nottheaverageactuary

Actuarial news and views from Cape Town and beyond

Fairness of the DB fund pecking order – Ireland

11 Comments

As of 2012, there were 990 defined benefit pension schemes in Ireland, serving just under 200 000 members. In 2012 a large number of members of these schemes were told that the schemes would be winding up and that the members would no longer be receiving their promised benefit because the pension scheme was to wind up.

The pension schemes found themselves in a situation where there were insufficient assets to meet the future liabilities and had therefore become insolvent. The schemes had an amount of assets only able to cover a certain percentage of the total liabilities.

This news had little effect on those already receiving their pension because they were entitled to 100% of their promised benefit by law.

The active members of the scheme were the most hard struck by this news because if, for example, the scheme had enough assets to fund 80% of the liabilities but there were 20% of the members already retired and earning their guaranteed benefits, this left the remaining active members with assets in the scheme to cover significantly less than 80% of their promised pension.

In summary, active members were losing a large portion of their promised benefits whilst current pensioners felt no brunt of the scheme’s insolvency.

This issue can be further magnified by observing (another example) that an employee who retired in 2012 could receive full benefits, but his colleague (due to retire in 2013) will only receive 60% of his pension, thus posing a serious threat to his wellbeing in retirement because it has become too late for him to recoup his costs.

This issue raises the question of whether the law regarding the priority of DB pension recipients is fair and/or relevant. Additionally, are DB funds a viable product for the future, after considering improving longevity?

Here are some further readings on the development

http://www.independent.ie/business/personal-finance/pension-windup-storm-28901588.html

http://www.lcpireland.com/news-and-publications/bulletins-and-updates/2013/lcp-radar-update—changes-announced-to-defined-benefit-priority-order/

http://www.rte.ie/news/2013/0709/461395-pension-schemes/

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11 thoughts on “Fairness of the DB fund pecking order – Ireland

  1. Q) Why are these pensions becoming insolvent in the first place?
    A) 80% of DB funds in Ireland are insolvent because they have been unfunded for a long time. The reason for this is that regulation is very loose and lenient to sponsors, e.g. solvent sponsors can walk away from underfunded schemes. Ireland has also been having financial problems, e.g. the government defaulted on its debt, which could have had consequences on the schemes’ solvency as it affects the value of their investments.

    Q) Are DB funds still a viable option for savings in the future?
    A) Unlikely in South Africa, because of laws restricting employers from benefiting from surpluses in the schemes, so there is no incentive (unless laws change) for employers to provide DB schemes as opposed to DC schemes. Furthermore, with trends towards greater job turnover, people may be less happy with arbitrary DB fund rules determining their withdrawal values.

    Q) Is it possible to amend the laws to guarantee 100% of your pension for people at a younger age, e.g. 50-year-olds?
    A) Although it’s possible to amend the laws, DB schemes may not have sufficient funding to implement this. The government could also guarantee the pensions itself when the schemes are unable to provide the pensions, but this could come at great cost to the country at times when the economy is performing poorly and DB schemes are wound-up (as happened to Ireland).

  2. Group 1 question: “What does legislation [require] when a benefit scheme is being wound-up? ”

    As of Christmas 2013 the legislation surrounding distribution of assets in DB wind-ups have been changed in order to improve the priority of future pensioners. The following was taken from http://www.citizensinformation.ie/en/money_and_tax/personal_finance/pensions/occupational_pensions.html:

    “Single insolvency order – If the employer is solvent

    This order applies to cases where the pension scheme is insolvent but the employer is solvent. The first priority is additional voluntary contributions and defined contribution benefits.

    The second priority is the pensions payable to current pensioners but there are now limits on the amounts to which priority is attached as follows:
    •The first €12,000 annually of pension
    •90% of pensions between €12,000 and €60,000 with a minimum of €12,000
    •80% of pensions over €60,000 with a minimum of €54,000

    The next priority is 50% of the pensions of future pensioners. After that, the priority is:
    •The remaining pension of current pensioners
    •Remaining pensions of future pensioners
    •Any other remaining benefits

    This means that existing pensioners could have their current pensions reduced. Pensions under €12,000 may not be reduced. The maximum reduction is then 10% of pensions under €60,000 (but they cannot be reduced to less than €12,000) and 20% of pensions over €60,000.

    Double insolvency order – Employer insolvent

    The priority in the winding up of a defined benefit pension scheme in cases where the employer is insolvent is as follows:
    1.Additional Voluntary Contributions (AVCs) and defined contribution benefits
    2.50% of current pensioner and future pensioner benefits
    3.Pensioner benefits up to €12,000 a year
    4.Remaining benefits for current pensioners
    5.Remaining benefits for future pensioners

    Where the scheme does not have enough funds to pay 50% of pensioner and future pensioner benefits and pensioner benefits up to €12,000 a year, the Minister for Finance must provide the necessary funding.”

