The Finance (No.2) Act 2011 introduced a four year annual levy on pension funds.  The stated purpose of the levy is to raise €470 million annually to fund the Government’s “Jobs Initiative”.

The levy is a stamp duty of 0.6% applied to the aggregate market value of assets under management in pension funds and pension plans approved under Irish tax legislation.  The levy does not apply to:

• Approved Retirement Funds (and Approved Minimum Retirement Funds)
• Occupational pension schemes where the trustees have passed a resolution to wind up the scheme (subject to certain restrictions)
• Assets of pension funds in respect of the provision of retirement benefits to non-resident members or
• Assets in annuities in payment

For 2011, the levy was required to be paid through the Revenue On-Line Service on or before 25 September.  A number of issues in relation to the application of the levy have emerged that may require further consideration and/or action by scheme trustees and sponsoring employers.

As the levy does not apply to annuities in payment, the impact of the levy is reduced where a scheme purchases annuities in respect of its pensioner liabilities.  Some schemes have therefore been considering whether their particular scheme circumstances might support a bulk annuity buy-out or buy-in.   Where this is not appropriate, scheme trustees have had to consider alternative ways of funding the cost of the levy.

Most pension scheme trustees will have requested that the scheme’s sponsoring employer fund the cost of the levy in order to avoid any reduction in benefit for members.  Employers’ responses to these requests have varied, with some willing to make funding the levy part of the wider funding discussions relating to their scheme.  Given the difficult economic climate however, many employers have stated clearly that they are not willing to fund the cost of the levy and that members’ benefits should be reduced where necessary.  This has led to scheme trustees being placed in a difficult position in having to balance the requirement to pay the levy with their obligations to act in the best interests of scheme members.

The assets of many defined contribution schemes are insured which, for the most part, takes the decision making out of trustees’ hands in that the levy is payable by the insurer.  Some insurers deducted the levy from scheme assets on or around 30 June (the valuation date) and paid it over to the Revenue Commissioners well in advance of the last date for payment.  The early deduction and payment of the levy by insurers meant that scheme assets were out of the market for longer than was legally required and we would advise that scheme trustees raise this with their insurer if they have not already done so.  Where they have not already done so, trustees should also consider whether the sponsoring employer should be requested to reimburse the scheme for the amount of the levy.

The situation for defined benefit schemes is more complicated.   The legislation provides that scheme trustees have a statutory discretion to reduce benefits but does not place them under an obligation to do so.  Where a sponsoring employer has indicated an unwillingness to fund the cost of the levy, the trustees must decide whether to proceed with a reduction in benefits (and if so, how benefits should be reduced) or whether they should explore other options with respect to the funding of the levy.  Depending on the particular circumstances of the scheme, these options could include making a contributions demand of the sponsoring employer where the scheme provisions allow for this or adopting a “wait and see” approach and/or attempting to absorb the cost of the levy within the current funding arrangements of the scheme.  Trustees should seek appropriate advice where necessary and should be mindful that given their obligations to act in the best interests of the scheme members, reducing benefits would generally be considered an option of last resort.   
 
Trustees should in all cases take care to consider all the relevant factors and record both their decision and the reason for their decision.

Contributed by Michael Wolfe.