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Contact: Joyce Brennan
Tel: +353 1 603 9700

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Ireland
Dublin, 11 March 2010

Mercer, the pension and investment experts, at their annual Defined Benefit Conference launched their 2010 survey which revealed that 80% of defined benefit pension plans fail to meet the statutory funding standard and half of them must submit a recovery plan to the Pensions Board by 30th June.
  

Key Survey Findings
  

Half of all defined benefit pension schemes will change their benefits or their employee contribution rate this year.
  

• One in four schemes have either implemented or are strongly considering an increase in the required employee contribution rate, generally from 5% to between 8% and 10%, or in some cases even higher. 
   
• Nearly 15% of schemes will stop providing benefits from the DB scheme for the future and will switch to a defined contribution scheme instead. This means members will receive some of their pension from a DB scheme and some from a DC scheme. 
   
• Nearly 15% of schemes are likely to wind up due to funding difficulties. 
   

Mercer has called for an extension to the deadlines for funding proposals, in order to give employers and trustees the opportunity to take into account the National Pensions Framework published last week. Several aspects of the framework, such as the increase in State retirement age, a change in the tax treatment of employee contributions, and the outline for a new type of defined benefit pension scheme, could all have a significant impact on funding plans.
 

Speaking to employers and trustees, Joyce Brennan, Principal with Mercer said: “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. Avoid tinkering around the edges and have a fundamental look at what is going to meet the needs of your business and your employees for the next twenty years.”
 

At today’s seminar, Mercer examined the practicality of reducing benefits already earned to date, in order to ensure the future affordability and viability of DB schemes. Attendees saw a case study involving one of Mercer’s clients whose pension scheme was the first to receive the consent of the Pensions Board to reduce accrued pensions, under new “Section 50” legislation. The reduction involved taking away the promise to increase pensions after retirement. Mercer reveals that about 10% of all defined benefit schemes may go down this route. Joyce Brennan noted: “Trustees and employers generally do not want to reduce the benefits members have earned. 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.”
 

Mercer highlighted that a key reason for the increase in the cost of defined benefit pension schemes is the dramatic increases in life expectancy. Joyce Brennan said: “In the 1970s when many defined benefit pension schemes were established, the expectation was that a pension would be paid for 13 years for a man who retired at age 65. The expectation now for a man in his 20s is that he will receive pension for double that period of time.”
 

Mercer is also encouraging trustees and employers to examine the investment strategy of their defined benefit pension schemes, hand in hand with reviewing the benefits provided. David O’Sullivan, Principal with Mercer explained: “For maturing schemes, in particular, investment strategies should not remain static; they need to consider derisking over time (moving from equities to bonds), as more of the members become pensioners. A key element of this process is to ensure that trustees and employers have governance and implementation structures in place to monitor the assets and liabilities on a regular basis and bank gains as they arise.”
  

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Contact: Joyce Brennan
Senior Consultant
Tel: +353 1 603 9700