IRELAND - More than three out of 10 defined benefit (DB) pension schemes submitting actuarial funding certificates (AFC) in 2008 failed to meet the required funding standard, the Pensions Board has warned.

Figures from the Pensions Board's annual report and accounts for 2008 showed the falls in investment markets in 2008, and early 2009, had resulted in sharp declines in the value of defined contribution (DC) schemes and a "significant deterioration" in the solvency of DB schemes.

Brendan Kennedy, chief executive of the Pensions Board, pointed out "very few [DB] schemes now meet the funding standard, and a small number do not have enough assets to meet the liabilities of current pensioners".

In his review of the year, Kennedy added "although pension losses were unavoidable, the experience of 2008 was worse than it could, or should, have been" as too many schemes did not take account of the investment risks they were running and instead focused on keeping contributions to a minimum.

The report revealed the Pensions Board received AFCs - required every three years - from 402 schemes, however only 69% of these, or 279 schemes, met the funding standard, against 81% in 2007, while the remaining 123, or 31%, failed.

Of these 123 schemes, the Board said 53 have funding proposals in place, and 28 of these were approved for a period of more than three years, while the remaining 70 schemes had funding proposals pending at the end of 2008 as 51 had taken advantage of the six- to nine-month extension to submit their proposals. (See earlier IPE article: Pensions Board grants DB schemes further reprieve)

That said, because the AFCs are only required every three years, the report noted "at the time of writing, the Board is of the view that the percentage of schemes failing the funding standard stands at approximately 90%".

The Pensions Board said problems of scheme funding and investment losses "have not in general resulted from any criminal breach of pensions legislation. However, in 2008 there was a significant increase in the number of cases being investigated by the Board for potential offences under the Pensions Act".

The Board opened 181 new investigations in 2008 and used its powers to levy penalties for a failure to co-operate on 61 cases, mainly in relation to complaints about the Construction Workers' Pension Scheme, while 150 investigations stemmed from whistleblower reports, primarily related to alleged failures by employers to pass on pension deductions from pay.

Kennedy warned: "The Board operates a proactive supervisory approach based on a hierarchy of risk priorities. The misappropriation of scheme or PRSA [personal retirement savings account] assets, including the failure to pass on contributions, is of highest priority for the Board and our supervisory resources are deployed accordingly."

Meanwhile trustees of 23 DB schemes were fined over the year for failing to submit an AFC, although in six cases the alleged offence had not occurred the fine of €2,000 was paid by 14 scheme trustees, while the fines have been reissued to different addresses in the remaining three cases.

Kennedy said the most important influence on whether a pension scheme can meet its obligations "is not regulation, not the funding standard, but the prudent management of that scheme by its trustees and the support of the sponsoring employer on an ongoing basis".

The report also highlighted concerns about the investment strategy of DC pensions, which now account for 33% of pension scheme members, as Kennedy argued these schemes "should provide lower risk investment choices to members as they approach retirement and should have well-designed default investment options for all members".

He pointed out DC scheme members should be provided with "adequate and understandable explanations of investment choices and risks", but admitted that members should also take an active role in their pensions and "if they do not understand what is provided to them, they should talk to their scheme trustees or pension providers".

In his foreword to the report, Kennedy added: "It is not appropriate for trustees to focus on minimising contributions and satisfying the funding standard: a scheme needs to be sustainable for the long-term, and trustees must therefore consider realistic costs, investment risks, and the ability and willingness of the employer to support the scheme."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

Topics