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Pension Provisions

Wednesday, 12 June 2013

Dáil Éireann Debate
Vol. 806 No. 2

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Pension Provisions

Deputy Willie Penrose: Information on Willie Penrose Zoom on Willie Penrose I thank the Ceann Comhairle for selecting this most important topic for debate, and I thank the Minister, Deputy Burton, for her presence here, which indicates clearly that this is an issue to which she attaches significant importance. This is a very sensitive and complex issue, which requires detailed analysis, focus and consideration, as undoubtedly there will be impacts as a consequence of any proposed change, but it must be tackled and addressed. The last thing we should do is to adopt an ostrich-type stance, with the wish that the circumstances relating to pension fund wind-ups, deficits arising and employer exposure will go away. Clearly, that will not suffice because of the pressing nature of events surrounding defined benefit schemes.

We are all aware that currently, when a defined benefit pension scheme is wound up, pension legislation and the trust deed require that the scheme's assets be applied to provide for members' benefits after payment of the expenses incurred necessarily in the wind-up, in the following order: first, benefit entitlement relating to members' additional voluntary contributions, AVCs, or relating to a transfer of rights from another scheme; second, the continued payment of pensions currently in payment, excluding any future increases; third, deferred pension entitlements for members who have not already retired, including statutory revaluations up to retirement age but excluding future increases post-retirement age; and fourth, post-retirement pension increases on the above benefits, in so far as they are required under the rules. It is possible, therefore, in the context of these priorities, that some people will receive 100% of their benefits while others will receive much reduced benefits or no benefits.

Prior to the Waterford Crystal case, in which judgment was delivered by the European Court of Justice, ECJ, in April 2013, the 1980 directive, which was updated in 2009, required the State to provide appropriate protection in the event of a double insolvency - that is, where both the employer and the pension scheme are insolvent at the same time. The insolvency protection scheme introduced in the 1980s provided for cover for contributions payable in respect of the last 12 months prior to wind-up, but in the current environment this can represent a small fraction of the deficit on a scheme.

Following on from the Carol Robins case in 2007, in which the ECJ ruled that the UK Government was not compliant with the directive, the then Government introduced the pension insolvency payment scheme, PIPS, for a limited three-year period, which I believe will expire in February 2013, with an initial budget of €100 million. This facility is subject to a number of stipulations and conditions; in particular, it is limited to pensions at the date of insolvency, so it provides no relief for active and deferred members. That is the area on which we are trying to focus our attention, particularly with regard to those who are active members and nearing the end of their lives. They are particularly worried and concerned about this matter and great stress and anxiety are caused to many people in these situations.

The structure of PIPS is designed to ensure cost efficiency and to provide pensions in a more cost-efficient way than through the purchasing of an annuity contract. It can reduce the cost of an annuity purchase, which ensures there is more cash available, but it is still possible that a significant deficit can arise.

We are all aware of the most recent decision in the Waterford Crystal case, and I understand that it has gone back to the High Court for consideration. As it is before the courts, we cannot comment too much on it until it is finalised, and I appreciate the Minister's dilemma in that regard. The ECJ ruled that the Irish legislative mechanisms do not provide sufficient protection in these situations.

I am deeply concerned about this matter and it is one I feel very strongly about. I have raised it in parliamentary questions to the Minister. It is important that an appropriate scheme be put in place to protect workers' pensions rights - workers who are paying into pensions are deeply concerned about this matter - when an employer becomes insolvent and the relevant pension fund to which contributions have been made is in deficit. There is no doubt that consideration of an adjustment of the priority order to ensure that significant funds will be available to active and deferred members will have to be confronted and addressed and appropriate alleviating measures introduced.

I genuinely wish the Minister well in her efforts to devise an appropriate scheme. I know she has received a report, which I hope addresses this matter, and I hope the decision of the High Court in the Waterford Crystal case will feed into her consideration.

Minister for Social Protection (Deputy Joan Burton): Information on Joan Burton Zoom on Joan Burton I thank Deputy Penrose for raising this extremely important issue. The Pensions Act sets out the order in which the assets of a pension scheme are distributed in the event of the wind-up of a pension scheme. The statutory order of priority is of no consequence, as the Deputy knows, where a scheme winds up with sufficient assets to meet all of its liabilities. In the event of the wind-up of a pension scheme, all pensioner benefits except provision for post-retirement increases are given the highest priority after wind-up expenses and additional voluntary contributions made by individuals. Any remaining assets are then divided according to the accrued liabilities among active and deferred scheme members.

If a scheme is underfunded, the assets remaining after the distribution of assets in respect of payments to pensioners may not be sufficient to meet the liabilities pertaining to active and deferred members. In some cases, they may receive much less than the promised benefit after the commitments to existing pensioners have been satisfied.

The Government decision dated 4 October 2011 approved the drafting of legislation to change the current 100% priority given to existing pensioners on the wind-up of a deferred benefit pensions scheme in deficit by introducing a threshold on the amount and percentage of the pension payment. However, this is a complex and difficult issue which directly affects a group of people who are about to retire and those who are already retired and have little opportunity to increase their incomes. Given the significance of the proposed change, I have requested that the legislation not proceed for the moment pending broader consideration of some of the issues to which Deputy Penrose referred. A consultation process was completed in the last quarter of 2012. The process involved engagement with representatives of older people, the pensions industry, employers and trade unions. In addition, the Department engaged external expertise to assess the impact of possible changes on how the assets of a scheme are distributed on the wind-up of a scheme.

When I published the Social Welfare and Pensions (Miscellaneous Provisions) Bill 2013, I pointed out that I would not be proceeding at this stage with a change to the manner in which the assets of a scheme are distributed on the wind-up of a scheme. It must be remembered that while people are very conscious, as Deputy Penrose has said, of the impact that the wind-up of an underfunded pension scheme can have on a scheme member who is close to retirement, any change to the current arrangements is likely to involve a reduction in current payments to pensioners. It is a challenging issue and one which requires a determination of the fairest outcome for all beneficiaries, bearing in mind that the level of pension for many pensioners of such schemes, as the study shows, is relatively low. This is an important factor to bear in mind. The matter is under active consideration and, in light of the recent decision by the European Court of Justice in the Waterford Crystal case, the Government recognises the need for a comprehensive policy and legislative response that addresses the range of issues involved.

The Deputy may also be aware that the Pensions Act provides a procedure - that is, the funding standard - for determining whether a scheme has sufficient assets to meet its liabilities. The funding standard was suspended following the downturn in financial markets in 2008 until it was reinstated in June 2013 by me. Following the reintroduction of the funding standard, defined benefit pension schemes have until the end of June this year to submit funding proposals to the Pensions Board. It is considered prudent to await the submission of funding proposals by the trustees or plan sponsors of underfunded defined benefit schemes, as these will give a more comprehensive, in-depth picture of the funding position of defined benefit schemes. It will also allow for the impact of the many measures already introduced by the Government to be assessed, including the potential benefits to schemes, for instance, of the use of sovereign annuities or annuities. As such, I am keeping the situation under intense review and I will report back to the Government in the coming months. A wider package of legislative proposals and additional reforms will be considered at that stage.

Deputy Willie Penrose: Information on Willie Penrose Zoom on Willie Penrose I thank the Minister for her comprehensive reply. This is a very complex issue which needs to be addressed with great care, and consideration needs to be given to all of the various elements. There will be an impact on people who are currently in receipt of various pensions. That must be spelled out in the overall context the Minister outlined. Defined benefit schemes are under pressure to submit funding proposals by the end of June and it will be quite difficult for them to reconcile this aspect and examine how it will affect benefits in terms of how they will proceed.

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