New priority rules governing the wind up of defined benefit (DB) schemes, on or after 25 December 2013, are intended to:

• ensure a fairer distribution of DB scheme assets on wind up by reducing the previous 100% priority for pensioners; and
• ensure Ireland’s compliance with the EU Employer Insolvency Directive.

Fairer distribution of scheme assets (scheme deficit/solvent employer)

Under new rules where there is a scheme deficit and a solvent employer, pensioners will no longer receive full priority up front on wind up but will continue to receive priority over active and deferred members in respect of their benefits (excluding post-retirement pension increases) in accordance with the following limits:

• 100% of the pension if the annual pension is €12,000 or less.
• the greater of €12,000 or 90% of the pension where the annual pension is between €12,000 and €60,000.
• the greater of €54,000 or 80% of the pension if the annual pension is €60,000 or more.

Any remaining scheme assets would then be used to secure 50% of active and deferred members’ benefits (excluding post-retirement pension increases) before any further distribution can be made to “top up” pensioners’ benefits to 100%. 

EU Employer Insolvency Directive (scheme deficit/insolvent employer)

A completely different set of priority rules will apply on the wind up of a DB scheme where the employer and the scheme are both insolvent, ie where there is a double insolvency.  (This follows a ruling of the EU Court of Justice in the Waterford Crystal case 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. View previous article here).  In this scenario:   

• all beneficiaries of the scheme (ie pensioners, active members and deferred members) are to receive 50% of their benefits including post-retirement pension increases;
• pensioners in receipt of pensions from the scheme are to receive 100% of their pension subject to a cap of €12,000 per annum (excluding post-retirement pension increases).

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.

As an example, John receives an annual pension of €10,000 and Tom receives an annual pension of €14,000 from the ABC pension scheme.  The scheme is underfunded and has insufficient assets to meet the above thresholds.  On a wind up, John would receive 100% of his pension (and any pension increases in respect of the first 50% of his benefits, ie €5,000) and Tom would receive a pension of €12,000 (and any pension increases payable in respect of the first 50% of his benefits, ie €7,000).  The State would provide any shortfall required to ensure that these benefits are paid to John and Tom.

Where a scheme has sufficient assets to meet the above thresholds, the State will not provide any funds to the scheme on a wind up.  Once the thresholds have been met out of the scheme assets, any remaining assets would then be used to secure pensioners’ benefits to the extent that same have not been discharged (excluding post-retirement pension increases), following which any remaining active and deferred members’ benefits (excluding post-retirement pension increases) would be secured.  Finally, any remaining assets would then be used to pay any remaining benefits, including any post-retirement pension increases.

If, in the above example, the ABC pension scheme has sufficient assets to meet the thresholds, Tom would first receive a pension of €12,000 (and any pension increases payable in respect of the first 50% of his benefits, ie €7,000).  Any scheme assets remaining after the thresholds have been met would then be used to “top up” the benefits of Tom and the other pensioners to the extent that same have not been discharged (excluding post-retirement pension increases).

Comment

While the changes to the priority rules are certainly welcome, arguably they do not go far enough to protect active and deferred members of underfunded DB schemes where the sponsoring employer is solvent.  Furthermore, they do not address concerns raised in a recent OECD report on pensions in Ireland that a financially “healthy” employer may be able to walk away from its DB scheme without addressing its pension liabilities.  It is expected that the changes to the priority order will be of limited benefit to active and deferred members unless the sponsoring employer is also insolvent, in which case such members could rely on the State to top up their benefits.