Majority Of Irish DB Plans Are Underfunded

Over two-third of defined benefit pension plans in Ireland are underfunded, according to a survey of Irish pension plan trustees by Mercer Investment Consulting.

The Mercer Investment Consulting 2006 pension fund survey found that over two-thirds of defined benefit pension plans in Ireland fail to meet long-term fully-funded status. Despite the strong equity market performance over the past three years, Irish pension fund trustees continue to struggle with the long-term financial well-being of their pension plans, according to the survey.

"While assets have performed well, pension fund liabilities have continued to rise at a faster pace than expected due to declining long term bond yields, enhanced mortality conditions and a strong salary growth environment in the local market," said Tom Geraghty, head of Mercer Investment Consulting in Ireland.

The survey also found that total employee and employer contributions into defined contribution plans have increased from three years ago, with more than three quarters of respondents paying more than 10% into the defined contribution plans. Tom Geraghty said: "Interestingly 30% of survey participants are now paying in excess of 15%. Ongoing education and communication regarding pension adequacy and the provision of a sufficient standard of living on retirement seem to have been effective although this challenge still remains."

Going forward, the survey found that the main areas of focus for trustees and plan sponsors are getting investment manager selection right and the setting of investment strategy. Tom Geraghty noted that "while both of these areas received equal prominence in our survey, we would contend that the setting of investment strategy is a far more important exercise. Historically, investment managers (specialist or otherwise) have accounted for up to 20% of the actual return and risk level achieved by pension plans with the other 80% being attributed to getting right the basic allocation to equities, bonds property etc. While better investment management will help the cause, the impact is likely to be much less significant than restructuring the investment strategy of the fund."