealed “too often we see schemes whose only goal is to keep contributions to a minimum. And which give no thought to risk”.
“It is a cliché that pensions are long-term: this is often given as a reason why short-term issues are not important. The truth is the other way round. Pensions are long-term, and therefore they must be able to survive what will happen in the short term in order to deliver on their long-term promise. Trustees have a clear responsibility to think about this and to consider what the short-term may bring,” continued Kennedy.
But having stressed that his comments should not be interpreted as an attack on DB schemes - as “there has not been enough notice taken of how badly DC schemes have performed” - he warned “if DB is to be a viable alternative to DC, it must be managed in such a way to have long-term viability and affordability”.
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