Pensioners on high retirement incomes could see their entitlements slashed by up to 50% as the Government tries to ensure funds in insolvent defined benefit schemes are distributed more fairly between those in retirement and those still of working age.
At present, when a defined benefit (DB) pension scheme goes bust, 100% of existing pensioners’ entitlements are protected, while those yet to reach retirement age see the sum they will receive decimated. Now though, the Government has announced a number of scenarios to ensure the non-retired members of the schemes will receive greater entitlements. The changes, for which Social Protection Minister Joan Burton was given Cabinet approval yesterday, can be broken down into three scenarios.
nDouble insolvency: When both a company and its DB pension scheme become insolvent, the funds will be divided to ensure all beneficiaries of the scheme (pensioners, current employees, and former employees who have not yet retired) will be guaranteed 50% of their entitlements. Existing pensioners will have their payment protected up to €12,000. If the pension scheme does not have enough funds to meet the above requirements, the fund will be bolstered from the Government’s pension levy funds;
nSingle insolvency: When only the DB pension scheme becomes insolvent, existing pensioners with pensions of less than €12,000 will continue to receive 100% of that amount. However, those on pensions between €12,000 and €60,000 will see their pension reduced by 10%. Those receiving over €60,000 will receive a maximum reduction of 20%. The Government would make no contribution in that case because the company is still in business and it makes the pension “promise”.
nPension restructuring: When trustees are restructuring a pension scheme to keep it open and viable, pensioners with entitlements of less than €12,000 will continue to receive 100%. Trustees will then have the option to reduce higher pension benefits (up to 10% for €12,000 to €60,000; up to 20% for €60,000 and over) to make funds available to other scheme members.
It is understood €130m is being set aside from the pension levy to cover the double insolvency liabilities the Government could face.
The department said the measures meet Ireland’s obligations under the EU Insolvency Directive to protect workers’ entitlements and also address the long-demanded need for reform of the pensions priority order to ensure greater fairness within DB schemes. It did point out, though, that 55% of private sector pensioners have occupational pensions of less than €12,000, so if a double insolvency were to arise it would be a small number of people affected.
Meanwhile, Samantha McConnell, chief investment officer at IFG Corporate Pensions, criticised the fact that the pensions levy was still being applied to defined contribution pension holders, even though they would not see the benefits from it: “That, in our view, is blatantly unfair because DC scheme members currently have to pay the majority of the cost of securing their pension benefits.
“Very few of them will ever enjoy the level of pension that people in DB currently enjoy because the level of contributions you would have to put in are beyond the reach of most normal citizens.
“Cynics might say the Government sees this as too good a source of funds to be able to switch off the tap. They will have raised over €1.5bn over the four years the levy has been in existence.”
© Irish Examiner Ltd. All rights reserved