Money Times With Jill Kerby
Retirement disaster looms for many
DO you work for a company that has a defined benefit pension scheme and are you a member of that scheme?
If you are, you may want to consider carefully what has just happened regarding these retirement schemes, and how the latest announcement by the Pensions Board could affect your own retirement.
First, a defined benefit pension has traditionally meant that the worker/member of the pension scheme can expect to receive a retirement pension that represents a portion of their final salary and of their years of service/membership. Some schemes provide for 50% of final salary multiplied by service years, and the most generous schemes offer two thirds of final salary multiplied by years of service.
For example, if your final salary at age 65 is €50,000 and you have a full service record of 40 years (the maximum number of years the Revenue will allow for claiming tax relief on the money you and/or your employer contributes), then your defined benefit scheme will produce a retirement income for life of €25,000. If you only worked 20 years for the company, your pension will be €12,500.
Some companies index this pension upwards, based on the consumer price index, so it increases slightly in value every year. Others do not.
If your employer offered a DB scheme that was the equivalent of two thirds of final salary multiplied by the years you belonged to the scheme and you earned €50,000 at retirement and you had 40 years of service, you could expect a final pension income of €33,333.
Civil and public service workers belong to the State defined benefit pension scheme, which offers up to 50% of final salary as retirement income, and while this pension will include the contributory State pension that many private sector workers also receive in addition (but not always) to their private DB pension, up to now most state employees have retired before age 65 and with fewer years service.
The majority (now more than 80%) of Irish defined benefit pensions are in deficit (for several years now). Poor stock market investment returns, poor investment strategies and artificially low interest rates have all contributed to the insolvency of schemes.
In addition, the cost of providing an annuity (by buying bonds on the open market) has gone up as the euro crisis has progressed, pushing schemes further into insolvency.
In recent years, the Irish Pensions Board, which regulates and supervises private pensions, has told companies with DB schemes to come up with ways to get their schemes out of the red.
The vast majority have been unable to do so. Irish DB schemes have until 2023 to get the shortfall in their funds back on a sound footing and meeting all their obligations to their members, but the Pensions Board wants them to tell them how they will do this by December 31. If they cannot, or their plan is not sustainable, they may have to wind up their scheme and pay out whatever is left in the fund to their workers, which can then be turned into retirement income by those workers at (usually) age 65.
And that is the nub of the problem. If a company has a DB scheme that is currently in deficit (it does not have sufficient money to meet all its pension income promises) and it is wound up on the order of the Pensions Board, not all the members of the scheme will be treated equally.
Under current DB pension rules, existing pensioners, whose retirement income is paid directly from the fund (and not from an annuity that has already been purchased for them) get first dibs on whatever money there is in the fund. This could mean reduced benefits.
Then, if there is still money left over, the worker members of the scheme will have their share of the fund calculated. This is done via a transfer value that can be used to create an income of some kind for them some day. It is likely to be much less than what they could have expected if the scheme was fully funded.
The deferred pension members (those workers who left the company but understood they would get a reduced service pension at retirement) are at the bottom of the wind-up process. If there is no money left after existing pensioners and worker members get their share, they could end up completely empty-handed, no matter how much they paid into the scheme.
If you suspect your defined benefit pension scheme is in deficit — and you may not know this since annual statements to members only confirm what you can expect to get at retirement, not the current transfer value — then you should urgently speak to a pension trustee or your trade union representative.
If you are an existing pensioner, you need to know what will happen to your current income if the scheme is wound up. If you are a worker member, you want to know what the transfer value is for your share of the pension. If you are a deferred member, you also need an up-to-date transfer value.
Young workers, in particular, should be prepared for a shock if your scheme is seriously insolvent and is a candidate for winding up. “They are as likely to get a pension at retirement as the Irish football team is to win the European Cup,” a pension expert and actuary told me last week. “They are providing a pension for people who retired many years ago, or in the next few years.”