The Sunday Times - Money Comment 17/05/09

Posted by Jill Kerby on May 19 2009 @ 21:46


The country’s defined benefit (DB) pensions crisis hasn’t gone away you know – it just seems that way. 


The shocking revelations that many Waterford Glass workers and those at SR Technics would end up without their full pension entitlements after a lifetime’s work, brought home the grim truth that workers in companies with defined benefit pensions – 90% or more of which are currently underfunded - could lose not just their jobs if their firms went bust…but their retirement income as well. 


Under considerable pressure from the employers, trade unions and pension fund managers the Pensions Insolvency Payment Scheme (PIPS) was quickly passed as part of the amended Social Welfare and Pensions Bill 2009 at the end of April.  (The funding standard had already been eased.) 


The Irish Association of Pension Funds in particular have been calling for a fairer distribution of pension fund assets when a company is wound up for some time.  Before this existing pensioners and their benefits were ring-fenced and any money left over once they were paid was only then distributed to active and former workers.  Now, existing pensioners may have to forego indexed increases, for example, in order for workers behind them to receive a greater share of the pension pot in the event of a winding up due to insolvency.


Meanwhile, the pension trustees can now also tap into the resources of the National Treasury Management Agency to purchase lower cost pension annuities for retiring workers.  


These issues and many others to do with low pension coverage here and even whether it would make sense to just beef up the old age pension, were to be addressed in the long overdue Pensions White Paper. 

Now the Department of Social and Family Affairs says there is no date set for its publication– the consultative green paper process has taken nearly three years already – and industry sources say the delay is to accommodate the report of the Commission on Taxation which is not expected before July. 


Too much attention, says pension specialists has already been focused on the €3 billion worth of tax relief given for private pension contributions, which they say is more widely distributed than it’s detractors claim and if reduced would simply result in fewer pension sales. 


However that row is settled – and in this climate of antipathy to anyone earning over the average industrial wage, it doesn’t look good for higher earners – the government might still want to reconsider putting one of its known time-bombs on a back burner while it tries to put the pin back into all the new ones that have been thrown into its lap.  




Over the past year financial advisors have been scrambling to try and come up with a better solution for their anxious clients than just switching them into cash deposits or funds and out of volatile – and collapsing – equities. Falling interest rates and rising DIRT tax shows just how unsatisfactory such a strategy could be over the longer term. 


It’s no wonder that the better informed advisors are taking a much closer look at various bonds funds – government and corporate – for their clients and not just those approaching retirement. 


Bonds are not a widely held asset by ordinary investors here, who aren’t particularly well-informed about the merits of different assets anyway, though they’ve always made up a small part of the ubiquitous managed fund that people buy to fund their children’s education or for other longer term savings. 


In recent years some better informed trustees and pension fund managers have shifted huge occupational pension schemes exclusively into bond holdings (as they do on the Continent) because of the combination of longevity risk, the sponsor company’s funding obligations and flat or poor stock market performance over the past decade. 


The danger of large cash holdings, say an increasing number of financial advisors, is the price inflation risk that is building as the world’s central banks force up the money supply with near zero interest rates and massive debt financing of the insolvent banking sector. 


As this money spills into the wider market place, our cash holdings will devalue with the falling value of currencies.  Inflation-linked bonds – which offer protection from inflation that might impact negative on both the coupon (your annual interest) and the bond’s capital value could be a better line of defence than ordinary government or corporate bonds, I’ve been told. 



Anyone interested in a defensive investment position (that is if you don’t think the latest stock market rally is going to last) should speak to a good independent financial advisor about the merits of bond holdings.  You can check out a low cost inflation-linked bond fund for Irish investors from iShares here to get an idea of what protection it offers: http://uk.ishares.com/content/stream.jsp?url=/publish/repository/documents/en/downloads/factsheet_global_inflation_linked_bond.pdf





I’m looking forward to seeing the new theatrical version of The Shawshank Redemption at the Gaiety Theatre – I’m a big fan of the movie.  


Clearly, so are the chancers behind ‘Dufresne & Andy International’, the American boiler room operation that was added to the Financial Regulator’s list of unregulated companies last week after they were found to be cold-calling Irish investors: ‘Andy Dufresne’ is the name of the leading character in the prison drama Shawshank Redemption. 


And if anyone from Ellis Boyd & Redding should subsequently give you a ring, ask them to put Morgan Freeman on for a chat.  The great American actor played Ellis Boyd ‘Red’ Redding, Andy’s closest friend and mentor in the film. 


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