Building an effective pensions framework

Emma Dunkley: What changes are happening in Irish pension regulation and why?

Mary Hanafin: I have recently introduced a number of changes in pension legislation, particularly in relation to DB schemes.

The Pension Insolvency Payment Scheme (PIPS) will be introduced to provide trustees of DB schemes in deficit where the sponsoring employer is also insolvent with an alternative to purchasing annuities from private providers, when the scheme is in wind-up.

The PIPS is intended to make it cheaper to pay for the pensions of retired pension scheme members, so that more money is available for the pensions of those yet to retire.

With increases in pension costs, the liability for post retirement increases can be substantial and, in a situation where a severely under-funded scheme is wound up, the allocation of assets for pensioners in payment can significantly reduce the assets available for other scheme members.
The priorities on wind up of a DB scheme have been re-ordered by moving post-retirement increases to a lower priority.

The purpose of this change is to enhance the funds available to active and deferred scheme members in the event of a DB scheme winding-up in deficit. This change will not affect the current pension payment to pensioners.

Once the basic pension entitlements of all scheme members are covered, the distribution of scheme assets for post retirement increases will then be applied.

This is an important change in the priority order and will improve the situation of other scheme members without affecting the pensions of those already retired.

It is impossible to say how many people will be affected by this as we don't know how many schemes wind up in deficit or how many members such schemes might have. However, we do know that only one third of schemes provide for post-retirement increases. A further third provide for discretionary post-retirement increases.

The Pensions Act has been amended to broaden the scope of a scheme restructuring to include those currently in employment, those who have ceased employment with the current employer, and the provision of post retirement increases for all scheme members including pensioners.

The purpose of this change is to help trustees secure the viability of the pension scheme by extending the elements of the scheme which may be considered in any scheme restructuring.
This will help trustees to maintain the ongoing viability of the pension scheme and hopefully avoid the scenario of a scheme wind-up. It must be stressed that this change will not affect the pension currently in payment to pensioners.

I can't say what might happen in the future but suffice to say that the government is currently developing a National Pensions Framework which will shape the direction of pension policy in Ireland for years to come.

It is important to point out that the measures I have outlined will retain the current priority given to pensions in payment which means that employees who have retired, and those who have reached normal retirement age, will not see any diminution of their entitlement to a pension.

It will be easier to prosecute employers who do not pass on the pension contributions made by employees to the pension scheme and anyone convicted of this offence will also face much harsher penalties.

The Courts now have the power to relieve trustees in whole, or in part, from liability for breach of trust when the Court is satisfied that said trustees have acted honestly and reasonably, having regard to all of the circumstances of the case.

Emma Dunkley: When will PIPS be implemented?

Mary Hanafin: The Social Welfare and Pensions Act 2009 provided the legislative framework for the development of PIPS. Detailed regulations are needed before the scheme can commence operation. The Department of Finance is currently developing these regulations, in consultation with my department, with a view to introducing PIPS as soon as possible.

Emma Dunkley: What difficulties are defined benefit (DB) schemes facing in the current environment?

Mary Hanafin: DB schemes are facing significant difficulties at the moment, particularly because of the huge losses in the equities market over the past 18 months or so.
It is estimated that in excess of 90% of DB schemes are currently in deficit with estimates suggesting a shortfall of up to €30bn.

Emma Dunkley: What other measures are you proposing to support workers in DB schemes?

Mary Hanafin: With regard to DB schemes, the government's initiative started last December with the announcement of a number of short-term measures aimed at reducing the pressure on under-funded DB schemes by allowing greater flexibility and time to recover funding positions.
These measures include granting additional time for the preparation of funding proposals aimed at restoring pension funds.

It includes the Pensions Board dealing as flexibly as possible with applications for approval of funding plans.

The Pensions Board can allow longer periods for recovery plans in appropriate circumstances and that the term of a replacement recovery plan will be allowed to extend beyond the end date of the original plan.

The measures also include taking into account voluntary employer guarantees in approving recovery plans.

However, in order to ensure that these extensions are not seen as a weakening of supervision, the Pensions Board will reject recovery plans which fail to demonstrate an appropriate investment approach.

Emma Dunkley: Do you think there needs to be more government intervention in terms of strengthening regulation? For example, ensuring employers pass on the pension contributions made by employees to the pension scheme?

Mary Hanafin: Under the Pensions Act, an employer who has deducted contributions from an employee's salary for remittance to a pension scheme is obliged to pay over every such sum to the scheme within 21 days following the end of the month in which the deduction was made.

Certainly, I did think there was room to strengthen regulation in this regard and I used the opportunity provided by the recent Social Welfare and Pensions Act to do just that.

This change to the legislation will enhance the admissibility of documentary evidence in court proceedings and avoid the necessity for oral evidence which had been causing difficulties.

It is my belief that placing more reliance on readily available documentary evidence such as payroll records and payslips will greatly enhance the chances of successful prosecution in this area.
Indeed, a new offence for failure to remit pension contributions deducted from an employee's salary has been created.

This provides for a summary conviction of €5,000 or imprisonment for a term not exceeding one year or both, or on conviction on indictment to a fine not exceeding €25,000 or imprisonment for a term not exceeding five years, or both.

The current maximum term of imprisonment for each such offence is two years.

However, it must be noted that the vast majority of employers are compliant with the requirement to remit contributions to the trustees but it is important that there are appropriate penalties in place for those who do not.

Emma Dunkley: What's due to change in the future?

Mary Hanafin: In terms of pension policy, the government is currently developing a National Pensions Framework which will shape the direction of pension policy in Ireland for years to come.