Eighty per cent of Ireland's defined benefit (DB) pension schemes fail to meet the statutory funding standard, and half of them must submit a recovery plan to the Pensions Board by 30 June 2010, finds Mercer.

At its annual Defined Benefit Conference, the financial consultant launched its 2010 survey showing that half of all DB pension schemes in Ireland also plan to change benefits or their employee contribution rate this year.

A quarter of schemes have either implemented or are seriously considering an increase in the required contribution rate from employees, increasing on average from five percent to between eight and ten per cent. In some cases, this figure is even higher.

Almost 15 per cent of schemes plan to cease providing benefits from the DB scheme for the future, and intend to switch to a defined contribution (DC) scheme instead.

And more worryingly, nearly 15 per cent of schemes are in a poor enough state to be likely to wind up due to funding difficulties.

An extension to the deadlines for funding proposals has been proposed by Mercer, which would aim to give employers and trustees the chance to take account of last week's National Pensions Framework. Aspects such as an increase in the State retirement age, a change in the tax treatment of employee contributions, and the intention for a new type of DB pension scheme, could all impact on funding plans, Mercer said.

Joyce Brennan, principal at Mercer, told delegates at Mercer's conference: "You need to take a cold hard look at whether you can realistically continue to afford the costs and risks of current defined benefit pension plans. If change is needed, ensure that the change makes the scheme sustainable and robust for the future. Avoid tinkering around the edges and have a fundamental look at what is going to meet the needs of your business and your employees for the next twenty years."

Mercer looked at the potential for DB schemes to reduce benefits already earned to date, under new "Section 50" legislation. The consultant believes that ten per cent of all DB schemes may opt to go down this route. "Trustees and employers generally do not want to reduce the benefits members have earned. We are seeing a huge amount of goodwill from employers toward defined benefit pension schemes - they want to continue to support these schemes, but reducing accrued pensions may be appropriate where the funding difficulties are so stark that a wind-up would be the only other option," said Brennan.

Increased life expectancy was cited as the key reason for the increase in the cost of DB pension schemes. Trustees and employers must also examine their investment strategies alongside a review of benefits provided.

David O'Sullivan, Principal with Mercer explained: "For maturing schemes, in particular, investment strategies should not remain static; they need to consider de-risking over time (moving from equities to bonds), as more of the members become pensioners. A key element of this process is to ensure that trustees and employers have governance and implementation structures in place to monitor the assets and liabilities on a regular basis and bank gains as they arise."

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