Defined Benefits Schemes right across Ireland, are facing economic headwinds and companies are looking in many directions to reduce their financial exposure to the risks they pose.
A Defined Benefit Scheme was a staple of the Irish Market in the past and many employees enjoying a long tenure at a company was fortunate to have a pension guaranteed to them by the company.
But due to the increasing complexity of investment risk in global markets, specifically reduction in bond yields from 2008, companies are looking to exit these funds, either by complete closure or by transferring the scheme to a Defined Contribution Scheme where essentially the risk is taken on-board by the employees themselves.
If the pension fund does well, then its members reap the rewards, if not, they reap the liabilities and in consequence an underfunded pension at retirement. While political & union headwinds has stood in the way of DB Scheme closures, it seems all too often, the company succeeds of getting the DB scheme risk off their books and into the hands of employees, like the preverbal hot potato.
For instance, in 2018, one of the Largest Pension Providers in the Irish Market, Irish Life plan to close their Defined Benefit scheme for its members and transfer them to a Defined Contribution Scheme. This would represent an approximate cut of 30% off their pension value at retirement. Where Irish Life used to bear the financial risk of the scheme, it is now upon its members and trustees for the performance of the upcoming Defined Contribution Scheme.
In 2017, there were 628 DB Schemes in Ireland, which was a 6% decline on the previous year. With Liabilities increasing on the books of the DB schemes right across the country, closures of the DB schemes are likely to continue. This would indicate that DB schemes are no longer economically viable for companies. And for instance, in the Irish Life case, it was a well-funded scheme and even then, they choose the route of closure rather than risk possible wind up due to decreases in the fund value.
Large companies like Independent News & Media in 2016, Ireland’s largest media conglomerate deciding to stop contributing to its DB Scheme, due mainly to a 23 million deficit on its books at the time.
Pfizer, a worldwide leader in Pharmaceuticals, in 2018 is also seeking to close it DB scheme. Diageo in 2017, managed to get its DB members to accept a modification to its existing terms at the time, to close the fund to new members, essentially ending the scheme for future entrants.
DB Schemes such as Bank of Ireland, CRH, Kingspan, Heineken, Cadburys heavy hitters so to speak in the Irish Market are either closing or in negotiations for closure of DB schemes. Considering this, it is now more and more imperative that individuals seek financial advice from qualified professionals to protect their financial future.