As an in-house lawyer, you may find yourself faced with questions relating to your employer’s staff pension scheme. Alternatively, you may be employed by a pension provider or pension consultant with a direct role in providing pensions legal advice. Either way, recent economic events have made this area of law very relevant, whether on a personal or professional level.
It has certainly been a busy year for developments in pensions in Ireland during 2008 and into 2009. It is no surprise that some of the more significant developments took place in the latter half of the year, as a consequence of poor investment performance on the back of the global economic downturn. No doubt most readers will be aware of the media attention on challenges currently facing many pension schemes, both in Ireland and the UK. This article concentrates solely on significant pensions law developments in Ireland during the past year. Mindful that many readers may not be familiar with this area of law, we have provided some additional information as necessary for ease of understanding.
Defined-benefit scheme funding
2008 has proved to be something of a watershed in terms of the funding of defined-benefit pension schemes, with employers considering how to reduce their liabilities in the face of sometimes catastrophic scheme funding deficits and trustees exploring what action, if any, they can take in the interests of scheme members.
Defined-benefit pension schemes essentially promise a scheme member a specified level of retirement income based on several factors, including the member’s final salary and the number of years’ service with the employer. Regardless of investment performance, the employer is generally responsible for ensuring that sufficient funds are available to pay the promised benefit. The employer, therefore, shoulders a considerable financial risk.
In Ireland defined-benefit schemes are assessed by an actuary every three years to establish whether the level of funds held within the scheme are sufficient to meet a pre-determined minimum funding standard (MFS) as required under Irish legislation. If a scheme fails to meet this MFS, it is in deficit and a funding proposal/recovery plan must be submitted to the Pensions Board (the pensions regulator) within a specified time frame. The recovery plan will set out how the deficit will be remedied, with the intention of ensuring that the scheme will meet the MFS when next assessed.
Recent poor market performance has placed considerable stress on defined-benefit scheme funds, many of which have been plunged into severe deficit. Employers and pension scheme trustees have had to prepare and agree recovery plans in difficult financial circumstances. Against this backdrop, in the autumn of 2008, the Minister for Social and Family Affairs asked the Pensions Board to do the following:
- Grant additional time for the preparation of funding proposals/recovery plans to address scheme deficits. Essentially, an additional six or nine months has been allowed for the submission to the Board of funding proposals in respect of certain pension schemes. This is a temporary measure, with normal deadlines to be resumed in due course.
- Deal flexibly with applications for approval of funding proposals/recovery plans.
Concerns about the funding of defined-benefit schemes became so heightened that, on 19 December 2008, the Minister announced changes to the governance of such schemes to assist with recent investment losses. These changes relaxed existing funding rules.
The Minister issued a press release stating that:
‘The Department of Social and Family Affairs and the Pensions Board are actively monitoring the impact of global financial market developments and the effect of investment losses on defined-benefit pension schemes. The current significant funding pressures on pension schemes which reflect the impact of unprecedented developments in worldwide financial markets are a particular concern.’
Given the deterioration and ongoing problems in investment markets, the Minister asked the Pensions Board to implement further changes to the supervision of defined-benefit schemes as follows:
- the Board is to allow longer periods for recovery plans (ie greater than ten years) in appropriate circumstances;
- the Board is to allow the term of a replacement recovery plan to extend beyond the end date of the original recovery plan where the scheme is part-way through a previous recovery plan but is off track due to investment losses;
- the Board is to take account of voluntary employer guarantees in approving recovery plans; and
- to ensure that these extensions are not seen as a weakening of supervision, the Board will reject recovery plans that fail to demonstrate an appropriate investment approach.
The Pensions Board is due to publish technical details of these revisions in the near future and will review the proposed changes before 1 January 2011. The Minister has made it clear that she and her officials will maintain ongoing contact with the Board and has asked the Board to update her on the effectiveness of these new measures.
Defined contribution annuity deferral
Given the volatility in financial markets, submissions were made by the Irish Association of Pension Funds (IAPF) to the Department of Finance, the Department of Social and Family Affairs, and the Revenue Commissioners to allow the trustees and members of defined-contribution pension schemes greater flexibility in relation to the purchase of annuities upon retirement.
Defined-contribution pension schemes essentially provide retirement benefits based upon the contributions paid into the scheme, the investment return thereon and the cost of purchasing an annuity at retirement. An annuity is a product that is purchased from an annuity product provider (eg an insurance company). In return for a single premium (ie the proceeds of the pension scheme contributions plus the investment return thereon, less any tax-free lump sum that is taken by the scheme member1), the product provider will pay the individual a regular income/pension until their death.
