Growth of Occupational Pension Schemes

In Ireland the growth of occupational pension schemes established by private employers has been relatively recent. During the 1930s and 1940s employment in agriculture declined and non-agricultural employment increased. This trend was intensified after the war, when there was widespread emigration from both urban and rural areas. With the establishment of the Industrial Development Authority in 1950 foreign companys were encouraged to establish themselves in Ireland. These foreign companies, many of whom were from the United Kingdom, introduced the British model of occupational pension schemes into their Irish subsidiaries. This development encouraged Irish employers to establish pension schemes and the trade union representatives of employees to seek their establishment#. In the 1960�s significant changes began in the economy of the Irish state. What was an underdeveloped agricultural economy was becoming an industrial based developed economy. A major influence on the development of pension schemes were the national wage agreements, the current version of which is called the programme for competitiveness and work. The rules governing pay increases severely restricted local bargaining on wages, but left room for negotiation on fringe benefits such as the introduction or improvement of occupational pension schemes.

Factors which have contributed to the increase in the establishment of occupational pension schemes are :

(a) the growth of the wage earning and salaried middle class. It is important for the middle class ethos that the knowledge exists during one�s working life that there will be a pension at retirement.

(b) a formal pension scheme provides certainty of retirement provision, as opposed to the previous discretionary arrangements.

(c) the advent of less personable employment and its replacement by a large organisation (perhaps multi-national) necessitates a formal guarantee of pension rights.

(d) The example of statutory pension schemes in the public sector created an awareness of the need for greater security in the private sector. (e) The tax advantages of pension schemes made them more effective as an incentive than an equivalent increase in salary.

(f) Occupational pensions scheme are the best available vehicle for personal savings because of income tax reliefs.

(g) The need for wide spread pension provision has become greater as a larger percentage of the population can expect to reach 65 years and continue living for a substantial number of years after that age. Growth in Assets of Pension Funds

The increase in membership of occupational pension schemes from the early 1970�s, has resulted in a vast accumulation of assets by pension funds. The contributions and assets of pension funds increased at a phenomenal rate in the period 1975 to 1989. Contributions grew at an annual compound rate of 18%, and assets grew at a rate of nearly 30%. The result has been an increase in the ratio of pension assets from less than 6% of gross national product (GNP) in 1975 to nearly 10% in 1980, to 38% in 1989 and almost 50% in 1995. Thus in a short period of time pension funds have grown from relative insignificance to a position where they are a major depository of savings and an important source of investment capital. There are no official statistics of pension funds in Ireland. In 1995 assets of Irish pension funds are valued at approximately �16.3 billion#. It should be remembered that any valuation of pension funds is strongly influenced by the state of the stock market at the time the valuation is made. The value of pension assets exceeds the market capitalisation of the Irish stock exchange. In 1995 an estimated �663 million in new cash flowed into Irish pension funds. Investment decisions are made with respect to �700 to �800 million of pension fund money each year. 39% of Irish pension assets are invested outside of Ireland. Tax relief in the region of �300 to �500 million is granted annually to Irish pension funds.

Asset accumulation of pension funds in Ireland due to income growth and capital gains is an upward trend which is likely to continue for some time. A survey of the expected growth of pension fund assets in Europe by de Ryck in 1991, suggests that pension fund assets in Ireland could grow by 12% annually from 1991 to 2000. The average GNP growth rate is unlikely to be more than 4% (at the present time the Irish growth rate is considerably higher). Hence the ratio of pension assets to GDP could more than double from 33% in 1989 to 75% by 2000.

Maturity of Pension Funds

In addition to the rapid growth of pension fund assets, another feature of pension funds is that investment is long-term. This is especially the case in Ireland. The vast majority of occupational pension schemes in Ireland will not reach maturity until well into the next century. Money will continue to flood in and the eventual need to pay out to pensioners is only a distant worry. Pension funds at present need pay little attention to their liability profile in setting their investment strategy. However, subsequently mature schemes have to worry about selling assets in order to pay pensions. The position in Ireland contrasts with the position in the United Kingdom where time is catching up with pension funds which have been established for many decades. The difficulties of mature pension schemes# are going to become increasingly apparent in the United Kingdom and the resolution of these difficulties will be a valuable lesson for Irish pension funds.