A company’s defined benefit (DB) pension scheme can be its single biggest operational risk, however there are many ways to minimise this risk, delegates attending the pension consultants' Mercer’s Annual Conference, were told today.
"Where the value of the pension scheme is small relative to the size of the company, the risks are modest. But when the pension scheme liabilities begin to approach 20% or 30% of the market capitalisation of the company, the risks associated with the pension scheme can become the biggest single area of risk for the company – even bigger than any risks in its core business," said Liam Quigley, Senior Consultant with Mercer.
"One of the biggest risks with pension schemes is the investment risk. In the past few years, more sophisticated investment products have emerged that can help trustees and plan sponsors to control the investment risk, such as duration bond funds, interest rate swaps, and even full or partial buyout options," according to Tom Geraghty, head of Mercer’s investment business in Ireland.
Longer life spans are affecting the cost of pensions. The latest projections from the UK show that life expectancy could rise from 22 years currently for a male aged 65, to over 30 years by the year 2050, with females living on average 3 years longer. And Irish longevity, which previously lagged the UK, seems to have caught up.
Mercer also published key findings from their 2008 Defined Benefit Survey, which indicate that:
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55% of current defined benefit schemes are now closed to future joiners. Interestingly, though, schemes closing tend to be smaller in size.
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78% of employees covered by the survey are in DB schemes that are still open.
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Employer contribution rates have doubled over the last 8 years, with an average contribution rate now of 18%.
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Employee contribution rates have also increased to an average of 5.5%. Approximately 10% of schemes have increased employee contributions since Mercer’s last survey in 2006.
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22% of schemes have modified benefits in the last two years, generally reducing benefits in some form in the future.
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Funding standard difficulties remain, with one third of schemes failing the funding standard under the Pensions Act at their latest measurement date (and expected to be worse now given recent market falls).
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Investment in bonds is increasing as stakeholders seek to reduce risk.
Michael Madden, Actuary with Mercer, concluded that: "Our survey shows that employers and trustees of DB pension schemes are attempting to manage the risks associated with DB schemes on several fronts. While controlling investment risk is one aspect, controlling growth in pension costs can be achieved by looking at the benefit design. Converting to a defined contribution (DC) plan has been a common reaction, but some companies have come up with some creative solutions that have enabled them to keep their DB plan going".
Examples provided were DB/DC hybrid plans, career average plans, salary caps, variable retirement ages and linking benefits to fund performance.
It is well to remember that 900,000 Irish private sector workers have no occupational pensions.
Mercer Defined Benefit Survey 2008
Presentations at Conference
