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Ireland unveils pensions insolvency 'state annuity' scheme

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  • Ireland unveils pensions insolvency 'state annuity' scheme

IRELAND - The Irish government has unveiled a new payment scheme designed to help members of underfunded defined benefit (DB) schemes when an employer becomes insolvent.

Mary Hanafin, the minister for social and family affairs, has announced a series of measures to support workers in DB schemes, including a Pensions Insolvency Payment Scheme (PIPS) to help employees "receive a greater proportion of their expected benefits".

Under the new system, trustees of underfunded schemes that are forced to wind-up through employer insolvency will be able to "pay a sum to the Exchequer" to cover the cost of paying benefits to pensioners, instead of buying annuities.

The PIPS will be run by the National Treasury Management Agency (NTMA), which will be given powers by the Ministry of Finance to "price the cost of purchasing pensions on a not-for-profit basis".

The intention is that the savings made from securing the pensioners benefits through the government rather than through an insurer will then be put towards the pensions for active and deferred members and will help reduce the shortfall in the scheme.

Hanafin said: "I am bringing forward PIPS to address the problems being faced by people who have seen their employer become insolvent and their pensions reduced. The scheme should go some way towards reducing those losses in a way that is cost-neutral to the Exchequer."

The Irish Association of Pension Funds (IAPF) pointed out that the effectiveness of the PIPS will depend on the maturity of the scheme and "what they pitch the price at" for the pensioners benefits, but suggested there could be significant savings for more mature schemes.

That said, the IAPF warned it is "critical" that the buyout level for the wind-up of insolvent schemes is carried through to the minimum funding standard as DB schemes at present need to maintain enough reserves to buyout pensioner benefits at annuity rates even though the majority will not take this option.

Maurice Whyms, spokesman for the IAPF, said: "Our view is that this needs to change. If the price for an insolvent scheme is 15% below the market annuity rates, then this should translate into the funding standard and this would cut down on the amount of cash employers need to set aside for the reserves."

Benefit protection for members of underfunded DB schemes has been an ongoing issue recently following the collapse of firms such as Waterford Crystal earlier this year, because in Ireland there is no pension "lifeboat" similar to the Pension Protection Fund (PPF) in the UK.

As a result of the Waterford schemes winding-up with a deficit of €120m, Unite, the union, said earlier this month that it was initiating legal action against the government for failing to implement an EU Directive on insolvency. (See earlier IPE article: Unions to sue gov't over Waterford pension collapse)

Other measures meanwhile announced by Hanafin included a change to wind-up priorities which means pensioners would continue to get first priority but would not receive any pension increases until active and deferred members receive their share of the benefits.

Hanafin pointed out that while the amendments to the Social Welfare and Pensions Bill 2009 will continue to protect pensioners, making increases a lower priority means other workers "get more of a share of their entitlements".

The government has also announced it will "strengthen regulation" to make it easer to prosecute employers which do not pass on employee contributions, while also appearing to clear the way for employers to alter accrued pension benefits when restructuring a DB scheme.

The ministry pointed out only existing employees can currently "make sacrifices" to secure the future of the pension scheme, so it confirmed the Pension Act "is being amended so that they will not be the only group to suffer if the fund is being restructured".

It added: "For the future, current and former employees and pension increases can be included in any restructuring", although it said benefits paid to existing pensioners would not be affected.

But Whyms added: "The devil will be in the detail of this measure as to what sort of restructuring will be allowed and how it will work. In extreme situations where winding up is the only alternative, some sort of restructuring might, for some schemes, help them out."

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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