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Aer Lingus eyes DC scheme to avoid major balance sheet damage

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  • Aer Lingus eyes DC scheme to avoid major balance sheet damage

IRELAND - Aer Lingus is proposing to introduce a new defined contribution scheme for all staff in an attempt to avoid having to change its accounting practices to defined benefit (DB) rules that would add "significant" liabilities to its balance sheet.

The airline is a participating employer in the Irish Airline Pilots Superannuation Scheme and the Irish Airlines (General Employees) Superannuation Scheme (IASS), but as it is only one of the main employers - the other is Dublin Airport Authority - Aer Lingus pays fixed amounts into the scheme on a defined contribution (DC) basis rather than as a DB scheme.

Yet in a statement outlining its cost reduction plans last week, the airline admitted its employees face "significant challenges" in relation to the current deficits in the two schemes.

Aer Lingus confirmed it had met with trustees of both pension schemes recently and said the trustees "are aware that any change to Aer Lingus' position would result in the Group having to adopt "defined benefit" accounting rules for the schemes, which would result in both income charges and significant balance sheet liabilities for the Group".

Figures communicated by trustees of the IASS in a memo in September revealed that at the end of March 2009 the IASS as a whole reported a €700m deficit, in relation to the minimum funding standard, and had an aggregate funding level of 67% against a fully funded position in March 2009. This was attributed to falls in investment values, although it was estimated the deficit had reduced to €500m by the end of July following a recovery in the stock markets. 

Aer Lingus therefore said it was "proposing to introduce a new DC scheme for the future service of all employees, which will attempt to recognise, through higher contribution rates, past service in the business but will on average cost the company no more than the current schemes".

The trustees of the IASS acknowledged in September that they had been in talks with participating employers of the scheme ahead of the submission of a formal funding proposal to the Pensions Board by 31 March 2010.

They said "a particularly contentious issue is likely to be the treatment of the scheme as a DC scheme for accounting purposes by the participating employers, on the grounds that the employers' contribution rate is specified under the Scheme Rules and the claim that this constitutes the limit of their financial obligation to the Scheme".

Aer Lingus reiterated plans to continue to engage with the trustees of both schemes to "reach a solution that delivers the best result for staff in the context of what the group can afford".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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