Are private pensions up for grabs?

27 March 2011

By Kathleen Barrington

The focus on the enormous holes in the balance sheets of our banks has distracted attention from some of the alternative solutions being adopted by other EU countries to help resolve their financial crises.
These solutions are of interest to investors in private pension funds, as the crisis measures have included seizing private pension assets to plug the gaping holes in both bank and government balance sheets.
Take Hungary, for example. In February, it cancelled $7.5 billion worth of government bonds after grabbing privately-managed pension funds to cut the country’s indebtedness.
The appropriation of the assets came despite protests from leading pension fund managers, as well as legal threats.
The raid was carried out by Hungary’s Debt Management Agency, which is roughly equivalent to our own National Treasury Management Agency.
László Buzás, the deputy chief executive officer of the agency, told news agency Bloomberg that by cancelling the government bonds, the government would reduce Hungary’s debt by 5.5 percentage points from about 80 per cent of gross domestic product.
Hungary followed the example of Argentina, which in 2001 confiscated about $3.2 billion of pension savings before the country stopped servicing its debt.
The Argentinian government also nationalised the $24 billion industry two years ago to compensate for falling tax revenue after a 2005 debt-restructuring. The February raid on private sector pension funds was a measure of how desperate the financial situation in Hungary had become.
The idea of raiding state pension funds has long been popular with European governments seeking to plug the holes in their exchequers’ finances.
Our own government has plundered the €24 billion state owned National Pension Reserve Fund to help cover the costs of recapitalising our bust banks. It has also imposed a pension levy on public sector workers, and increased the age at which the state pension will be paid out.
The effect of increasing the retirement age from 65 to 68 is that people will be missing out on state pension payments of about €1 billion a year.
The affected cohort of 65-year-olds will forgo a state pension of €12,000 a year for three years once the retirement age is increased to 68, an effective loss of €36,000 per person.
With our state pension reserves heavily depleted and our senior citizens soon being expected to work till the age of 68, the cash-strapped government is increasingly turning its attention to other sources of funding.
While no one is suggesting that the government has any plans to nationalise our private pension funds, both the former and the current administrations have been dreaming up wheezes to use private sector pension funds to help prop up the public finances.
The now-departed Fianna Fáil/Greens government introduced the concept of a sovereign annuity bond, which is to be issued by the state to Irish pension funds.
Once the technicalities have been ironed out, this will pave the way for private pension money to be invested in high yielding Irish government bonds.
The pensions industry lobbied for the move because it saw the higher returns available as a way of plugging the holes in private sector pension schemes.
But the risk is that, if the Irish sovereign were to default (as some influential commentators expect), private pensioners would lose out.
The new government is also eyeing private-sector pensions as a source of revenue. Fine Gael’s election manifesto called for the introduction of a 0.5 per cent tax on all private pension funds.
The party said during the election campaign that it would publish a jobs budget with a cost of €381 million within 100 days of entering government, which would be funded by the early payment of the first tranche of the 0.5 per cent levy on pension funds.
The pensions industry opposes this proposal.
Jerry Moriarty, chief executive of the Irish Association of Pension Funds (IAPF), has argued that applying a levy to the pension fund industry would only make matters worse at a time when many pension schemes have been struggling to plug the massive holes in their schemes.
The shortfall in the private sector defined benefit schemes was estimated at €13 billion at the end of 2008.
Since then, trustees, employers and members have been focusing on reducing those deficits. ‘‘To now levy those funds only makes a bad situation worse,” he said.
It has been suggested that those schemes could cut the benefits of an estimated 65,000 pension members to take account of the levy - a move which would, in Moriarty’s words,’ ‘penalise the prudent’’.
But the scale of the EU’s banking and fiscal crisis is now so enormous that it is entirely possible that governments will find themselves penalising the prudent in an effort to shore up the public finances.
This column has previously highlighted how the Danish government decided that some depositors in Amagerbanken, a small, insolvent Danish bank should contribute to the cost of bailing it out.
The depositors learned last month that they would lose 41 per cent of any amount they held on deposit over the statutory guarantee limit of €100,000.The depositors were effectively forced to take a 41 per cent haircut alongside the bondholders.
The Hungarian and Danish governments’ moves serve as yet another reminder that the financial crisis in Europe is now so deep that EU governments are giving consideration to measures which were unthinkable only a few short years ago.