Funding of Occupational Pension Schemes

It is preferable that occupational pension schemes be funded as there is always a risk of the bankruptcy of an employer. This would leave members with no benefit entitlements due to the absence of assets earmarked for pension purposes.

Thus nearly all occupational pension schemes operate on a funded basis, where the amount required to provide pensions is accumulated in advance by regular contributions into a fund. The pace at which such an amount is accumulated is referred to as the funding rate of the scheme. In defined benefit schemes the funding rate is calculated by an actuary on the basis of assumptions about the future, such as future income levels, investment earnings and mortality rates.

Usually the funding rate is prescribed as a percentage of the payroll of the members. In the case of defined benefit schemes if the investment performance of the fund is inadequate to provide the full benefit promised, the employer undertakes to make up the difference. Defined contribution schemes avoid risk to the employer and are preferred by smaller companies.

An insured contract, offered by insurance companies is an investment medium which is available to funded schemes, whether they are operated on a defined benefit or a defined contribution basis. These guarantee a certain monetary benefit on retirement with the possibility of a bonus depending on the performance of the insurance company investments. In many schemes (regardless of how the pure pension benefit is funded) benefits payable in the event of death or disability are provided by assurance contracts.

A wholly insured scheme is one in which the retirement benefits are secured solely by insurance policies or annuity contracts arranged with an insurance company to which the contributions are paid as premiums. The trustees hold no assets other than the insurance contracts, and the insurance company pays under the contracts from its own funds. Such a scheme should be distinguished from a pure investment contract.

The trustees of defined benefit schemes are required by the Pensions Act 1990# to ensure that their scheme complies with a funding standard. This is to ensure that, at a minimum, the scheme has sufficient funds to secure the pension rights that members have built up. The Annual Report 1995 of the Pensions Board stated that at December 1995, 2,067 defined benefit schemes with a total membership of 203,146 are subject to the funding standard.

Pay as you go schemes do not fund for future liabilities. The pension benefits are paid out of the current revenue of an employer. These cover only a small proportion of employees in the private sector, as compared to the public sector#.

The great majority of schemes in the public sector are financed in this way. This is possible because the State is the ultimate guarantor. According to the Annual Report 1995 of the Pension Board those schemes excluded from the funding standard number 70 with a total membership of 202,760. The excluded schemes are in the public sector and are excluded from the application of the funding standard by regulation, because the benefits are or may be paid, in whole or in part, out of monies provided from the Central Fund or monies provided by the Oireachtas.