The Minister for Social & Family Affairs has introduced some very significant changes to the laws regulating defined benefit pension schemes in Ireland in the Social Welfare and Pensions Act 2009 (the “Act”) which was signed into law on 29 April 2009.

These changes are intended to assist employers and trustees responsible for schemes which are facing serious funding difficulties. The changes are summarised in this client briefing, as are some additional changes made to the Pensions Act.

Winding Up of Scheme – Priority Order Section 48 of the Pensions Act sets out a priority order to be followed by trustees when discharging liabilities on the winding up of a defined benefit pension scheme. This order has been amended by the Act. All defined benefit pension schemes wound up on or after 29 April 2009, or which have commenced winding up but have not discharged any liabilities prior to 29 April 2009, must adhere to the new provisions.

Section 48 now requires that pensions in payment remain a first priority after AVCs, but provision of increases to pensions, both for existing pensioners and active and deferred members, now ranks after provision of all preserved benefits payable in respect of deferred and active members.

Trustees are now obliged to distribute the assets amongst active and deferred members of the scheme, after AVCs and pensions, but before any pension increases can be paid even where this is provided for by the rules of the scheme. The intention of the change is to achieve a more equitable distribution of available assets to members in circumstances where a scheme has insufficient assets to meet all of the liabilities.

Reduction of Benefits Prior to the introduction of the Act, Section 50 of the Pensions Act empowered the Pensions Board to direct the trustees of a scheme to reduce the benefits of active members where the relevant scheme had failed the minimum funding standard.

A direction could not be made by the Board to reduce benefits for deferred members of a scheme, even in circumstances where that scheme was facing serious funding problems.

Under the Act, Section 50 has now been extended. The Board can now direct that both deferred and active members’ benefits, as well as pension increases, can be reduced where in the opinion of the scheme’s actuary this is required, so that the scheme will meet the funding standard following the reduction.

By broadening the possible scope of a direction under Section 50, trustees are assisted in their ability to meet the statutory funding standard. It is hoped that the new provision will help both trustees and employers.

Amendment of Benefit Provisions A new Section 50A of the Pensions Act has been introduced which allows trustees with the consent of the Board to amend the terms of a scheme if the only other option for the trustees is to wind up the scheme due to insufficient funds. Unlike Section 50, it is not necessary that the scheme actuary has first certified that the scheme fails the minimum funding standard. Amendments under Section 50A could include a reduction of benefits under a scheme in order to improve the funding position.

Section 50A will be subject to Section 50, meaning that the Board could not consent to any amendments which would be contrary to a direction it may have made under Section 50. However, it may be possible for Section 50A to be used by scheme trustees independent of Section 50. Before any amendments can be made under Section 50A, the trustees must consult with the members of the scheme. Member consent to the amendment, however, is not required. If the trust documentation requires employer consent to any amendment, then this appears to still be required.

Pensions Insolvency Payment Scheme In a ground breaking development, the Act sets out a framework for the establishment of a new Pensions Insolvency Payment Scheme (“PIPS”). No establishment date has been announced for the PIPS as yet.

The PIPS is being introduced to assist trustees in securing benefits under a scheme where the sponsoring employer is insolvent and the scheme is in deficit.

To be eligible to join the PIPS a scheme must:

  • be a defined benefit pension scheme within the meaning of the Pensions Act;
  • have commenced winding up;
  • have insufficient resources to meet its liabilities;
  • have been sponsored by an employer which is insolvent for the purposes of the Protection of

Employees (Employers’ Insolvency) Act 1984.

The trustees of a participating scheme must agree to pay a certain amount (which will be calculated by the Minister) to the PIPS which will then be used to pay the benefits of pensioners of the scheme. The PIPS allows trustees the option to secure benefits for pensioners without having to purchase annuities in the open market. It is expected that securing benefits for pensioners under the PIPS will result in savings to the pension scheme which can be applied in providing a greater level benefits to active and deferred members on winding up than would otherwise have been possible.

The PIPS will not allow trustees to secure benefits for pensioners taking into account future increases to pensions. The benefit from the PIPS will be a level, and not increasing, pension.

Other Changes The Act has also introduced other amendments to the Pensions Act in relation to which we believe trustees and employers should be aware:

  • The sanction for failure by a sponsoring employer to remit contributions to the trustees of a scheme within the prescribed time limit has been increased. Now conviction on indictment will result in a fine not exceeding €25,000 or imprisonment for a term not exceeding 5 years or to both. Previously, the prison term was 2 years.
  • To assist in the prosecution of these offences the Pensions Act has been amended to provide that certain documentation will be admissible as evidence; e.g. payslips of employees, payroll books and ledgers, and reproductions of payroll documents stored in non-legible form.
  • These amendments signal the intention of the Board to continue enforcement of the statutory requirements on employers to remit contributions.
  • The Act has also introduced a statutory protection of trustees for a breach of trust. In addition to anything contained in the trust documentation, the Court can exonerate a trustee in an action for breach of trust where the Court is satisfied that the trustee has acted honestly and reasonably having regard to all the circumstances of the case.

Conclusion

The new legislation, in particular the change in winding up priorities and the powers to reduce benefits, is significant. It will present opportunities for any trustees and employers who are currently grappling with the difficulties presented by an underfunded pension scheme