Leo Varadkar (Dublin West, Fine Gael) | Oireachtas source

I welcome the opportunity to engage in a discussion of the problems in defined benefit pension schemes. The provisions contained in the Bill propose major changes to the Pensions Act. The changes would have significant and far-reaching consequences for the defined benefit pension sector in Ireland. I will speak first about the general issues affecting defined benefit schemes and then about the impact of the provisions contained in the Bill.

Defined benefit schemes have been facing substantial challenges in the past two decades due to volatility in the stock markets, increasing liabilities arising from the demographic pressures of increasing life expectancy, low interest rates and regulatory requirements. The cost of providing benefits has increased at a rate that has not been covered by the investment returns earned by pension schemes. In addition, accountancy standards which make pension liabilities very apparent on a company’s balance sheet contribute to the pressures under which defined benefit schemes are operating. During the financial crisis the decline of such schemes accelerated to the extent that the whole sector was at risk. At that stage, a series of legislative amendments were brought forward to alleviate the position. This followed much consideration of the matters dealt with in the Bill such as balancing returns between members, debt on the employer and pension protection funds.

There has never been a statutory obligation on employers under Irish law to contribute to a pension scheme, nor to accept liability for deficits therein. The Bill would turn a voluntary contribution into a mandatory obligation and would, therefore, be a major change. Most defined benefit pension schemes were established under a trust deed. The employer generally undertook to be bound by the rules of the scheme and meet certain liabilities and duties on a voluntary basis. In spite of the difficulties, many employers have made great efforts to support and deliver on the pension promise made to scheme members.

Many scheme trustees are working hard to ensure the ongoing viability of their schemes. This process is best managed through discussion and negotiation between trustees, employers and members, where efforts are made to reach agreement on the steps that must be taken to secure scheme viability. These steps generally include a mix of measures such as increased employer or member contributions, longer working through changes to the retirement age and amended benefits. This is the best approach to dealing with scheme difficulties. Further steps can and should be taken regarding the funding standard.

Following discussions between my officials, the Pensions Authority, the Society of Actuaries in Ireland and the Irish Association of Pension Funds, the Pensions Authority will shortly bring forward proposals to allow some additional flexibility for defined benefit schemes and to tackle some of the difficulties in the current operation of the standard. I intend to consult employer and union representatives on these proposals before making any change, as is appropriate.

I turn to the provisions contained in the Bill. As Members are aware, it can be very difficult to put forward legislative proposals which would have the desired effects without negative implications. The area of pensions is very technical and the issues are complex and not often amenable to easy solutions. While it may seem that a few simple changes could provide scheme members the level of security they desire, the unintended consequences can be far-reaching and destructive.

Section 2 proposes that an appeals mechanism be put in place to provide for appeals by scheme members where a pension scheme is being wound up, frozen or restructured by scheme trustees where any category of members is being treated in an inequitable manner. There are already regulatory safeguards in place for members where a wind-up or restructuring of a scheme is proposed. Trustees must have undertaken a comprehensive review of the scheme with a view to its long-term stability and sustainability. This includes asking the employer for contributions sufficient to ensure scheme funding. Trustees must notify, in writing, the scheme members and anyone receiving benefits under the scheme, as well as the trade union or representative group representing scheme members, before they make an application to the Pensions Authority to reduce benefits. The scheme members or their representatives are entitled to make written submissions to the Pensions Authority which will consider submissions prior to making a direction. Groups representing the interests of pensioners and deferred scheme members have a right to appeal a direction by the Pensions Authority to the High Court on a point of law.

While the Bill seeks to introduce an appeals mechanism, it does not indicate what should happen if the appeal was successful. It aims to prevent schemes from being wound up where any category of members is being treated inequitably. However, this inequity is not defined in any way in the Bill. For example, if it is intended that all members should have equal priority, it would be a significant change from the current position where pensioners have higher protection than other categories. While I am sure this is not the intention of the proposers of the Bill, it could be a consequence. Rather than being protected as they are, the Bill could expose existing pensioners who are already retired to having their pensions cut substantially in the event of a wind up.

