Northern Ireland has poor pension systems for many private sector employees.

Most employees of private firms and businesses do not have the benefit of a substantial employer organised pension scheme.

Not only is there a problem of unsatisfactory post-retirement pension incomes, there are growing problems for many people who are members of a formal defined benefit pension scheme organised by their employer.

Basically, the existing defined benefit schemes are proving more and more costly.

Defined benefit (DB) schemes accumulate contributions from employers and employees into earmarked funds that are invested with the expectation that, on retirement, an employee will have a pension related to his earnings when he retired.

These schemes usually offer a pension (with a lump sum) that at least might be equivalent to about 50% of previous income.

The funding of these schemes has been stretched by a number of adverse changes. In part, funds invested have recently been hit by the fall in the capital value of investments.

In another part, these schemes offer pensions for life to people who are now living much longer than the actuaries assumed when the schemes were started.

Just to confirm the local position, a review of what is known from the largest 100 businesses in Northern Ireland points to (at least) 37 which have recently operated DB schemes.

Not all employees necessarily qualify to join a DB scheme: many are only open to senior managers or other selected groups.

Of these 37, three have decided to close the scheme to any further new members and 20 are known from recent accounts to be carrying an actuarial deficit.

Hardly surprising, therefore, that the debate between pension providers has turned to an assessment of the longer-term prospects for DB schemes and, where deficits persist, how the schemes can be restored to viability (or closed).

Kevin Wesbroom, Director, Kerr Henderson Hewitt, confirmed last week to local trustees, that the deficits in DB schemes are a global feature, not peculiar to Northern Ireland.

When eight of the 20 schemes last reported they had a deficit that was the equivalent of 10% or more of the assets of the scheme.

The financial strains are imposing a search for adjustments. More interestingly, the emphasis appears to be shifting to find means of withdrawing from DB schemes.

While this is understandable from an employer’s perspective, that still leaves the employees with questions on how to accumulate funds to finance retirement.

The Kerr Henderson Hewitt professional research has been examining ways to restore viability and other ways to reduce long-term commitments.

To restore viability some schemes have:

• Increased employee contributions

• Reduced the rate of accrued benefits

• Closed the scheme to new members

• Closed further accrual to existing members

• Switched to link to career average salary

• Capped any pension increases

• Raised the retirement age

• Introduced a salary sacrifice option.

More radically, options are on the table for decommissioning the DB scheme by:

• Selling the scheme through the Pensions Insurance Market

• Buying out members entitlements

• Offering members an annuity based buy out

• Offering members enhanced transfer values

Kevin Wesbroom takes a cautious view of DB (final salary) schemes.

He said: “We are getting close to the end game now for final salary schemes. They have simply becoming too expensive for employers to support.”

He is not hopeful that Government will be willing to take the unpopular decisions to protect pensions by, for example, raising the retirement age. The present formula is unaffordable!

Yet, if employers need to withdraw from too expensive commitments, then employees must see that this puts the onus on them to plan alternative forms of saving.