Pension legislation is welcome and long overdue
Despite its flaws, the Bill helps create a leveller workers’ playing pitch
Over four years after Waterford Crystal closed its doors, leaving its workers without a job or most of their pension benefits, the Government finally took steps yesterday to recognise the injustice of their position – at least in part.
Having lost a European Court of Justice ruling that said it had not done enough to protect the pension rights of 1,700 workers at the glass-making plant – and others in a similar position – the Government was told future legislative provision for such workers must ensure they received no less than 49 per cent of their pension benefits.
In the event, Minister for Social Protection Joan Burton’s new measures propose they should receive 50 per cent.
Whether that’s the end of the matter remains to be seen. On first sight, it looks to be one of several areas in what is a radical reform of the defined-benefit, or final salary, private pension sector that is likely to face legal challenge at some point.
The measures approved yesterday by Government do not just deal with the Waterford Crystal/ECJ case. They are far more ambitious – looking to address some of the most intractable problems in a defined-benefit pension model designed for a very different age and struggling to survive at all under the pressure of people living for longer in retirement, increased regulation and underperformance of investments.
That perfect storm has seen employers in the private sector move increasingly to a defined-contribution model where all the risk of the defined-benefit pension promise is transferred to the employee. Unsurprisingly, the benefits are generally less than they would have been traditionally under the defined-benefit model. The most fundamental change is in the “priority order” – the rules which state that people who have already retired from a private pension scheme must be fully catered for before any other members are taken care of.
This has become all the more sensitive in an environment when working conditions have become tougher and pension benefits have diminished.
Where there were 2,500 private sector defined-benefit schemes a decade ago, now there are just 800 still open. Some of the rest still exist but are closed to new members or contributions, but many have been wound down altogether. A parallel problem is that where 80 per cent of schemes were fully funded at the turn of the century, just four in 10 now are – and that is a notable improvement on the position just a couple of years ago.
The bottom line is that when schemes are wound up, increasingly there is not enough in the pot to meet all its obligations. With retirees guaranteed 100 per cent of their benefits for life, any shortfall falls to those still working – or deferred members who had left the scheme but have not yet retired and started drawing down pensions.
One recent wind-up saw “active” members left with just 54 per cent of the pension benefits, and there have been even worse cases. Those near retirement, with little time to make up any shortfall, have been particularly badly affected.
The Minister’s Pensions (Amendment) Bill 2013, due to be introduced in the Oireachtas today seeks to address this inequity.
If passed, pensioners will no longer be totally insured against any collapse of their pension scheme after they retire, unless they have a relatively small pension.
The first €12,000 of any private pension will be guaranteed – on top of the State pension. However, if a scheme collapses, the trustees will be able to reduce by up to 10 per cent any pension over that €12,000 floor and under €60,000. In other words, if you had a private pension of €40,000 and your scheme had to be wound up, you could lose up to €4,000 a year.
For those with pensions in excess of €60,000, the maximum reduction could be 20 per cent.
This money would go to increase the benefits available to working and deferred members up to a maximum of 50 per cent of the benefits they would have been expecting.
Pension levy safety net
For schemes that are “doubly insolvent” – ie both the scheme and the employer have collapsed, like the Waterford Crystal case – the Government will guarantee that workers will receive 50 per cent of their benefits, even if this is not attainable by reducing pensioners income. Any shortfall will be funded, Ms Burton said, by funds from the private sector pension levy, with agreement from Minister for Finance Michael Noonan secured on this issue, she said last night.
It is clear the Government has worked hard to find a fair line between protecting the rights of pensioners who are not in a position to replace lost income and workers, who were disproportionately impacted by the existing legislation.
But problems remain.
First, the Government is almost certain to face a legal challenge from pensioners over loss of what are considered property rights.
The Waterford Crystal case is also still lurking in the background. It was sent back to the Irish High Court after the ECJ ruling and it remains for it to decide what level of pension should be protected – a roughly equivalent case in the UK saw almost 90 per cent of pension rights protected after an earlier ECJ ruling. Ireland was party to that earlier ruling in 2007 in a case which largely set the precedent for the Waterford Crystal action.
And of course, despite the myriad promises of Government, it likely makes permanent the pension levy in a move that will further undermine the benefits of pension scheme members. This will be a sore point particularly for members of defined-contribution schemes who must pay the levy but receive no benefit for it.
Peter Fahy, a partner and benefits expert at Eversheds notes that while members of “doubly insolvent” schemes are guaranteed 50 per cent of their benefits, active and deferred members of a scheme wound up by a sponsoring employer have no such protection. The best they can hope for is that pensioners will lose some benefit to bring other members outcome closer to the 50 per cent threshold.
“There is a strong disconnect here which may lead to unintended consequences,” he notes.
And the Government has yet to clarify just how it will protect this 50 per cent of benefits.
There is nothing in the legislation – at least as outlined yesterday– about indexation - and whether the thresholds will rise over time in line with consumer prices to ensure consistency.
Equally, very specifically, it will do nothing to address the thousands of workers who have lost chunks of their pension rights while the Government dithered over recent years.
End of an era
More significantly, the additional regulatory focus in the Bill and the locking-in of losses in benefits for underfunded schemes at viable employers seems designed to accelerate the end of the defined-benefit pension model.
Finally, of course, the measures only exacerbate the growing inequity between pension provision in the public and private sectors.
The Government has ducked these issues for far too long. It deserves credit for finally looking to provide a fairer deal for all players in the pensions sector, even if the Minister spent too long yesterday focusing on the low cost of the reforms to the State rather than the more fundamental issue of fairness.
Whether it succeeds remains to be seen.