Why pension change is the right move
This has followed unprecedented lobbying from the pensions industry, Trustee bodies and trade unions to try to get some change to the existing unfair priority order over the last two years in particular.
From a Government perspective, the change addresses the current exposure of the State following the ruling of the European Court of Justice (ECJ) in Apr 2013, which stated that Ireland is in breach of the EU Insolvency Directive. The ECJ ruled that when both the employer and pension scheme are insolvent, the State must put measures in place to provide at least 49% of the pension benefits expected.
The Government response is seen as a pre-emptive move in respect of the Waterford Crystal case which is before the courts at present. The High Court can decide (as the British courts did) to award more than 50% to members, but at a minimum the Government have now drawn a line in the sand.
Over 500 pension schemes have wound up since 2008 and there is no impact for those that have already been declared insolvent. What the new bill does do is to introduce for members that are impacted by a double insolvency, a feature whereby going forward they will receive at least 50% of their benefits, or €12,000. If the fund has insufficient monies to facilitate this, the difference will be contributed by the Government from money raised from the pensions levy. This is only in respect of new double insolvencies announced from the date of the legislation. Old insolvencies guarantee pension benefits of 100% and other members will be entitled to at least 50% of the value of their benefits based on EU insolvency law.
In addition, the minister said that in single insolvencies (ie, where the employer remains in existence), pension benefits could be reduced on a scaled basis to allow for the enhancement of deferred and active member benefits, and this method could also be used to restructure an existing ongoing DB scheme. In all but the double insolvency situation, the funds are moving between members of the scheme to ensure a fairer distribution of assets. The Government suggested that, up to €12,000, no reduction to the pension would take place, between €12,000 and €60,000 a 10% reduction would be effected, and beyond that up to a 20% reduction could be levied.
This is a significant step towards the fairer distribution of wealth between members of underfunded pension schemes and was something the industry has been pushing for some time.
The Government is also expected to bring forward tougher rules to prevent schemes going below the 50% funding threshold when submitting funding proposals, or where schemes are going off track with funding below this level.
What is not clear is whether, when the minister talks about benefits for active and deferred members, she means benefits on a transfer value basis or on a deferred annuity basis — this needs to be clarified. There seems to be some suggestion in the briefing that the Government is looking to bring in some form of ‘debt on the employer’ legislation to deal with single insolvencies, but again this in unclear. It is also unclear how many pensioners are in receipt of a pension in excess of €12k, that the new legislation will apply to. The bill is due to be published in full later this week which should clarify a number of details, including how this change in the priority order will interact with the existing PIP legislation.
Another issue is that the new pension levy due to pay for the underfunded double insolvent schemes is being raised from not only defined benefit (DB) schemes but also defined contribution (DC) schemes. Given that DC members already have to contribute the majority of the cost to fund their own pension and that many will struggle to enjoy a pension of 50% of final salary, is it right that they are subject to this levy to fund a level of DB benefits that they will likely never receive? In our opinion this is blatantly unfair and the minister should ensure the new 0.15% levy is applied to DB schemes alone.
* Samantha McConnell is chief investment officer with IFG Corporate Pensions
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