PEOPLE ARE BEING warned about defined benefit pension schemes, with a pension expert saying that those under 45 “could end up with little or nothing” because of insolvency.
Clear Financial, which is based in Dublin, has issued a warning to younger (aged 45 or less) members of Defined Benefit (DB) pension schemes that have been or are likely to be declared “insolvent”.
It is encouraging such people to review their current pension savings arrangement immediately.
It said that over 197,000 people are members of 993 DB pension schemes in Ireland, though this membership is down from 222,000 in 2010.
Clear Financial said that insolvent pension schemes “ultimately have insufficient money” to meet the pension promises made to all members of these schemes, but that “many members are still unaware of how exposed they could be”.
According to Michael Bradley of Clear Financial:
None of the money contributed by individual employees to DB schemes is ring-fenced in the name of that employee. What this ultimately means is that in a wind-up situation the rules of defined benefits dictate that younger members are discriminated against while those in and approaching retirement receive their funds first.
He said that the most drastic situation that could ensue would be where the entitlements of retired members soak up all available funds.
Bradley said he would “strongly advise” that employees in insolvent DB schemes put several questions to their pension trustees and use the answers to work out whether they should continue paying into the scheme or make alternative arrangements.
Younger employees should ascertain the average age of the members (not just current employees) of the scheme. If the average age of members is 15-20 years older than you, then it doesn’t look good as everyone older than you will have their pension benefits fully satisfied before you as they hit retirement age, even if this means you’ll get nothing.
If you’re older than the average age, then you’ll retire before most of the others and lock in your pension benefits.
But as each employee reaches retirement and extracts their pot of gold, there is proportionately less for those still working.
He also advises pension holders to ascertain the solvency level, as being insolvent means that the solvency level is less that 100 per cent.
This means that 95 per cent solvency shouldn’t generate too much worry, but 20 per cent solvency is different and indicates that there’s only enough money in the fund to cover 20 per cent of the liabilities, said Bradley.
He added that the implications for members depend on what category of membership in the defined benefit scheme you fall into – and if you are not amongst the older 20 per cent of members, you should consider a review.
Basically the employer and the trustees have to raise enough funds over a given period to make the pension scheme solvent. Those already retired in the scheme receive first priority over everything except Additional Voluntary Contributions (AVCs), and their pensions are protected.