Irish government announces changes to DB priority order
The Irish government has approved measures to ensure greater fairness in payouts to members of defined benefit (DB) affected by insolvency, introducing changes to the priority order after several years’ delay.
The changes follow the high-profile Waterford Crystal court case, whose pension scheme was left underfunded following the sponsor’s insolvency. Workers at the company found their accrued pension entitlements reduced by as much as 80%, while pensions for those already retired were unaffected.
In April this year, the European Court of Justice found that under the EU Insolvency Directive, the Irish state was obliged to protect at least half of the the pension entitlements of the Waterford workforce. The new measures are designed to meet those obligations.
The changes, announced by Joan Burton, minister for social protection, apply to underfunded DB schemes winding up in deficit, or choosing to restructure.
The changes aim to address the current situation that grants pensioners absolute priority over benefit payments to active and deferred members. The new rules will ensure a more equal distribution of assets by increasing the future pension entitlements for the latter two cohorts, the department said.
The changes will see priority order upon wind-up or in a single insolvency altered so that pensions in payment are no longer guaranteed. Under the new rules, pensions up to a maximum of €12,000 will not be reduced.
Where both the scheme and the sponsor company are insolvent, the government will guarantee the value of existing pensions to a level of 50%, with 100% protection for pensions of €12,000 or less.
However, all scheme members will be expected to contribute to bring the benefit level of all members up to 50%. If the pension scheme still has insufficient funds to cover this obligation, the state will fund the shortfall from the current 0.6% pensions levy, increasing to 0.75% in 2014.
The Irish government said it believed that every 1% redistributed from pensions in payment could result in a 2% or more increase for future pension entitlements for current and former employees in the scheme, depending on the number of pensioners and rate of pension in payment.
Burton said: “The state could not be expected to solve employers’ funding problems given the financial implications for taxpayers.
“However, the state can intervene to ensure a fairer deal for workers and sufficient protection for pensioners while allowing employers to get to grips with their pension problems.”
She also emphasised that the state pension is unaffected by the changes. The number of schemes affected is expected to be fairly limited.
Historic double insolvencies will not be covered by the rules, but rather by the European Commission’s Insolvency Directive. However, the government said it may use funds from the pensions levy to explore options to resolve historic double insolvencies which failed to protect 49% of workers’ entitlements, as stipulated by the Directive.
Maeve McElwee, head of industrial relations and human resources, IBEC, the group representing Irish business, said: “The proposed change will ensure that the assets of insolvent schemes are distributed more fairly.
“The current rules are desperately unfair,” she added. “If a scheme collapses, a person one day short of retirement can have their entire pension wiped out, while a person who has just retired retains 100% of their benefits.”
Michael Madden, partner and senior retirement consultant, Mercer in Dublin, agreed that the measures are generally welcome.
But he warned: “There is a slight risk, because the changes mean there might be less disincentive for employers to wind up a scheme.
“Furthermore, up to now, schemes could not reduce pensions in payment. These measures introduce the possibility of reducing pensions in payment, while a scheme continues after restructuring.”