Is your pension safe?


Pensions are under siege – first they were hammered by stock market loses and now the Government is dipping into
private pension funds, writes CAROLINE MADDEN

WITH A NEW levy slapped on private pensions to pay for the jobs initiative, and the National Pensions Reserve Fund raided to bail out the banks, and of course the small matter of the ongoing funding crisis in defined benefit (DB) schemes, it’s little wonder people approaching retirement, or already retired, are getting jittery.

Seen by many as an arbitrary “smash and grab” appropriation of private retirement savings, the new pension levy not only sets an unnerving precedent but will have a real impact on many people’s income in retirement.

Though a 0.6 per cent levy on pension fund assets may not sound like a lot, it could translate into a 9 per cent cut in pension income for the 66,000 people who are members of DB schemes.

Unlike defined contribution (DC) schemes, which tend to secure the pension benefits of retired members by purchasing annuities, defined benefit schemes generally pay pensions directly from their funds. As a result, their members are more likely to be exposed to the levy.

Jerry Moriarty of the Irish Association of Pension Funds (Iapf) explains that for every €10,000 paid out to a member, DB schemes are required to keep €150,000 in reserve. A levy of 0.6 per cent on €150,000 equates to €900, so unless the employer tops up the fund by this amount, the pension payment of €10,000 will be reduced to €9,100.

Minister for Finance Michael Noonan has accused the pensions industry of reacting to the new 0.6 per cent charge in a “quasi-hysterical” way.

However, to put it in context, Moriarty has calculated that for one of the larger DB schemes he deals with, the levy (which will be imposed for four years) will be equivalent to all of its employee contributions for the year.

So for the next four years, all of the workers’ contributions will be absorbed by the levy.

“This can only be made up by reducing their benefits, or the employer coming under pressure to increase their contributions,” he says.

The problem is that many DB schemes have already cut members’ benefits and increased their contributions in an attempt to tackle funding deficits. The imposition of the new levy will make this precarious position even more difficult. Another criticism of the levy is that it hits pensions in payment, ie, the incomes of retired people who have finished working and therefore have no chance of making up the shortfall. According to Eamon Timmins of Age Action Ireland, this will cause “huge financial uncertainty for retired people who up to now had made financial plans based on defined, fixed income”.

The Government has argued that it is simply calling in a very small proportion of the tax relief given in respect of pension fund contributions over the years. However, Moriarty believes that taking money off the pension funds of people coming close to retirement is “a bit harsh”.

“Yes, they got tax relief on it, but they’re also paying tax on it in retirement, so [that argument] doesn’t really wash,” he says. “It seems a bit of a scattergun approach. We did write to the Minister for Finance and suggested we would be quite happy to discuss alternatives where pension funds could invest in the economy rather than just losing the money,” he said. “We would much prefer to sit down and come up with something more positive.”

So far, the Iapf has not heard back from the Government.

SOME PENSIONERS have dodged the bullet however. Those who have already bought an annuity (or whose pension scheme bought one for them), which is an insurance product that guarantees a set annual income for life, will not be affected by the levy.

More controversially, people who have taken out Approved Retirement Funds (ARF) will also escape the new charge. This exemption attracted howls of disapproval last week, as most people who hold ARFs are very wealthy.

ARFs are funds to which people can transfer their pension assets when they retire, and they offer an alternative to buying an annuity. One of the main attractions of an ARF is that the proceeds of your retirement fund can remain invested for longer. However, until this year only certain categories of workers, such as the self-employed and proprietary company directors, were eligible to hold them. Although access to ARFs was extended earlier this year so that all members of DC pension schemes can now take them out, a Department of Finance spokesman said the vast majority of people holding such funds have “significant amounts of money”, because ARFs are complex in nature and require more investment decision-making.

The Department stressed that ARFs are not tax-free. Drawdowns from these funds are subject to income tax and, even if you don’t drawn down from the fund, you will be taxed on a deemed distribution. The annual notional distribution was increased from 3 per cent to 5 per cent in Budget 2011. “This is a permanent, not a temporary change, whereas the levy is temporary,” the Department said. Nonetheless, holders of ARFs will be relieved to have dodged an additional 0.6 per cent levy.

Though the Irish Brokers Association may have been playing to the galleries to a certain extent when it predicted that the levy could precipitate many more Waterford Glass situations (referring to the case taken by employees after the glass manufacturer closed with a large pension deficit), it does raise the question of what happens to pensioners if their employer goes bust while the company pension fund is in deficit. Are they left high and dry or will the State step in and protect them? Pensions Ombudsman Paul Kenny explains that if a company goes out of business and the pension trustees have to wind up the fund, retired workers have “first crack” at the assets in that fund. However, he says the “immunity” that pensioners used to enjoy has been eroded.

In 2009, the Government changed the way in which funds are paid out if a DB pension scheme is wound up with a deficit. Though pensioners continue to get first priority, any future pension increases that may have been promised to them are not now granted until members who have yet to retire receive their share of the benefits.

“That is a reflection of the fairly insolvent state of a lot of defined benefit schemes . . . basically they’ve eaten into the pensioners’ protection in order to leave something over for other people,” Kenny says.

The Waterford Crystal case, which is expected to be referred to the European Court of Justice (ECJ) soon, will have implications for the pension entitlements of all workers who find themselves caught in the “double insolvency” bind, whereby their former employer, and their company pension scheme, becomes insolvent.

The case was taken by 10 former employees of Waterford Crystal after it went into receivership in January 2009, and the company pension scheme was wound up with a deficit of more than €100 million.

The former workers were offered pension payments representing between 18 and 30 per cent of their entitlement, but claimed that (following a 2007 European court decision) they are entitled to at least 49 per cent. The decision on this will be left to the ECJ, but the problem is that, regardless of the outcome of the case, it looks as if the State simply doesn’t have deep enough pockets anymore to protect workers caught in this situation.

In March of this year, the secretary general at the Department of Finance Kevin Cardiff appeared as a witness in the Waterford Crystal case and said the Government can’t commit to pay the estimated €13 billion actuarial cost of guaranteeing the full pension entitlements of workers whose employer becomes insolvent.

He said a State guarantee for pension schemes would pose a “serious threat” to the commitments made to the IMF and EU.

Another issue that came to the fore when the levy was announced last week was the well-worn public sector versus private sector debate. Much of the criticism of the levy focused on the fact that it will only apply to private pensions.

However, it is not true to say that public sector pensions have escaped unscathed. Although it remained largely under the radar, public sector pensions in payment were cut on January 1st of this year by an average of 4 per cent. (This was in addition to the pay cuts and pension levy already introduced).

Retired public sector workers receiving a pension of up to €12,000 were immune, but those on €12,000 to €24,000 saw their pensions reduced by 6 per cent, while pensioners on over €60,000 a year were hit by a substantial 12 per cent cut. Mr Kenny says he has received numerous complaints from public sector pensioners who believe the cuts are in breach of the terms of their contract.

However, the reductions have been legislated for and there is nothing the ombudsman can do about it.