Currently, most members of defined-contribution pension schemes are compelled to purchase an annuity on retirement. The level of retirement income available through an annuity purchase depends on the size of the member’s accumulated pension fund and on the annuity rate then available (ie how much pension the member’s fund will purchase at the relevant time). Annuity rates are affected by interest rates, among other things, so they are currently very low. Consequently, the cost of purchasing an annuity has increased greatly. Put another way, it now costs a lot more to provide for the same level of pension benefit by way of an annuity purchase than it did, say, ten or 15 years ago. Members of defined-contribution schemes have also seen the value of their pension scheme investments plummet in recent months. This loss of value, combined with the increasing cost of an annuity purchase, is resulting in lower pension incomes for those affected.
The purpose of the IAPF’s submission was to provide relief and flexibility to members of defined-contribution schemes who are retiring in the current economic climate and are forced to purchase annuities with their fund, which is likely to have lost significant value in recent months. The Minister for Finance subsequently announced a temporary deferral arrangement to be administered by the Revenue Commissioners. Under this arrangement, members of defined-contribution schemes who retire between 4 December 2008 and 31 December 2010 have the option to take a tax-free lump sum and purchase an annuity immediately upon retirement or to take a lump sum and defer the purchase of an annuity up to and including 31 December 2010 (by which date this option is currently due to cease).
In December 2008 the Pensions Board issued guidance on such deferral of annuity purchase. Scheme members who avail of the deferral option should, along with the scheme trustees, sign a declaration that the Board has published in a suggested form.
Rules
Additionally, the Revenue Commissioners have advised pension providers of certain administrative rules on how this deferral arrangement will operate. The Revenue Commissioners’ administrative rules include the following:
- The deferral period will operate from 4 December 2008 until 31 December 2010. All individuals who choose the deferral option must purchase an annuity on or before 31 December 2010, regardless of their date of retirement.
- Prior to availing of the purchase deferral option, the individual should consider taking appropriate professional advice. Any guidance notes issued by the Pensions Board must be complied with.
- Any alteration to scheme deeds, rules and/or policy conditions to reflect the deferred annuity option will not impact on the existing Revenue approval of the scheme/arrangement.
- The concession is entirely optional and can only take place with the agreement of the scheme trustees and the member.
- In the event of the death of the member prior to annuity purchase, the deferred annuity purchase option may be offered to a spouse and/or a dependant. In the event of there being no dependants, the value of the deceased member’s fund will form part of their estate.
Green Paper on Pensions
Consultation process and report thereon
The Irish government’s ‘Green Paper on Pensions’, which was published in October 2007, introduced a consultation process inviting all pension stakeholders to contribute towards the creation of a framework for addressing the challenge of pension provision in Ireland. This consultation process has since been completed and on 30 September 2008 the Minister for Social and Family Affairs published her ‘Report on the Consultation Process for the Green Paper on Pensions’.
The report summarises the key issues that emerged during the consultation process, including:
- options for pensions reform (eg mandatory or auto-enrolment options);
- retirement age;
- state pension eligibility; and
- security of pension benefits.
Commenting on the publication of the report, the Minister remarked that, while it is clear from the report that there is very little consensus on the future of pensions in Ireland, the report would assist the government in developing a long-term framework on pensions which, at that time, the government was committed to producing by the end of 2008.
Given the developments in relation to funding and annuity purchase as previously outlined, it is clear that energies were diverted to more immediate concerns. Publication of the government’s long-term framework on pensions is now awaited.
Registered Administrators
1 November 2008 was the deadline for registering as a Registered Administrator (RA) with the Pensions Board, following recent legislative changes requiring pension scheme administrators to effect such registration.
This new system was introduced following the publication, in 2007, of a 'Report on Trusteeship in Ireland’. The report recommended that pension scheme administrators should be registered and supervised. Pension scheme trustees may now only appoint an RA to provide certain ‘core’ administration functions.
The Board has published a Register of Administrators. The register is available on the Board’s website (www.pensionsboard.ie). Any new pension scheme administrators must register before commencing business. The RA must renew its administration annually within 30 days of the end of the registration year.
In summary
The past 12 months have been very eventful for pensions both in Ireland and globally. Given the severity of the global economic downturn, this trend is likely to continue throughout much of 2009. It will certainly be interesting and, indeed, sobering to see how pensions will withstand the pressure and what further measures will be taken in Ireland to reduce that pressure. In-house lawyers who have any role in advising their employers in relation to a staff pension scheme or who have a direct pensions advisory role will find themselves involved in this challenge.
By Michael Wolfe, partner, and Peggy Hughes, associate, pensions group, William Fry. E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Note
- In general, a lump sum equal to a maximum of 1.5 times final remuneration can be taken as a tax-free benefit on retirement.