I am happy to have been invited to this hearing to assist the committee in its examination of our accounts for 2007. I would like, in a short opening statement, to cover the following: the status, composition and functions of the board; the financing of the board to the extent that we have not already discussed it; the accounts and activities in 2007 and 2008 given that our 2008 report was published just a number of days ago; an overview of how we regulate pensions and some recent developments in that approach; and finally I will raise a number of issues facing pensions at present.
The Pensions Board was established by the Pensions Act 1990. It is a representative board and comprises a chairperson and 16 ordinary members appointed by the Minister for Social and Family Affairs. The board includes representatives of trade unions, employer organisations, consumer interests, pension interests, the Government represented by the Department of Social and Family Affairs and the Department of Finance, the pensions industry, member trustees and professional groups involved in the pensions sector.
Our functions include the regulation of occupational pension schemes and personal retirement savings accounts, PRSAs, that together cover more than 1 million members and contributors at the end of 2008. We provide information to the Minister for Social and Family Affairs on pension issues. We also provide public information and promote public awareness of pensions.
We are one of a number of agencies concerned with pensions. These include the following: the Department of Social and Family Affairs, our parent Department, which is responsible for the State retirement pension and, in conjunction with the Department of Finance, for pension policy matters generally; the Revenue Commissioners, who are responsible for administering the taxation aspects of pensions; the Pensions Ombudsman, who investigates and decides on complaints and disputes in relation to maladministration for specific scheme members; and the Financial Regulator which regulates the financial institutions that provide financial products that pension schemes and individuals invest in.
As has already been said, we are financed by a levy on occupational schemes and PRSA providers. The current level is €9.50 per active scheme member, reducing to €4.50 for larger schemes and public sector schemes. This levy has not changed since January 2003 and is set by the Minister for Social and Family Affairs. In 2008 PRSA activity, as already discussed, moved to a self-financing basis. In 2007 our total income amounted to just under €7.4 million and fell to just over €7 million in 2008. Our expenditure in 2007 was €6.6 million and 2% higher at just over €6.75 million in 2008. Therefore, we had a surplus of €745,000 in 2007 and €294,000 in 2008.
We have provided the committee secretariat with our annual reports for 2007 and 2008 which provide a comprehensive picture of our activities. I will now summarise some key features. At the end of 2008 there were 1,271 defined benefit schemes with a total membership of almost 580,000 active members and over 90,000 defined contribution schemes with a membership of 272,000. This gives a total of over 850,000 active members of occupational pension schemes. It represents about 41% of those in employment at the end 2008. At the end of 2008 there were over 155,000 PRSA contracts in force with a total asset value of €1.2 billion.
In our policy advisory role, we contribute to European occupational pension issues through our participation in the Committee of European Insurance and Occupational Pensions Supervisors, CIEOPS. In 2007, we assisted with the preparation of the Green Paper on pensions which was launched in October of that year and we continue to provide the Department of Social and Family Affairs and other Departments with technical advice on pensions matters.
We regard our information and education activity as central parts of our work. The board dealt with over 9,500 direct telephone or written enquiries on pension matters, and our website attracted almost half a million visits in 2008, an increase of 11% on 2007. In performing its regulatory role, the board operates on a hierarchy of supervisory priorities. Misappropriation of scheme or PRSA assets is our highest risk priority and this is so that we can use our resources as effectively as possible.
A very significant development in regulation in 2008 was the new requirement for schemes to appoint a registered administrator to carry out specified functions. By the end of 2008, 192 registered administrators had registered with the board. This new provision enables us to focus directly on administrators and, through them, on the schemes they administer. This is more efficient than dealing directly with the 90,000 plus individually registered schemes.
We directly engage with trustees and their administrative providers in order to assess levels of compliance based on the board's hierarchy of risk priorities. This engagement includes convening meetings with trustees and their advisers to discuss a range of compliance issues. We also carry out off-site audits and on-site inspections of regulated entities, selected on both a targeted and random basis.
We opened 181 new investigations in 2008. Over 150 of these were as a result of whistleblow reports which related to alleged failure by employers to forward pension contributions deducted from workers' pay packets. This has been a particular problem in the construction sector and in one case we obtained a High Court order directing an employer to pay contributions arrears of €186,825. We are increasingly using our powers to levy on-the-spot fines in respect of a range of administrative offences. This is more cost-effective than the more expensive and time-consuming alternative of instituting prosecutions.
The members of this committee will be aware that occupational pensions and PRSAs have experienced significant difficulties of late. In 2008, and into the early months of this year, investment market losses led to sharp falls in the value of defined contribution schemes, where retirement income is related to contributions and their investment returns, and in the funding levels of defined benefit schemes, where retirement income is a function of salary. In both cases, a significant factor has been the tendency for pension schemes in this country to invest a relatively high proportion of their assets in equities, namely, stocks and shares, compared with other European countries. While this approach worked well for a long time as equity markets performed strongly, it inevitably contributed to losses once the equity markets turned. The basic problem is that this approach did not take adequate account of investment risks and downsides.
A second factor that has affected the position of defined benefit schemes is that the contribution rates by employers and employees have not been consistent with the level of benefits promised. The focus in Ireland – understandable in many respects – has been on minimising contribution rates rather than setting contributions on a basis consistent with the long-term cost of retirement benefits. These long-term costs have increased significantly mainly because of the significant and welcome improvements in life expectancy. For example, CSO data show that a man aged 60 can now expect to live to over 80 compared to 76 for a man at the same age 25 years ago. Increases for women have been in line with those for men.
These factors as well as some others have led to a position where very few defined benefit schemes now meet the funding standard and a small number do not have enough assets to meet the liabilities of current pensioners. In other words, if the scheme wound up tomorrow there would not be enough money to continue paying for the rest of their lives those who have already retired. In response to these difficulties, the board has endeavoured to adopt a flexible approach to the necessary scheme restructuring through, for example, allowing schemes more time to put funding proposals in place to restore solvency and by agreeing to proposals with a longer timeframe over which the funding standard must be met.
Recent changes to the Pensions Act now allow scheme trustees to reduce scheme benefits in circumstances where a scheme is facing wind-up. The board has a role in approving the necessary scheme amendments and we recently published a set of guidelines to assist trustees and their advisers in this process. The guidelines emphasise the importance of trustees undertaking a comprehensive review of their schemes which will ensure that, if approved, their proposals will ensure the long-term sustainability of the scheme. To back this up we also ran a series of public seminars throughout the country.
While the problems of defined benefit schemes get a lot of attention, we are also concerned about the poor performance of defined contribution schemes. A forthcoming and welcome change in this area is the introduction of a requirement that members of defined contribution schemes be provided with estimates of what pension they may receive when they retire. It is also important that members of these schemes are provided with adequate and understandable explanations of investment choices and risks and that scheme members take an active role in their pensions.
In conclusion, we are trying to use our resources in a way that maximises their regulatory impact. We continue to promote the importance of saving for retirement. We are also exercising whatever discretion is open to us in tackling the particular difficulties facing defined benefit schemes.
My colleagues and I will be happy to address any questions committee members may wish to raise.