Under insolvency plan, trustees may pay sums to exchequer instead of paying insurance firms, writes LAURA SLATTERY
How do the new measures help to protect the pensions of employees whose companies become insolvent?
The Government has decided to help employees (and former employees) of companies that go bust and leave behind a defined-benefit pension scheme that is incapable of paying existing and future benefits in full.
The Government will allow pension scheme trustees to pay a sum to the exchequer to cover the cost of paying pensions to members who retire, instead of buying annuities from insurance companies. It is calling this the Pensions Insolvency Payments Scheme (Pips).
Do the new measures apply to all company pension schemes?
No, they apply in the case of defined-benefit pension schemes, under which workers are promised a pension based on a certain proportion of their final salary for every year of service.
However, most people who belong to a company pension scheme have a defined contribution pension, where the value of the pension in retirement will be based on the level of contributions and the stock market returns (or lack of).
But what are annuities?
When a defined-benefit company scheme winds up, the employer uses whatever money is sitting in its pension scheme to buy policies called annuities from insurance companies. This pays the retired members a fixed sum for life, eg it is the private pension that people are paid in retirement.
If there is anything left over, it will be paid toward the pensions of “active members” of the scheme who are yet to retire. But because most pension schemes are underfunded, there more than likely won’t be enough to go around.
Why does it help members if the trustees don’t have to buy annuities?
Annuities are expensive and have become more so in recent years, partly because of improvements in life expectancy. The annuities market is also not particularly competitive. Under the new scheme, the Government is effectively setting up a State annuity fund under the National Treasury Management Agency (NTMA), cutting out the middle man insurance companies. By providing annuities at a lower cost, there will be more money left over for the future pensions of active members and former members (eg, ex-employees).
Why has the “order of priority” been changed for wound-up schemes?
At the moment, pension members who have already retired are prioritised when a scheme is wound up. They continue to receive their full pension, plus any index-linked increases that are due in the future, before current or former workers get a look in. This can mean that someone who retires a month before a scheme is wound up is fully protected, but someone who is due to retire the month after the scheme is wound up gets next to nothing.
Minister for Social and Family Affairs Mary Hanafin has changed the rules so that pension increases have moved lower in the order of priority. This means active and former members are likely to get a bigger share of what is due to them.
What do the changes mean for people who used to belong to a scheme but have now parted ways with their employer?
Former members may benefit from the changes to the order of priority if the scheme is wound up. But if the employer decides to change the terms of the scheme so that a lower benefit is payable for each year of service, they will be affected too. Up until now, only current workers suffered if the scheme was restructured.
Will these measures save defined-benefit pension schemes?
No. Defined-benefit pension schemes are increasingly costly for employers to fund. With large deficits to make up through additional funding programmes, many are closing their schemes to new members to stop their liabilities from getting even higher, while other employers are diluting their pension promises or asking workers to contribute more.
How have the new measures been welcomed?
The Irish Association of Pension Funds (IAPF) said the new wind-up rules were more equitable and said active members and former employees could get 15-30 per cent more of what they are due, depending on how the NTMA prices the pension purchases.
Pensions consultancy firm Mercer said the idea should be extended to all companies that cannot afford to meet their pension obligations, but are not technically insolvent, while Age Action said people with small pensions should not have to take the same pain as those on large pensions.