According to the Central Bank, about 40 per cent of the 1.66 million occupational pension scheme members in the State are in the fortunate position of having what are often described as defined benefit (DB) pensions.
The security associated with these is their key selling point. That doesn’t mean those holding them can simply join one and not worry about it until retirement.
“Defined benefit pensions have long been considered the most secure form of retirement benefits, but they are not without risk,” says John O’Hara, actuary at Davy. “The long-term security of a member’s defined benefit pension depends mainly on the financial strength of the employer and the funding level of the pension scheme.
“Lessons learned from the global financial crisis have led to significant improvements in the risk management and regulation of defined benefit pension schemes over the past decade, with the majority of schemes now in a robust financial position.”
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These extra measures in regulation are reassuring but are no silver bullet, according to O’Hara. “Evidence of financial difficulties for a sponsoring employer or communications from scheme trustees outlining failures in meeting regulatory funding standards would raise valid concerns about the viability of scheme pension benefits.”
Some employers are engaging in wind-downs of schemes, leading to buyouts of pensions. The lump sum holds some appeal but comes at a cost.
“The offer of a buyout or enhanced transfer value may look attractive, but by taking this, you’re giving up a potentially inflation-linked defined income for life, and that’s not a decision to take lightly,” says Conail Flynn, director of LHK Group.
“As well as the scheme funding position, personal circumstances will also influence what the right decision is for scheme members. A buyout can give you flexibility to shape your income around your lifestyle.”
That lifestyle management aspect is an area that Flynn recommends DB holders consider seriously.
“Whereas in the early years of retirement, individuals typically spend more, gradually they will taper down their spending as they get older. That freedom to match cash flow with real life is something a traditional DB pension with a fixed income cannot offer.”
There’s also a matter of control when it comes to a DB pension. A member might have concerns about the viability of the scheme but if no buyout is on the table, their options are limited.
“Typically, there are no obligations on trustees to allow members to transfer out of a scheme that is underfunded. If a member has a serious concern about the longevity of a scheme, unfortunately their ability to take action is low,” says Eoin Hassett, head of trustee services at ITC Group.
“From a personal financial perspective, it may be wise to start funding an additional pension arrangement, typically a PRSA, outside of the employer. If contractually possible, the member may choose to cease contributing to the scheme.”
Hassett says there are other ways that individuals can work to guard against the fears they might have.
“If your health circumstances justify it, claiming an early retirement ill-health benefit may be a wise option. It is important to take professional financial advice before making any decisions,” he says.
“After assessing options that are in the member’s control, the member can then concentrate on what needs to happen to improve the scheme’s health. Lobbying the employer, trustee or trade union to address the funding issues may have an impact and lead to the employer and trustee agreeing a revised funding plan to get the scheme back to a healthy position.”
These potential issues are why it is vital for pension holders of all types, not just DB holders, to treat their pension as an active investment.
“It’s remarkable how many people can take a completely passive approach to their pension planning. Even busy, successful, high-net-worth individuals who are consciously building towards financial independence can sometimes have a blind spot when it comes to pension planning,” says O’Hara. “Others are simply content to let their pension pot tick along in the background, untended. Your pension may be ticking along, but it is far too important to leave to its own devices.”
