In December 1970 the year before I started my company City Life I was working in a company that specialised in providing employee retirement planning and was handling the retirement of an employee in a defined benefit scheme. There was high inflation around that time and in his last year of service which was 1970 his salary increased by £1,000 IR and even though his pension scheme was fully funded up to that point in time the company had to put in an extra £10,000 IR to cover that salary increase. Back then £10,000 was a huge amount of money.

My initial reaction was that a defined benefit scheme was a very dangerous type of plan and in our 42 years in business, we have never put such a scheme in place in any company that we advised on retirement planning. Yes we have put in Pension Plans for employees, but they were all ones where the contributions not the benefits were defined. Typically the employer would put in say 5% or 6% of the salary and the employee would match that. Now the cost could be budgeted and there was no promise or liability on the employer providing that those agree payments were made.

I was so lucky to learn from that experience as it brought home to me how difficult it could be in trying to budget the future costs of a defined benefit scheme.

Just think about it; If you owned a company and you were taking on an employee aged 35  and you said to them “when you retire at age 65 I will give you an annual pension for the rest of your life of two thirds of whatever your salary will be at that time and your only cost will be say 6% of your salary each year”!

In many of these old schemes the employee didn’t have to make any contributions at all!

How could that cost be budgeted for when the employer doesn’t know;

1) What the employee’s salary is going to be in 30 years

2) What the return is going to be earned each year on the pension       premiums invested 

3) What the interest/annuity rates are going to be at the time of retirement.

That’s the nub of the problem with Defined Benefit Pension schemes; there is no control over future costs; they can not be budgeted for and naturally they will in time all have to be wound up.

 Naturally the employees who have been promised these wonderful retirement plans are up in arms but the reality in most cases is that if the employer has to contribute 20% or 30 % or in some cases 40% of the company salary role into their pension schemes then the company might no longer be viable and could have to stop trading.

I was at a family business meeting in Clontarf Castle a few  weeks ago and  the main speaker who runs a 7th generation very successful food company in Ireland told us of his difficulties with trying to fund his company’s Defined Benefit Scheme. For two year he paid in twice the normal contributions to fully fund his scheme and then the funding rules were changed and again his scheme was underfunded and so his choice was either; wind up the defined benefit pension plan, or wind up his company.

He said it was one of the most difficult things he ever had to do as he was effectively breaking his promise to his employees. He was put into a terrible position that he should never have been in. In my view he received poor advice over the years.

Will there be a Positive outcome?

The outcome of all of this is that all employees and indeed all of us lucky to be in employment in Ireland have to face the reality that we have to take responsibility to make sure that we have enough income to live on when we retire or are unable to work any more. No longer can we depend on the state or our employer to give us this income when we need it. It is up to us

 What do we need to have in our retirement plans at retirement age?

 As a rule of thumb I advise to my customers that if they want an income of €50,000 a year they need close to a final pension fund of €1,000,000 at retirement age. How much will your retirement plan be worth when you retire? Maybe it is time to do a bit of planning!

 Ted Dwyer

Family Business

Nov 2013