Cullen urges review of pension deficit at Aer Lingus

Advisers on the sale of Aer Lingus have been told to examine the potential implications of the airline's looming pension deficit before making recommendations to Government. Emmet Oliver reports.

UBS and AIB Capital Markets are currently assessing the timing and method of selling a majority stake in the airline. But in a parliamentary reply this week, the Minister for Transport, Martin Cullen, made it clear that the pension issue would also have to be taken into account.

The pension question could provide the Government with a convenient reason to slow down sale plans for the airline, although the airline's managing director, Dermot Mannion, believes that a privatisation process is still on schedule for the third quarter of next year.

There has been some suggestions in political circles that the Government might in some way underwrite the pension scheme, but with similar problems at ESB, this is thought unlikely.

An actuarial review of the pension scheme linked to Aer Lingus earlier this year suggested that a deficit of €336 million could arise if index-linked increases continue to be paid.

The scheme, the Irish Airlines (General Employees) Superannuation Scheme, is one of the largest in the State and has members from Aer Lingus, the Dublin Airport Authority (DAA) and SR Technics.

In response to a parliamentary question this week, Mr Cullen said: "In examining the pensions issue, the Government advisers will take account of the most recent valuation of the scheme carried out earlier this year.

"The Minister for Finance and myself will consider all of the issues involved when the report from the Government advisers is received," he added.

The current scheme is not required to pay out index-linked increases each year, but index-linking has been the practice for most of the 50-year life of the scheme. Consultants Mercers recently said that if Aer Lingus was privatised, it would certainly have to assume such index-linking in its accounts under recently introduced international accounting rules.

At present, the scheme boasts a surplus of almost €140 million. However, if allowance is made for inflation-linked increases into the future, a deficit of €336 million emerges. The defined benefit scheme is funded at arms length by the companies and their employees, both of whom contribute 6.375 per cent of salary.

If a deficiency arises in a pension fund, the trustees have to take measures to remedy the situation. This usually involves the company and employees increasing contributions, members settling for reduced benefits, or both.