MoneyTimes - December 9, 2013

Posted by Jill Kerby on December 09 2013 @ 09:00




“Do you think they’ll strike on Sunday?” my neighbour asked, as we stood outside our homes last week, our dogs getting tangled in each others’ leads.

 “I don’t have a crystal ball,” I replied. “It could go to the brink. Maybe a deal can be made, but just in case, you might want to get some extra batteries and candles in.  Oh, and maybe don’t overload your freezer with too much Christmas baking and food.”

As we know now, the strike threat was averted last Sunday evening but the ‘settlement’ is even more mysterious (as I write) than the apparent cause of the dispute: the two sides agreed that the ESB scheme, is indeed, a ‘defined benefit’ or DB one, and should the issue of deficits arise again, the parties will meet to try and sort them out.

And for this the workers were about to pull the plug, the week before Christmas

My neighbour certainly didn’t know what caused that threat. But neither are pension industry experts I’ve spoken to, especially since management avoided making any comment in the lead-up. But what it is NOT about, they insist, is the €1.6 billion deficit the unions kept mentioning.

That funding hole is based on the last, 2009 actuarial report (a requirement of all defined benefit schemes.) but it has most likely been filled by a combination of the terms under the 2010 restructuring deal in which the company agreed to a payment of €590 million (stretched over several years), reduced future benefits for pensioners and three years of substantial investment growth, reckoned at 18% per annum.

The parties now say that their scheme is a conventional defined benefit one in which workers get an income that reflects their salary and number of year’s service, but the dispute involved the assertion by the company that it was also a defined contribution one in which the income workers get in retirement is based on contributions made and investment growth.

Unlike other more modern DB schemes, the ESB one is certainly unusual – created back in the 1940s, funded like a DB one, and paying out DB style salary/service related retirement incomes. But its founding document  also includes a clause, say industry experts, that allows the company to limit the overall amount it pays in, most recently to fill a huge deficit. (Other DB schemes that get into that kind of trouble must close their schemes.)

The ESB appeared to suggest it might opt– possibly from 2018 – to not fill any more deficit holes and then presumably (no on knows for sure because they won’t say) pay out pensions on a DC basis without having to adhere to the strict salary/service promises of the past. Was this agreed between the parties back in 2010? The unions say no.

What was always clear was that there was no immediate threat to anyone’s DB salary and service income or benefits and that it might not even happen after 2018 if the scheme stayed out of deficit.

Important as the ESB workers are, in reality, they are no different than any other members of DB type schemes. Global stock markets are volatile. Central bankers have messed around so much with the price of money in recent decades that interest and bond rates are too low to guarantee long duration salary/service income promises. And critically, retirees everywhere are just living longer.

The choices for these schemes are stark: close them off to all new workers; base retirement incomes on lifetime income averages, not a final salary. Stop indexing the pension every year to worker pay rises; make existing workers and company contribute more.

But what would almost surely sort out all DB deficits and future funding problems is if everyone retired later.  Very simply, today’s worker, if he lives to 85 needs to save for 50 years and retire when he is 75 if he is to assured a comfortable pension.

The same applies to the DB state pension. Pensioners who live 20 years to age 86 will get (assuming the amount stays the same) €12,000 a year from the old age pension, or €240,000 worth of benefits. They would have only paid in a fraction of that amount over their working life in personal PRSI contributions (especially if they were self-employed).

Meanwhile, the unfunded liability for public service and civil service DB pensions is now about €120 billion. 

With typical retirement pensions of about €45,000 per annum for ESB workers (2/3rd of average pay/allowance/pension of €78,900 but less the pension contributions) a total fund of €900,000 is already needed lifetime say industry experts. 

Next Sunday’s ESB strike have been averted.  But for how long?

I shared a theory with a number of pension experts who I’ve know since my years editing Irish Pensions magazine that the ESB workers may have wanted their DB scheme nationalised in order to guarantee that all the existing members’ 2/3rds of income/service pensions. The threatened strike was their bargaining tool.

That isn’t how it was avoided.  But it doesn’t address the flaws that underpin their pension DB scheme either…or anyone else’s.



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