Global Financial Crisis Impact on Defined Benefit Super

One aspect of the GFC which has not received much media attention is the impact of the decline in asset values on defined benefit superannuation schemes.

In Australia, defined benefit superannuation schemes mainly operate in the public sector with a few schemes operating for larger brand named companies such as Qantas and the banks: which bank?

While these schemes are mostly closed to new members, they have many current members and a considerable number of pensioner members, all of whose benefits are immunised from asset value fluctuations.

The decline in asset values could mean that defined benefit funds which were previously solvent (with possibly significant solvency margins) may, at the next actuarial valuation, be in a very different position.  This may give rise to significant obligations on the supporting employers to increase their contribution rates.

In the Australian private sector, over the past 20 years, defined benefit schemes have been closed to new entrants and often restructured to convert them to defined contribution schemes.  This means that the investment risk is borne by the member as evidenced by negative earning rates being credited to their accounts.

Overseas the position is different.  Many larger UK and US companies still operate defined benefit schemes (even if they are closed to new entrants).  The decline in asset values will mean, for the contributing employers to these schemes, increased – possibly significantly increased – contributions and, given international accounting rules, the unfunded pension liabilities will appear on the supporting employer’s balance sheets as liabilities.