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08 Oct 2009: Pensions Ombudman addresses Insurance Institute


Address by Paul Kenny, Pensions Ombudsman, at the Insurance Institute of Ireland’s Industry Leaders’ Summit, Four Seasons Hotel, Dublin 8th October 2009.
21st Century Pensions: the changing landscape of retirement income provision
When I started working in the pensions industry just over forty years ago, defined benefit schemes were the order of the day. They were taking over from older forms of pension provision, such as flat-rate or fixed benefits, or possibly career average schemes. DB schemes were generally designed to give benefits based on final salary or something close to it. The older provisions were not inflation-friendly and indeed, inflation was to be the death knell of a number of Defined Contribution schemes that existed at that time.
Pension provision was not general in the private sector – and it still isn’t. Public sector provision - while it applied to a large proportion of that part of the workforce – was primitive in its design. There were no dependants’ benefits, no preservation, no coverage of “atypical” employees and, of course, there was the notorious marriage bar which caused women to leave service when they married.
Today DB schemes in the private sector are underfunded, some of them seriously insolvent. Many companies have frozen their DB schemes.  IAPF figures this week indicate that 70% have been closed to new entrants. Some companies have wound them up altogether and opted for DC schemes instead - 60% of replacement schemes are DC schemes and 17% PRSAs. Even those companies which maintain a commitment to DB provision are seeking ways to share the risks with scheme members, so we are now seeing more “hybrid” schemes. These are popular with companies who close their DB schemes to future service accrual.
One of the most popular types of hybrid arrangement is a scheme whose basic provision is on a defined benefit basis. Typically, employees will be covered on this basis up to a defined salary limit (which would be revalued over time) or perhaps pinned to the pay a particular grade of employee. Where individual salaries exceed that limit, the employer’s commitment to the excess is on a defined contribution basis. Legally, if the DB and DC components of a hybrid scheme are governed by a single trust, the scheme must be registered with the Pensions Board as a DB scheme.
This type of hybrid is a clever solution to a number of problems. By limiting the employer’s commitment in terms of higher-paid workers, they protect the employer from the worst effects of large pay rises for these workers in the run-up to retirement. At the same time, they protect the lower-paid worker, whose benefits may often be fully provided from the DB element of the scheme. This can also, perversely, be a benefit to the employer. If staff turnover in a company is high, this usually tends to be among the youngest – and lowest-paid – cohort of employees. Defined benefit transfer values at young ages can be considerably lower than the amount that would be taken out from a defined contribution scheme. (This is an aspect of DC schemes that is often ignored, and can be quite costly.)
In the public sector, basic pensions have not changed in all that time, but a great many of the flaws have been taken out of the system and it is now recognised that public service pensions are generous, by any standards. However, there is finally a recognition of the true cost of the very generous pension provisions that now exist. The unfunded Pay-As-You-Go system used for these pensions disguised their real cost. In the current fiscal climate it would seem that public service pensions as we know and love them may be under threat.
As to the direction of future pension policy, it is interesting to note that views from very differing quarters suggest that a consensus may be building in favour of a universal pension scheme for Ireland. I am pleased to say that this was one of the main ideas in my Office’s submission on the Green Paper on Pensions in May 2008. That submission favoured the introduction of a universal pension based on the total contribution concept which would provide a basic index linked pension at retirement. Additional pension could be added through a soft mandatory SSIA type arrangement. I note that the recent Commission on Taxation report also favours the introduction of a universal pension and SIPTU has also recently come out in support of this idea. If a consensus on such issues emerges nationally, it would make it much easier for policymakers to drive change.
Another phenomenon is the news that we’re living longer. Half of the children born this year will probably live to over 100. It is not realistic to expect that retirement will – or can – last as long as a working lifetime. It’s inevitable and indeed desirable from a human development perspective, that pension ages will rise. They are already doing so in other countries: Denmark has had pension age 67 for years. The Netherlands, Finland and Australia are among those who have recently announced their intention to increase pension ages. This week the Tories are talking about speeding up the process in the UK. In this country, the report of An Bord Snip Nua has recommended an increase. However, the submissions to the Pensions Green Paper could broadly be summarised as favouring flexibility in retirement age – very few advocated a compulsory increase in the age of payment of State pensions, to which occupational retirement ages are usually tied. Pension ages must change – the only question is, when.
I’d like to say a few words about regulation. I’ve nothing against regulation in principle. Lately we discovered that perhaps the financial services sector as a whole was less well regulated than we had thought it was. In pensions, the purpose of a lot of our regulation is admirable – more rights for scheme members, more information to be made available, and so on. But I have been banging on for years to the effect that we must not confuse quantity with quality. If we micro-regulate– however well-intentioned that may be – we run the risk of pension scheme trustees and administrators retreating into box-ticking mode. As long as all the legal requirement are met, their backs are covered – whether the people who get these communications can actually understand them, or not. I wouldn’t wish to condemn everyone – the industry is full of examples of good, clear communication. But for every one of those there are several examples that are just awful. Communication is good only if it can be understood. A high proportion of the complaints I get have their origins in failed communication.
I had a recent case which typifies, at best, poor communication. The complainant had transferred her SSIA savings into a PRSA and had given clear written instructions as to how the funds were to be invested. She had even ticked the appropriate box! Due to an administrative error, however, the funds where put into the default option. To their credit, the company involved discovered the error some time later and contacted the investor. However, rather than writing to the investor and saying that the error had been discovered and that it had been put right with no loss to the investor, the first paragraph of the company's letter initially extolled the virtues of the default option, in particular the benefit of the automatic switching of funds to secure funds as retirement approaches. The investor was in her early 30s.
The letter then went on to say that the company had reviewed there records and had noted that in the discussions about how the transferring SSIA funds would be invested, the investor had “discussed” other funds. While this statement was technically correct, it failed to point out that the investor had specifically chosen one of these funds. It gets better. The letter then went on to say that at this "inconsistency" would be addressed to ensure that the investor was at no loss whatsoever and it went on to explain in great detail and in a somewhat technical manner how this inconsistency was to be addressed.
The point here is that the person was now so confused and more importantly untrusting, that she complained formally to my Office. In the meantime, the company had run the figures and credited her account with the relatively small loss which had been incurred.
The point here is very simple. If the company had been up front with their customer, come out with their hands up, admitted the mistake, said SORRY, advised her of the amount of the loss and credited to her account, there would have been no issue whatsoever and the company would probably have gone up in her estimation. Instead, the mumbo-jumbo palaver employed, indeed the actual misrepresentation of what had occurred, only succeeded in destroying this person's confidence in the company and forced her to come to my Office. In the end, the initial approach by the company, on discovery of the error, succeeded not just in alienating their customer but also resulted in the use of public resources to address the matter.
For further information contact Mr. Paul Kenny, Pensions Ombudsman at (01) 647 1650, or see
8 October, 2009