Tuesday, October 01 11:54:44
It would be a huge mistake if the Government took the example of other European states and raided pension funds to shore up the State's balance sheet in the short term, according to IFG Corporate Pensions.
In the wake of the Polish government nationalising pension schemes last month, the Irish Government should not consider following the Polish example by taking over all pension assets in the private sector to pay for insolvent Defined Benefit schemes, it said.
The pension provider said that while it was unlikely that the Irish Government would contemplate such an extreme measure, the Polish government recently moved assets out of the private sector and into the public unfunded pension scheme, thereby allowing it to reduce its debt load.
"We are not suggesting that the Irish Government is about to engage in a further raid on pension funds but lest we forget our Government did something very similar with the funded pension schemes of the universities in 2009 - nationalising those pension schemes allowed the Government to take all the assets on to the balance sheet, assume the liabilities and add them to the unfunded pay-as-you-go public sector pension fund, which is ultimately paid for by the ordinary tax payer. At another time the National Pension Reserve Fund was also raided to bail out the banks. Short-term win for long-term pain seems to be the preferred route," said Samantha McConnell, Chief Investment Officer with IFG.
According to IFG, Poland is not the only European Government to have filled a budgetary gap using pension funds in recent years.
"In 2011 Hungary practically seized private pension fund assets giving Hungarian citizens an ultimatum: they could either remit their individual retirement savings to the state, or lose the right to the basic state pension entirely (and still have an obligation to continue to pay contributions for it). In this way, the Hungarian government gained control over approx. E11bn of individual retirement savings they used to lower the national debt. Bulgaria and France have also dipped their hands into private pension schemes at different times. In all of these cases the funds were used to plug short-term deficits without implementing any reform and at the cost, I would argue, of the long-term sustainability of the system," said Ms McConnell.
IFG said that the move by the Polish government was a 'very extreme example', but that it served to illustrate what can happen where there were two diametrically-opposed goals.
The Polish experience highlighted again the necessity to take pensions out of the political arena. In Ireland, there is a need to establish a non-political body that can plan a long-term strategy to deal with the pension crisis without the requirement to consider short-term political necessities, the pension provider added.
"The Waterford Crystal case is due back into the courts shortly. How long it will take until a decision is made is anyone's guess at this stage. Nevertheless, at some point the piper will need to be paid. How much the figure will be we do not know, but we do suspect that the Government will be very unlikely to carry the cost." The pension provider can foresee a number of ways of dealing with this issue. "One of them could be for the Government to take over the assets and liabilities of double insolvent schemes and pay out benefits on a pro rata basis to the assets using sovereign bonds to underwrite the payments. For this to work, the Government needs to address the priority order issue and also needs to ensure that payments out do not exceed the assets taken over or else the cost will come back on to the tax payer," said Ms McConnell.