Main findings

	Two-thirds of defined benefit schemes currently meeting statutory solvency test, up from 50% a year ago.
	Employer contribution rates have doubled over last few years, with the average contribution rate now at  17% compared to just under 9% in 2000.
	Employees are also paying more, with 23% of schemes reporting an increase in the last 3 years and a further 18% either imminent or expecting increase in next 3 years.
	Extra contributions are ranging from 1% to 3% of pensionable salary.
	Nearly 40% of schemes are now closed to new entrants, and this is expected to rise to 60% over next 3 years.
	Only a minority of schemes are reducing benefits for existing employees or closing down completely.
	Investment in bonds is increasing as employers seek to reduce risk.

A survey released today by Mercer Human Resource Consulting reveals that the financial position of defined benefit pension schemes in Ireland has improved significantly in the past year.  However, the survey also shows that defined benefit pension schemes continue to be a costly burden for employers, with many companies actively reviewing options for the future.

Around 500,000 employees are members of defined benefit pension schemes in Ireland, and as a result generally expect to receive pension benefits related to service and salary at or around the time of retirement.  About half of these are public sector employees whose benefits are guaranteed by the State.  The remainder, mostly private sector workers, rely heavily on the support of sponsoring employers.

Solvency

Approximately 66% of defined benefit pension schemes now meet the statutory solvency test, compared to approximately 50% a year ago. Michael Madden, European Principal with Mercer commented: “This improvement is good news and is due mainly to good investment performance and employers paying higher contributions to pension schemes.”

Contribution rates

On average, employer contribution rates have more than doubled in the past 6 years.  The average employer contribution rate to a defined benefit pension scheme is now 16.8% of pensionable salaries, compared to 11.4% three years ago and 8.8% six years ago.  Also, employers have faced substantial increases in compliance costs as the regulatory burden continues to increase, and these costs are often met separately by the employer.

Although poor investment performance has in the past been blamed for high contribution rates, Michael Madden noted: “This is only part of the picture.  People are living longer and the return available on bonds, which drives liability values, is very low by historical standards.  Both these factors make pensions more expensive to provide.”

In order to meet some of this increase in cost, 23% of defined benefit pension schemes have increased employee contributions in the past 3 years and another 18% plan to do so in the next 3 years. Michael Madden observed: “In many cases, employers have asked employees to share the pain in order to preserve their pension benefits and, in our experience, employees have responded positively.” 

Typically, an extra 1% to 3% of pensionable salary has been sought from employees.  The survey revealed that 82% of schemes now require employees to contribute, with an average contribution rate of 5.3%.

Closing to new employees

Mercer’s survey reveals that 38% of defined benefit pension schemes are now closed to new employees with a further 22% of employers planning to close their defined benefit pension schemes to new employees within the next 3 years.   This means that the percentage of closed schemes is expected to rise to 60% over the next few years.  Michael Madden commented: “Although over 60% of defined benefit schemes in Ireland are still open to new employees, we seem to be heading in the direction of the UK where it is estimated that over two-thirds of defined benefit schemes are now closed to new entrants.”

New employees are generally provided with either a defined contribution pension scheme or a PRSA. This means that new employees receive a pension based on the value of their contributions and the employer’s contributions. Michael Madden cautioned: “A move from a defined benefit pension scheme to a defined contribution pension scheme transfers a significant amount of risk from employer to employee. In order to understand these risks, and ensure that their retirement savings are adequate, members need good communication and education in a DC scheme.” 

Current employees

Increasing the contribution rate and closing to new employees has generally been the response of employers to the increased cost of providing defined benefit pension schemes. Mercer’s survey reveals that only a minority of employers intend to change the benefits that current employees enjoy from their defined benefit pension scheme – over 80% expect the current level of benefits to continue.  In only a very few cases have employers stopped providing defined benefits for existing employees.  One clear trend emerging, however, is that early retirement is becoming less prevalent – approximately 40% of employers have ceased the practice, citing funding reasons.

Bond yields impacting on defined benefit pension schemes

Employers that sponsor defined benefit pension schemes have not only faced substantial increases in their contribution rate, but are also grappling with uncertainty over what the contribution rate will be in the future. This uncertainty leads to difficulties in financial planning. Michael Madden explains: “Mercer’s survey indicates that 41% of defined benefit pension schemes have changed their investment strategy over the past 3 years and that 32% have increased the amount of bonds they hold. We believe that this trend of increasing the amount of bonds held has been caused by companies aiming to limit volatility in the contribution rate and the solvency level going forward.  Some companies are willing to forego the possibility of extra returns in return for reduced risk.”

Mercer’s survey also reveals a lot of activity in reviewing investment managers, with 38% of defined benefit pension schemes having changed investment manager in the past 3 years. Michael Madden commented; “This seems to demonstrates a more proactive approach to scheme management among trustees and companies”

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