State pays the price for ignoring obligations on pensions

For about 1,700 former workers at Waterford Crystal, yesterday's European Court of Justice ruling that the State failed to adequately protect their pension rights is a relief.

For the State, the decision is a case of chickens coming home to roost.

It’s too early yet to say what the final cost will be – the High Court, which originally sought the clarification from the European court, must now assess what reasonable financial protection should have been afforded the glass workers – but it will be considerable, with one of those involved yesterday quoting a liability of up to €300 million.

And that’s just for Waterford Crystal employees. The ruling opens the door for claims from workers of other failed businesses who were left substantially out of pocket because of deficits in defined benefit, or final salary, pension funds.

There’s no slush fund there to pay it. The final bill will be a financial headache for Minister for Finance Michael Noonan as the Government tries to kickstart the economy under the watchful eye of the Troika. The ongoing acrimonious debate on securing savings under Croke Park II indicates how little wriggle room the Government has for unexpected additional expenditure.

It’s hard, nonetheless, to feel sympathy for the Exchequer. Since a 2007 ruling by the same European Court of Justice the State has been on notice that it had not made adequate provision for members of failed pension schemes.

That case – involving Carol Robins and more than 800 other staff at ASW in the UK – found that even providing 49 per cent of pension entitlements was insufficient. It was precisely because the State was aware of the likely fallout for insolvent pension schemes in the Republic that it took an active part in that case.

Both cases hinge on Article 8 of an EU directive designed to ensure “necessary measures” were taken to protect the old age benefits of employees and former employees in the event of the employer’s insolvency, which was put in place in 1980 – 33 years ago.

Proper provision
Although this was not transposed into Irish law until more recently, neither this nor any other EU government can have any excuse for failing to make proper provision.

That explains why Minister for Public Expenditure Brendan Howlin sought to persuade the Waterford workers last autumn to avail of the Pension Insolvency Payment Scheme – which would have improved their pensions, though by much less than is now likely. For the Government, the attraction is that it would also likely have seen the EU case withdrawn.

Part of the issue in the Waterford Crystal case is the existing priority order in pension schemes that are wound up. The Waterford Crystal schemes had assets of €130 million and liabilities of €240 million when they were wound up. That should mean that 46 per cent of accrued benefits were covered for all members. However, because Irish law states that those already receiving their pension must take priority, those members still working were left with between 18-28 per cent of their benefits.

Earlier this week, in a major review of the Irish pension system, the OECD joined the chorus of voices urging reform of this position to more fairly distribute assets of failed funds.

The OECD report also recommended that where an employer chooses to close a defined benefit fund, they should be forced to ensure it has sufficient assets to cover 90 per cent of liabilities. With companies ranging from AIB, Permanent TSB and Aviva to Independent News & Media, Grafton and Brown Thomas looking to reshape their pension “promise” to workers, this is a very real issue.

Insolvent schemes
This is true especially because the European court ruling affects only members of insolvent schemes in companies that have failed. Most of the final salary schemes now in trouble affect companies that do not face the threat of closure. The ECJ ruling has no relevance for these schemes.

In an ironic twist, the European court’s finding that, in essence, the State has not adequately policed pension funds or put in place proper insurance against their failure, will only strengthen the resolve of ministers and the regulator, the Pensions Board, to stick to the minimum funding standard, which has been blamed for making defined benefit schemes non-viable.

Waterford Crystal workers have won their case but that victory looks set to hasten the end for the defined benefit model in corporate Ireland.

In the UK, following the Robins judgment, workers left out of pocket on pensions when their companies fold – including the Wedgwood colleagues of the Waterford Crystal workers – are now entitled to 90 per cent of their accrued pension rights.

That is what the Waterford Crystal workers, their union Unite and their legal and financial advisers, will now seek from the High Court.