IRELAND - A pensions expert has called on firms to consider whether the costs and risks of DB schemes are still affordable, as a study has found 80% Irish defined benefit (DB) pension plans are underfunded, and 15% are likely to wind-up because of funding difficulties.

A survey conducted by Mercer Consulting into the funding status of DB pensions found eight out of 10 schemes have funding problems, and half have been told to submit recovery plans to the Pensions Board by the end of June 2010.

Joyce Brennan, a principal at Mercer, cautioned companies to carefully consider the future of their schemes.

"You need to take a cold hard look at whether you can realistically continue to afford the costs and risks of current defined benefit pension plans. If change is needed, ensure that the change makes the scheme sustainable and robust for the future," she said, speaking at the company's defined benefit Conference yesterday.

She argued more fundamental changes are needed than simply "tinkering around the edges".

The consultancy warned as many as 10% of DB schemes are looking to reduce benefits already earned, with the aim of improving their funds' long-term outlook. Mercer profiled one such company at the conference, albeit Brennan noted that trustees did not enjoy taking this step.

"We are seeing a huge amount of goodwill from employers toward defined benefit pension schemes. They want to continue to support these schemes but reducing accrued pensions may be appropriate where the funding difficulties are so stark that a wind-up would be the only other option," she cautioned.

Reducing accrued pensions by removing the obligation to increase the pension after retirement was made possible through the Welfare and Pensions Bill 2007, which amended Ireland's 1990 Pension Act.

At the same time, Mercer claimed 15% of schemes are expected to shift from DB to defined contribution in the future, with members then receiving payment from both schemes, while another 15% are likely to be wound-up as a result of funding problems.

Mercer has called on the Pensions Board to extend the deadline for recovery plans beyond 30 June, to allow all proposals to consider the impact of the new National Pensions Framework, announced last Wednesday, and the introduction of auto-enrolment for anyone over 22 from 2014. It cautioned that the changes, with also included an increase in retirement age to 68 by 2028, would significantly impact any plans.

One of the proposals being considered by many pension funds was to increase the employees' contribution rate, as one in four schemes were looking at such a proposal. And when asked by Mercer, some funds said they might ask members for 10% or more in future contributions.

Another solution would be a slow shift from equity to bonds, argued Mercer's David O'Sullivan.

"For maturing schemes, in particular, investment strategies should not remain static; they need to consider de-risking over time, as more of the members become pensioners," he said.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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