The Pension Insolvency Payment Scheme works only for companies with a pension deficit when they collapse, writes FIONA REDDAN

THE MINISTER for Finance this week signed a statutory order giving effect to the new Pensions Insolvency Payment Scheme (Pips), which will come into force next month.

Established in the aftermath of the collapse of Waterford Wedgwood, which left many long-serving staff with no prospect of receiving a pension from a pension scheme which was significantly in deficit, it attempts to provide some measure of security for members of defined benefit schemes.

However, it will only offer assistance to schemes of companies which are insolvent and will do little to improve the position of the vast majority of Irish defined benefit schemes which are currently nursing major deficits and are under pressure from the regulator, the Pensions Board, to take measures to regularise their situation.

What is the purpose of the Pips?

The Pensions Insolvency Payment Scheme is being established to support pensioners of companies which are insolvent and where there is a deficit in the pension scheme which is being wound up as part of the process. It will ensure more money will be available for the pensions of those yet to retire.

At the moment, if there is a deficit in a pension scheme being wound up following a business collapse, absolute priority is given to members already in receipt of pensions. Unfortunately, as in the case of Waterford Crystal, this can leave nothing in the pot for members still working or those who have left the company and deferred their pension.

When will it become operational?

The scheme will come into effect from February 1st and will run as a pilot scheme for three years. At that stage, any schemes which are already participating will continue, but the Government may decide to discontinue the scheme or to continue with it in a modified form.

How does it work?

In effect, the Pips scheme works by enabling pension schemes to buy annuities from the Government at a lower cost than they would be able to on the open market.

That means more money will be kept in the pension fund to disperse to members of the scheme.

“If annuities are available at a lower price, the balance of assets for other members will be greater, and there will be more left for others,” says Aisling Kennedy, a principal with financial consultants Mercer. She expects the savings to be in the region of 15-20 per cent.

These savings are based on current bond yields, as the annuities, unlike those offered by commercial entities which are tied to euro-zone bonds, are linked to the 10-year rate on fully secured government bonds.

With government bonds yielding so much at present, this equates to a lower cost of annuity – albeit in the short to medium term.

As the Pips is to be operated on a cost-neutral basis, pension schemes will be charged a fee for the service and must submit this to the Government in cash. The Government, in turn, will then outsource pension administration to a third party.

Who is eligible for the scheme?

In order to qualify for the scheme, there is a “double insolvency” criterion – ie, defined benefit pension schemes must wind up in deficit and the sponsoring employer must be insolvent.

This means that only a small minority of firms are likely to meet the requirements, as it is aimed at pension scheme members who have no other recourse to funding because their employer is insolvent and their scheme is in deficit.

So, while employees of firms which have collapsed, such as Waterford Crystal, will no doubt welcome the move, others, such as SR Technics, will find themselves ineligible because they do not meet the definition of insolvency as set out in the Protection of Employees (Employers Insolvency) Act 1984.

What happens to defined benefit schemes not covered by Pips?

Pips is relevant only for those companies that collapse and which also have a pension deficit. However, other measures of the Social Welfare and Pensions Act 2009 will also mean fundamental change for pension schemes.

Pensioners will continue to get first priority for their pensions but, under the Act, any future pension increases will not be granted until workers who have also contributed to the scheme, and have yet to retire, receive their share of benefits.

In addition, pensioners can now be affected by changes made as part of a restructuring of a pension scheme to improve its position – although their existing payments cannot be cut.

Indeed, given the situation facing defined benefit schemes – where the employer undertakes to pay a fixed monthly benefit to the employee on retirement – the Irish Brokers Association is calling on the Government to abolish such pensions.

Pointing to the situation whereby older members of a defined benefit scheme receive their benefit first, the association says younger employees of defined benefit schemes “have a real prospect of ending up with a zero pension”.

“Employees cannot continue to believe their retirements are secure, nor can employers be expected to continue to fund such schemes never knowing the true extent of their future liabilities.

“DB [defined benefit] schemes belong to a different era and should for the benefit of all be wound up,” says Ciarán Phelan, chief executive of the association.

It has also been suggested that, in order to boost the solvency of defined benefit schemes, the Government should allow all pension schemes access to the Pips on a once-off basis. However, this is seen to be unlikely.

While Kennedy acknowledges that there would likely be significant interest in such a move, she notes that the Government is taking on a level of risk with the Pips.

While it expects the scheme will be cost-neutral, she points out that the Government will not actually know how much it will cost until the last pensioner is paid.