Having discussed it with the Attorney General, we are also concerned about its constitutionality under Article 43, given that it would be retrospective and could constitute an expropriation of vested rights and an infringement of property rights. The Bill makes no provision for making up any shortfall or paying contributions. In some cases, stopping a scheme from winding up or the "extend and pretend" solution would result in a far worse outcome for some scheme members, particularly younger ones who were still paying in. The scheme would have to continue with solvency potentially deteriorating and older members using up the assets before younger members retired. This would surely be the most inequitable of all outcomes, effectively turning a defined benefit scheme into a pyramid scheme, ironically as a result of proposals which have the avowed aim of ensuring equity.

Under legislation passed in 2013, changes were made to extend the categories of benefits which could be considered in a restructure of scheme benefits to include a portion of pensioner benefits. These changes were designed to spread the risk of scheme underfunding across all scheme members and beneficiaries. The change also recognised that all beneficiaries of a scheme, members and pensioners, needed to share the risks when a scheme was underfunded.

In section 3 the Bill further seeks to prevent the wind-up of a defined benefit pension scheme when the value of the assets of the scheme is less than the amount of the liabilities until the deficit is eliminated. This would effectively put a debt on the sponsoring employer equal to the amount of the deficit. However, if the Pensions Authority was satisfied that the payment of the entire debt at the time of proposed wind-up would present a serious risk to the solvency of the employer, the Bill might allow for the payment of up to 50% of the deficit and-or allow the company up to five years to pay the deficit.

I understand there is a real desire to protect scheme members and prevent employers who will not pay, as opposed to those who cannot pay, from walking away from the schemes they sponsor. Serious consideration was given in the past to imposing a statutory obligation on employers to secure a minimum level of funding before a scheme could be wound up. The advantage of placing a minimum obligation on the employer would be to protect the benefits of current and former schemes members. It might also prevent employers from walking away from defined benefit schemes and encourage employers to ensure schemes were well funded and managed. However, there are also strong arguments against the introduction of an employer obligation. Imposing an employer guarantee might be seen as unfair on employers who have voluntarily set up defined benefit pension schemes. The previously voluntary commitments under these schemes would become mandatory, whereas there would be no corresponding obligation on employers who had set up defined contribution schemes or had not set up any pension scheme at all. To avoid debt, there is a danger that some employers with underfunded schemes might wind up the scheme in advance of completion of the legislative process which, by its nature, will take some time to put in place. Anti-avoidance structures would be necessary to prevent employers from restructuring to avoid their obligations. Account would have to be taken of single-employer schemes, multi-group schemes and those with multinational parent companies and how solvency could be measured in these complex circumstances.

The extra funding burden would accelerate the closure of defined benefit schemes in the private sector. The result of such a change, designed to protect the position of defined benefit pension members, would have the opposite effect. Few, if any, defined pension schemes would remain. While putting a debt on the employer might improve scheme security, in most cases, the pension liabilities and investment risk assumed would be too big for a company to support. It could jeopardise the viability of the businesses and jobs of those employed, given the employers' lack of capacity to absorb this extra liability. In such cases, people could lose their jobs long before becoming eligible for a pension. It could encourage imprudent investment behaviour by trustees, given that losses would have to be made good by the employer.

There is no readily available, reliably accurate and consistent measure of solvency and the Bill does not propose one. Furthermore, there is no connection between a company being solvent or having net revenues at a point in time and its ability to fund a scheme in the long term. Rather than implementing a solution by putting a debt on the employer with unknown consequences, the approach taken to date is to nurse and support schemes to gradually move to more appropriate funding levels in the short, medium and longer term using regulation and the benefits of a strengthening economy.

Changes such as the pensions insolvency payments scheme, sovereign annuities, the introduction of a risk reserve and allowing for the restructuring of scheme benefits are all measures which have been introduced with this approach in mind. These have all been put in place in recent years.

Section 4 proposes that the Pensions Authority prepares a report on the feasibility of changing the minimum funding standard for defined benefit pension schemes and establishing a pension protection scheme within six months.

See this speech in context