Action on pensions is long overdue
Why has the Government taken so long to tackle the major financial inequity that can follow the failure of some private sector pension schemes? This arises where members of a defined benefit (final salary) pension scheme risk losing their entire pension benefit if it collapses. In contrast, the scheme’s pensioners are invariably fully protected, and may well suffer no financial loss.
This injustice was starkly highlighted in 2008, following the collapse of Waterford Crystal. There, many former employees lost most of their pensions, when the company’s defined benefit (DB) scheme was wound up. Under existing law, retirees have prior claim on the distribution of assets of a failed DB scheme. This means members and deferred members of that scheme may receive little pension income in retirement. That is manifestly unfair.
Waterford Crystal workers in 2010 took their case to the European Court of Justice (ECJ). Last April, they won a significant victory. This court ruling has forced the Government to do later, what it should have done much sooner, namely to meet the State’s obligations under the EU insolvency directive, by setting up an insolvency guarantee fund. This fund would help to protect, partly, the retirement income of members of failed or restructured DB pension schemes. This change is welcome. But it has been too long coming. Indeed without the ECJ judgment forcing the Government’s hand, would it now be happening? In 2007, a government Green paper on pensions then proposed an insurance fund for DB schemes. And the UK has, since 2004, operated a pension protection fund.
Undoubtedly, the past decade has seen major changes in the pensions industry, in Ireland as elsewhere, which have adversely affected the performance of defined benefit pensions schemes. The financial crisis, and its toxic legacy, has depressed economic growth and lowered the investment returns of pension funds. And with interest rates remaining at record lows, the cost of buying annuities to pay for the pensions of retiring members has soared. Poor investment returns and higher costs have placed more and more DB schemes in financial difficulty: a decade ago there were 2,500 private sector defined benefit schemes, of which 800 remain open today. Then, four fifths of all such schemes were fully funded, meaning they could meet all their obligations if wound up. Now only 40 per cent are in that position.
The Pensions (Amendment) Bill 2013 proposes a rebalancing of risk in a more equitable way should a DB scheme fail. This should ensure a fairer balance is struck between the scheme’s various stakeholders. But it also provides greater protection to those who most need it – those with low levels of pension benefit who are most exposed when such a failure occurs.