It may be time for a look at pension options - (Sunday Business Post)

04 November 2011
Anyone planning to retire this year will be deeply concerned at recent bad news on the collapsing value of pension funds. Irish pens ion funds have lost an estimated €27 billion over the past 12 months, with the average managed fund falling in value by about 35 per cent, as worldwide recession gripped the markets.


Jim Connolly, head of pensions with Standard Life, said the impact of market turbulence on pensions boiled down to whether people had been properly advised or not. He said that, in general, investment theory suggested that anyone nearing retirement would move away gradually from risky options such as equities towards safer bets like cash.


‘‘Someone should never get to the stage where they are shocked by their pension value,” he said.


For people starting their career, pensions look likely to move down the financial priorities list as belts tighten.


‘‘There is an expectation in the industry that new business figures will be hit this year,” said Connolly. He said pension companies would be competing for transfer business.


However, while new business may be down, Connolly said now was an optimum time to start a pension. People would be ‘‘buying in low’’ and getting good value for their contributions. However, he added that funds would need to perform extremely well to return to previous levels. For example, a fund which has dropped by 50 per cent will have to double in value if it is to return to its former level.


David Malone, head of information services at the Pensions Board, said: ‘‘While this year will bring very turbulent times for some people, the need to provide for their retirement still exists.”


He pointed out that contributing to a pension was still one of the most tax-efficient ways of saving, but acknowledged that some people would face difficult financial choices in 2009.


‘‘People are being cautious, and individual investors are sticking with cash,” said Jerry Moriarty, director of policy with the Irish Association of Pension Funds (IAPF).


He said that, while pensions might be lower on people’s list of priorities when money was tighter, those who neglected their pension should remember that they were potentially losing out on employer contributions and tax relief on their own pension contributions.


Moriarty said he expected pension scheme wind-ups to come to the fore this year. He said there had not yet been a massive increase in the number of pension scheme windups, but this was likely to change. He said that under Irish legislation - unlike in Britain - there was no pension protection fund. As a result - in a worst case scenario - some people could be left with very reduced pensions and no backup.


If your employer goes bust in the year ahead, the implications will depend on the type of pension you have. In general, employee pensions are ring fenced in a trust and cannot be used to cover a company’s debts or other expenses.


However, potential issues could arise for employees who are members of defined benefit schemes, depending on the solvency of the pension scheme.


The Pension Act requires defined benefit schemes to be solvent and to have enough money to pay the pensions that have been promised to pensioners, existing staff and former employees.


Connolly said: ‘‘Given that the amount of money available to the trustees depends on contributions from the employer, coupled with the investment performance, many schemes are now below 100 per cent solvency as a result of poor investment performance.”


He said employers who found themselves facing insolvency would be unable to make up the shortfall. ‘‘If, say, the scheme is only 70 per cent solvent, then all benefits could be cut by 30 per cent,” he said.


If a defined benefit scheme is wound up and its liabilities exceed its assets, then existing pensioners are generally first in the queue under current legislation. Current and former employees are next to get their share.


With a defined contribution scheme, the payout is based on the final value of the fund so, if the investment performance is down, so are the amounts received by beneficiaries of the pension scheme.


Investment performance aside, members of defined contribution pension schemes could be missing out on significant retirement income, according to a new study from consultancy firm Hewitt.


The study of more than 100 defined contribution schemes with more than 30,000 members found that many of the schemes were not as efficiently run as they could be.


Many failed to introduce simple mechanisms that could considerably increase member retirement income.


The survey found that the median employer contribution into a pension scheme was 6 per cent of salary, plus 4 per cent of salary from the member.


According to Hewitt, this figure has not risen substantially in recent years, despite the strong economic climate that prevailed until recently and the attractive tax reliefs on pension contributions. Rachael Ingle, director at Hewitt Associates, said the survey found that one third of employees who were offered membership of a defined contribution scheme declined, so were potentially relying only on the state pension at retirement.


A government white paper on pensions, which will provide a framework for future Irish pension policy, is expected to be published in the coming months.


The Pensions Board will continue its annual awareness campaign this year, with National Pensions Awareness Week running again in May.


Malone said other projects on the horizon for the board in 2009 include updating the handbook for pension trustees and providing an e-learning resource for pension trustees via the Pensions Board website (www.pensionsboard.ie).