Employers whose pension funds fall below minimum funding requirements will have more time to boost their funds back up to acceptable levels, following changes in this year's Social Welfare Bill.
Depressed equity markets in 2002 mean a significant number of pension funds will be unable to satisfy the minimum funding standard set by the Pensions Board.
Defined benefit pension schemes guarantee employees a pension based on their final salary. For people lucky enough to be members of these schemes, the chance that the company could go bust and wind up their pension scheme is the main threat to their retirement income.
When these schemes fail to meet the funding standard, the employer must produce an actuarial funding certificate. If this confirms that the scheme cannot meet its liabilities, the employer, trustees and actuary for the scheme must agree to put more money into the fund to recover the shortfall. Otherwise, pension scheme members could see their supposedly guaranteed benefit promises cut.
Employers whose shortfall is due to plunging markets will now have up to 10 years to get their pension fund back on track, subject to the discretion of the Pensions Board.
Up to now, schemes that had fallen behind were to be obliged to fully satisfy the funding standard within three-and-a-half years. "In some cases, companies would have been very reluctant to do that," says Mr Philip Shier, of pensions and investments consultancy firm, Hewitt Bacon & Woodrow.
A breathing space of up to 10 years might make it more acceptable for companies, he adds. But what does it mean for al those who are members of defined benefit company pension schemes?
"Although it's less secure from the members' perspective, what's best from the members' perspective is that the company is committed to putting it right in the long term," says Mr Shier.
The Irish Association of Pension Funds (IAPF) has warned that the stringency of the standard could cause trustees to focus more on short-term funding issues rather than their ability to pay employees' benefits over the long-term.
"A number of trustees would have had to switch from equities to bonds to protect their solvency position," says Mr John Feely, chairman of the IAPF.
Minimum funding requirements are designed to protect consumers from pension schemes becoming insolvent, but they shouldn't dictate how employer and employee contributions are invested, Mr Feely believes.
Pension funds typically consist of about 70 per cent equities and 20 per cent bonds, with the remainder made up of property and cash. Over the last three years, pension funds have taken a hammering due to equity market falls, dropping by a massive 18.9 per cent in 2002.
Historically, equities have been said to outperform bonds in the long term. A forced move to bonds would increase the cost of pension planning and have a damaging effect on many defined benefit schemes, according to the IAPF.
"There is a danger that people running defined benefit funds would throw their hands up in the air and say this is the last straw," says Mr Feely.
They may have to either scale back benefits or move to a defined contribution scheme, where employees would no longer be guaranteed a pension based on their final salary. Instead, employees would have to take investment risks previously carried by their employers.
The minimum funding standard values the company's pension scheme on the basis that the scheme is broken up and discontinued at that exact moment.
The IAPF wants this changed, arguing that the purpose of the standard should be to provide a financial "health check" on the status of the fund as a going concern on a long-term basis.
