Pensions In Ireland: The illusion of power
Irish law currently allows the sponsors of defined benefit (DB) funds to wind up schemes without ensuring they are fully funded. This ability to walk away from pension obligations has caused some concern, not least when the ensuing benefits cuts would have all but wiped out the retirement provision of members.
Not only is there no obligation to meet any shortfalls, the absence of debt upon the employer also means that in case of sponsor insolvency, the fund could be left without any means of recovering the shortfall.
Insolvency of both sponsor and fund – or double insolvency – occurred in the case of Waterford Crystal in 2009. Employees and unions took the case to the Irish High Court, European Court of Justice and back, only to settle with the government for a reported €180m in December 2014.
Trustees have learned from the case, and over the course of 2013-14 two suits clarified the extent of their ability to demand funding, in one case above and beyond the minimum funding standard (MFS). Meanwhile, the Irish Airlines Superannuation Scheme settled a protracted dispute with its sponsors – Aer Lingus and Dublin Airport Authority – over its €715m deficit.
In the case of Element Six, owned by De Beers, the trustees settled with members over an alleged breach of duty. The case was brought after the trustees accepted €23.1m in sponsor contributions upon wind-up, significantly below the fund’s €129m deficit at the time.
Trustees of the Omega Pharma defined benefit (DB) scheme were more successful, winning a High Court ruling that resulted in a €2.23m injection into the fund despite it being fully funded under the MFS. The key word in the latter case was “reasonable”, with all demands for cash subjected to the test of reasonableness.
Deirdre Cummins, partner at Matheson’s Dublin office, is adamant that the two cases do not grant trustees any additional powers, rather that their powers are clearly spelled out in Irish trust law and in the individual fund’s deeds. “These rules either do or do not give trustees certain powers,” she says.
“What the two decisions do emphasise, however, is the manner in which trustees must exercise their powers as determined by the trust deed and rules.”
Element Six trustees were hampered by the deeds, which said that a month after the sponsor made it known that it would wind up the scheme, the trustee board would no longer be able to request contributions. It spent several meetings debating the company’s €23m offer, with the tie-breaking vote cast by the trustee chairman, appointed by the firm. In their lawsuit, members took issue with the fact that trustees accepted the offer without issuing their own contribution notice, a matter that they argued was a breach of the trustees’ duty as fiduciaries.
The Two Cases
• Element Six: Trustees were informed of the decision to wind up the scheme, at the time reporting a deficit of €129m. The firm offered to contribute €23.1m to bring active and deferred member benefits to the statutory minimum, discounting any future inflation increases – at the time important, as the wind-up order could have left both groups facing cuts. Settlement was accepted by trustee board in a three-three split, with the company-appointed chairman casting the deciding vote.
• Omega Pharma: Upon being informed of the sponsor’s intention to wind up the scheme, trustees requested €3.01m in contributions, meant to “secure benefits” despite the scheme not reporting an actuarial deficit and being fully funded. The presiding judge awarded the trustees €2.23m in funding after concluding the burden of proof was on the sponsor company to demonstrate the trustees’ demands had been unreasonable.
In the case of the deed for Omega Pharma, the court agreed that it offered greater flexibility – allowing for a three-month period for contributions to be made once the company decided to cease contributions. “The relevance of the specific trust deed and rules cannot be underestimated and is of central importance in any pensions dispute,” Cummins stresses.
The greater question stemming from the Omega Pharma case is one of adequacy of funding. The contrast with Element Six could not be starker – one left in deficit, the other funded above the MFS.
Cummins says that the fact that the MFS might not satisfy an employer’s liability “has definitely made employers more willing to engage”. The fact that Justice Michael Moriarty agreed that the statutory minimum was “not appropriate in the particular circumstances” has only put sponsors further on edge.
“However, an employer’s willingness to make payments in excess of MFS into a pension scheme will still ultimately depend on the specific balance of powers in the governing trust documentation of the scheme in question and the prevailing circumstances,” she adds.
It nevertheless appears the ruling accepts that the MFS will not stand, a view shared by Martin Clarke of consultancy LCP and Jamie McConville, a partner at law firm LK Shields.
McConville says sponsors need to accept that meeting MFS requirements can no longer be seen as “a winning argument” and he wonders how courts will be able to ignore Moriarty’s view in future.
Clarke adds: “If the MFS is not an appropriate basis, and the court seems to be taking the view – or certainly not objecting to the view that it’s an inappropriate basis – should there not be some kind of pushback on the legislator to change it?”
The government remains reluctant to act and minister Joan Burton’s Department of Social Protection seems to regard higher minimum thresholds too much of a risk to the recovering economy. She has referred to the MFS as a yardstick to assess the health of DB funds, and a report by the OECD calling for more stringent funding requirements has sat unheeded on her ministerial desk since 2013.
Additionally, the decision of unions to drop the Waterford Crystal case – likely to be a requirement of accepting the government’s settlement, funded by income from a levy on pension assets – will leave the matter of adequate protection, and the launch of a protection scheme, outstanding.
And despite the happiness among some trustees over the Omega Pharma judgment, it is being appealed. Cummins stresses that neither party is eager to rely on the High Court ruling, and that the future remains uncertain.