  3. What is the state going to do about this?
    The state could implement new regulation to ensure more equal distribution of funds. They need to be very clear on what the new legislation entails and how it should be applied to avoid confusion. I think that it would be easiest to implement legislation going forward and not retrospectively as the calculation and potential confusion could be great with retrospective legislation. The state could also encourage existing funds to convert to DC in order to avoid the issues relating to DB funds. They could do this either through law or some kind of encouragement (e.g. tax incentive.) They may also be able to do this through the promotion of the benefits to current employees of DC funds in comparison to DB funds which may lead to the employees placing pressure on the employers to convert to DC funds.

    Has this been done anywhere else in the world?
    I have not been able to find anything about this occurring else where in the world. In South Africa the law requires that a court determines how the benefits are distributed within the fund. The court must take into account recommendations from the funds valuator, expectations and rights of members of the fund and any additional benefits which the fund may be providing. (Some information on the SA regulation http://www.acts.co.za/pension-funds-act-1956/index.html?29_winding_up_by_the_court.php)

    • What do you think happens if an underfunded DB fund wants to convert to DC?
      For that matter, how do you think are the benefits in any DB to DC conversion determined?

      The second point – the court gets involved on wind-up, but on an ongoing basis the distribution of the surplus is down to the Trustees.

  4. GROUP 6
    Is the law fair?

    no it is not fair since the members who are closer to retirement are also getting less than 80% of their promised pension.

    How should the issue be solved?

    The benefit should be allocated by how close you are to retirement. Which means after the benefit of the pensioners have been paid, you will have a priority list. The current pensioners get 100% and the active members close to retirement must get a large proportion of the remaining funds.

    What can the government do?
    They can change the regulations on how pension fund is allocated. They can also make sure each company may have enough capital. The government can merge some of the schemes and impose that each company have a reinsurance.

    comment what we learnt

    We didn’t know that the government law can be so unfair. We thought the government acts on the best interest of the citizens.

    • It’s often hard to say what is fair. There are people who would say that what’s not fair is to cut down the benefits of retirees, because they are not able to get more funds (they are no longer working), whereas actives can still accumulate funds!

  5. Question from group 1: “What does legislation require when a benefit scheme is wound-up?”

    As of 25 December 2013 the legislation has changed in order to prioritise the future pensions more so than currently.

    The following was found from http://www.citizensinformation.ie/en/money_and_tax/personal_finance/pensions/occupational_pensions.html:

    “Single insolvency order – If the employer is solvent

    This order applies to cases where the pension scheme is insolvent but the employer is solvent. The first priority is additional voluntary contributions and defined contribution benefits.

    The second priority is the pensions payable to current pensioners but there are now limits on the amounts to which priority is attached as follows:
    •The first €12,000 annually of pension
    •90% of pensions between €12,000 and €60,000 with a minimum of €12,000
    •80% of pensions over €60,000 with a minimum of €54,000

    The next priority is 50% of the pensions of future pensioners. After that, the priority is:
    •The remaining pension of current pensioners
    •Remaining pensions of future pensioners
    •Any other remaining benefits

    This means that existing pensioners could have their current pensions reduced. Pensions under €12,000 may not be reduced. The maximum reduction is then 10% of pensions under €60,000 (but they cannot be reduced to less than €12,000) and 20% of pensions over €60,000.

    Double insolvency order – Employer insolvent

    The priority in the winding up of a defined benefit pension scheme in cases where the employer is insolvent is as follows:
    1.Additional Voluntary Contributions (AVCs) and defined contribution benefits
    2.50% of current pensioner and future pensioner benefits
    3.Pensioner benefits up to €12,000 a year
    4.Remaining benefits for current pensioners
    5.Remaining benefits for future pensioners

    Where the scheme does not have enough funds to pay 50% of pensioner and future pensioner benefits and pensioner benefits up to €12,000 a year, the Minister for Finance must provide the necessary funding.”

  6. Q ; How are active members prioritized?

    A : It is common for any DB fund that those already retired take precedent on receiving benefits on winding up of a pension fund-it is within legislation parameters that pensioners get the full benefits that they are entitled to and those who are still active members share the remaining funds in the fund-this could mean sometimes no money can be allocated to active members. The way that they allocate this remaining funds is in proportion of their accrued benefits to date of wound up-i.e. it is the proportion of their contributions accumulated to date to the schemes total funds.It is key for any new member of this fund to ask before he joins the scheme how he will be prioritized in cases of wounding up.

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