The Government has recently published draft legislation which intends to

• Ensure a fairer distribution of defined benefit (DB) scheme assets on wind up by reducing the current 100% priority for pensioners
• Ensure Ireland’s compliance with the Employer Insolvency Directive

Fairer distribution of scheme assets

• Under the proposed measures, pensioners will continue to receive priority over active and deferred members on wind up in respect of:
• Their benefits up to €12,000
• The greater of €12,000 or 90% of their benefits where the annual pension is between €12,000 and €60,000
• The greater of €54,000 or 80% of their benefits if the annual pension is €60,000 or more

Under the proposed amendments, the scheme assets would then be used to secure 50% of active and deferred members’ benefits before any further distribution can be made to “top up” pensioners’ benefits to 100%.  

The draft legislation also provides a new mechanism by which the trustees of an underfunded DB scheme can, as part of a scheme restructuring, apply to the Pensions Board to reduce higher pension benefits.  It is proposed that:

• Pensions of between €12,000 and €60,000 can be reduced by up to 10% (provided that no pension can be reduced below €12,000).
• Pensions of €60,000 or more can be reduced by up to 20% (provided that such pensions cannot be reduced below €54,000).

Employer Insolvency Directive

The Government proposes that a different set of rules will apply on the wind up of a DB scheme where the employer and the scheme are both insolvent (ie. there is a double insolvency).  The proposed amendment follows a recent ruling of the European Court of Justice where the Court found that the Irish State’s failure to guarantee at least half of the pension benefits from an insolvent company’s underfunded pension scheme was a “serious breach” of its obligations under the Employer Insolvency Directive.  

Under the proposed rules, the funds of the scheme will be divided to ensure that:

• All beneficiaries of the scheme (ie. pensioners, active members and deferred members) receive 50% of their benefits.
• Pensioners in receipt of pensions from the scheme of €12,000 or less receive 100% of their pension.

In the event that the scheme does not have sufficient assets to meet the above thresholds, the State will provide the shortfall to the scheme so that it can make up the difference.  The Government intends to fund such shortfalls from the pensions levy.

Contributed by Mary Greaney and Lorna Osborne.