Ireland's small open economy is working out how to cope with the rapid economic downturn. Pension schemes have been similarly affected.
In Ireland, as elsewhere, the cost of defined benefit provision has increased greatly in recent years, with the result that the benefits being promised under the current pensions model are becoming unaffordable for most employers. Companies that sponsor such plans are not required to guarantee their benefits; they are free to wind up the plan at any time without having to pay whatever shortfall is necessary to secure the full cost of annuities and deferred annuities.
Who gets what will then depend on the value of the assets in the fund at the time of wind-up and on the members' rights of priority at that time. At present, highest priority is given to additional voluntary contributions paid by each member, followed by pensions for those who have retired (and those who have reached normal pension age without having drawn down pensions); active and deferred members' entitlements come an equal last.
Currently, there is some debate about the fairness of pensioners potentially "scooping the pot". It can leave many who have spent all their lives working with little or no pension, while those who have just retired enjoy a full pension.
Every defined benefit pension plan (excluding some public sector schemes) must prepare and submit to the Pensions Board an actuarial funding certificate at three-yearly intervals. Its purpose is to certify whether or not, if the plan were wound up at the date of certificate, its assets could meet its liabilities. It is estimated that 90% of defined benefit plans do not currently meet the funding standard.
Where a plan does not meet the funding standard, a funding proposal must be sent to the Pensions Board showing how the plan's funding will be put back on track within a permitted period (originally three years but now longer periods are more common, with the approval of the Pensions Board). The longer period may give the markets enough time to improve, and with them the financial health of many defined benefit pension plans. New guidelines were published in February 2009 which set out the approach that the Pensions Board adopts in deciding whether to grant applications for extended funding period. A funding proposal must be agreed and signed by the plan actuary, the sponsoring employer and the scheme trustees, and getting agreement can sometimes involve protracted negotiations.
There was a time when the only method of enabling a plan with a deficit to get back on track was for the employer to inject more cash into the plan at agreed intervals, but plan sponsors have become more reluctant to do this and increasingly are looking at other ways, such as the use of contingent assets, parent company guarantees and getting the active members to pay more into the plan. In future, a reduction in benefits may also be an option.
The Irish Association of Pensions Funds and the Society of Actuaries in Ireland recently proposed a package of measures to the government which address the long-term issue of sustainability of defined benefit schemes as well as the more immediate impact of insolvent wind-ups. It proposed that a mechanism be established that would allow trustees to change the benefits of active and deferred members where the sponsoring employer and the members agree that this is necessary for the survival of the plan. It argued that reductions in benefit may in some circumstances be better than driving plans towards wind-up.
This has been favourably received and new pensions laws are imminent to implement this suggestion.
Another industry proposal focused on the pensioner priority in a plan's insolvent wind-up. It was suggested that where a pension plan is insolvent, it is unfair if pensioners' benefits are fully secured at the expense of other members. A specific solution was not identified but the inference was that a more equitable distribution might be appropriate between all classes of members. It appears that the government is sympathetic to this suggestion.
Where the employer is insolvent, it was recommended that the state would provide annuities on a 'not for profit basis'. This envisaged that the cost to the state would be less than buying an annuity on the open market. This idea is being adopted. A Pensions Insolvency Payment Scheme will be introduced and will be managed by the National Treasury Management Agency.