COLLAPSING GLOBAL stock markets are not just bad news for shareholders in publicly quoted companies. They are equally bad for members of private sector pension schemes where equity investments account for a very large part of a typical pension fund and where Irish funds have lost one third of their value in the past 12 months.
Many company schemes are now in breach of minimum funding legislation and could collapse. Minister for Social and Family Affairs Mary Hanafin has advised her Cabinet colleagues that the pensions funding gap could amount to some €30 billion and that half of all defined benefit schemes, where the pension is based on an employee's final salary, could be wound up in the next 12 months.
Current pension rules require company schemes to be fully funded to ensure that where a firm ceases to operate the assets of the pension fund are sufficient to meet liabilities and that the obligations to members and retirees are fully discharged. Pension industry estimates suggest that three quarters of all Irish final salary schemes would fail to meet the minimum funding standard.
Pension fund deficits have to be reversed whether by increased contributions from employers and employees or by reduced retirement benefits, and increasingly by both. But for many companies faced with declining profits, the extra cost of keeping their pension schemes fully funded has become prohibitive. In many instances companies have closed defined benefit schemes to new members and some have closed schemes altogether.
The minimum funding standard was designed to protect the pension benefits of members in a set of economic circumstances that no longer exist - where the economy was growing rapidly. To keep the same funding requirement in these changed circumstances could have a perverse effect by accelerating the decline of defined benefit pension schemes to the detriment of members' financial interests. Ibec has said the current funding requirement is no longer sustainable. And Ictu also accepts the need for some relaxation of the rules on funding standards. For its part, the Government has promised to review the funding arrangements of the pension industry in what is a belated public response to a problem ministers should have addressed sooner.
For those in defined contribution schemes - where the pension is based on the investment value of the fund at retirement which is used to buy an annuity and secure a retirement income - the Government response has also been tardy and unimpressive. Minister for Finance Brian Lenihan announced on Thursday that he was loosening rules relating to such schemes to allow those retiring to defer the purchase of an annuity for up to two years in the hope that financial markets would recover.
The pension crisis may be seen as a purely private sector affair. But of equal concern is the looming crisis in the public sector where public service pensions are unfunded and are financed by taxpayers who now find their own pensions in peril. The Government must address both problems.