Ireland granted further pension protection
Written by Sophie Baker
Ireland's defined benefit (DB) pension scheme members will gain further support with news that a new Pensions Insolvency Payment Scheme (PIPS) is to be introduced in the Social and Welfare and Pensions Bill 2009.
Minister for Social and Family Affairs, Mary Hanafin T.D., announced that the new development will assist employees and former employees of companies where the employer becomes insolvent and the DB fund is in deficit. The scheme trustees can pay a sum to the Exchequer which will cover the cost of paying the pensions of retired members, rather than buying annuities. Savings will be put towards the pensions of those who have not yet retired which, the Department of Social and Gamily Affairs says, will reduce pension shortfalls to some extent.
"I am bringing forward a Pensions Insolvency Payment Scheme to address the problems being faced by people who have seen their employer become insolvent and their pensions reduced," explained Hanafin. "The scheme should go some way towards reducing those losses in a way that is cost-neutral to the Exchequer.
"We are in a situation where defined benefit schemes are being wound up and some employees and former employees are ending up with less than they are due. I want to make it easier for people to get more. This new Government scheme will provide for pensions at a lower cost, leaving more funds available for those who have yet to retire."
The Minister for Finance has delegated powers to the National Treasury Management Agency to price the cost of purchasing pensions on a not-for-profit basis.
The move towards a state annuity fund in Ireland has been welcomed by the industry, with financial consultant Mercer voicing its support and proposing that the Government extend the State Annuity Fund to all schemes. Paul O'Faherty, CEO at Mercer, said: "We suggest that given the higher borrowing costs currently bring experienced by the Irish Government, and the extent of its borrowing requirements in the short-term, there is a unique opportunity to extend the initiative announced today to allow all pension schemes a once-off option to buy annuities on a cost neutral basis from the NTMA. This is a potential win-win scenario, as it would result in a significant reduction in pension schemes'
liabilities whilst providing the Government with greater certainty in relation to its borrowing requirements."
Hanafin also revealed that the way funds are disbursed if a DB scheme is wound-up with a deficit will change, with pensioners continuing to get first priority for their pensions but will not be granted future pension increases. This will stand until workers who have also contributed to the scheme, and are yet to retire, receive their share of benefits.
"I think it is unfair that when a defined benefit scheme winds up in deficit, a person who retired yesterday is entitled to his or her full pension - as well as annual increases in that pension - while a person who is due to retire tomorrow may receive only a small proportion of their benefits. This amendment protects pensioners, but by moving pension increases lower in priority, it means that workers - who may have been contributing to the scheme for decades - get more of a share of their entitlements," she said.
The Irish Association of Pension Funds' (IAPF) director, Maurice Whyms, has welcomed this move towards greater flexibility in the treatment of DB schemes. "The changes in wind-up priorities will provide for better equity between pensioners and members while still protecting those already in retirement," he said.
There has also been added an extended ability to restructure schemes, and stronger regulation has been put in place to help in easing this pressure, as well as protecting member benefits.