Speech by Minister for Social Protection Leo Varadkar - Private members Bill – Pensions (Amendment) Bill

Speech by the Minister for Social Protection Leo Varadkar, TD, Private members Bill–Pensions (Amendment) Bill, Tuesday 7th February 2017

Check against delivery

I welcome this opportunity for a discussion of the problems of defined benefit pension schemes.

The provisions contained in this Bill propose major changes to the Pensions Act. These changes would have significant and far-reaching consequences on 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 in the Bill.

Defined benefit schemes have been facing substantial challenges over the last two decades. This is due to

• volatility in the stock markets
• increasing liabilities arising from the demographic pressures of increasing life expectancy,

low interest rates and

• regulatory requirements

Essentially 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 pensions 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 was brought forward to alleviate the situation. This followed much consideration of the matters in this 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 any deficits therein. This Bill turns a voluntary contribution into a mandatory obligation. 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 to 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. And, many scheme trustees are working hard to ensure the on-going 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 regarding the steps that must be taken to secure scheme viability. These steps may include a mix of measures such as increased employer/member contributions, longer working and amended benefits.

I believe that this is the best approach to scheme difficulties.

I believe further steps can and should be taken in relation to the funding standard. Following discussions between my officials, the Pensions Authority, the Society of Actuaries 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 difficulties with the current operation of the standard. I intend to consult employer and union representatives on these proposals before making any changes.

I will now turn to the provisions in this Bill.

As you will all be aware it can be very difficult to put forward legislative proposals which have the desired effects without any negative implications. The area of pensions is quite technical and the issues are complex and not 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 from 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 who will consider any 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 this Bill seeks an appeals mechanism it does not indicate what should happen if the appeal is successful. It aims to prevent schemes being wound up where any category of members is being treated inequitably. This inequity is not defined in any way in the Bill. If all members have an equal priority then this would be a significant change from the current position where pensioners have a higher protection than other categories. I am sure this is not the intention of the proposers of this Bill but it could be a consequence.

Rather than being protected as they are currently, this Bill could expose existing pensioners who are already retired to having their pensions cut and cut substantially in the event of a wind up.

Having discussed it with the AG, we are also concerned about its constitutionality under Article 43 as it is retrospective and could constitute an expropriation of vested rights.

The Bill makes no provision for making up any shortfall or for paying any contributions.

In some cases stopping a scheme from winding up or extend and pretend will result in a far worse outcome for some scheme members, particularly younger ones. The scheme would have to continue with solvency potentially deteriorating, and older members using up the assets before younger members retire. This would surely be the most inequitable of all outcomes, ironically coming 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 can 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. This change also recognised that all beneficiaries of the scheme - both members and pensioners - need to share the risks when a scheme is underfunded.

In Section 3 the Bill further seeks to prevent the wind up a defined benefit pension scheme when the value of the assets of the scheme is less than the amount of the liabilities of the scheme until the deficit is eliminated.

This effectively puts a debt on the sponsoring employer equal to the amount of the deficit. However, if the Pensions Authority is 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 it may allow for the payment of up to 50% of the deficit and/or allow the company up to 5 years to pay the deficit.

I understand that there is a real desire to protect scheme members and prevent employers who “won’t pay” as opposed to those who “can’t pay” from walking away from the schemes they sponsor.

Serious consideration has been 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 may also prevent employers from “walking away” from defined benefit schemes and would encourage employers to ensure that the scheme is well funded and managed.

However, there are also strong arguments against the introduction of an employer obligation.

Imposing an employer guarantee would be 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 may 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 essential 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 circumstances.

The extra funding burden would accelerate the closure of defined benefit schemes in the private sector. So the result of such a change, designed to protect the position of defined benefit pension members, would be the opposite of that intended. Few, if any, such defined pension schemes would remain.

Putting a debt on the employer may improve scheme security but in most cases the pension liabilities and the investment risk assumed would be too big for a company to support.

It could jeopardise the viability of the business and jobs of those employed given employers lack of capacity to absorb this extra cost. In such case, people could lose their jobs long before becoming eligible for a pension.

It could encourage imprudent investment behaviour by trustees or any losses would have to be made good by the employer.

At present, there is no readily available, reliably accurate and consistent measure of solvency. This Bill does not propose a workable framework to apply a debt on employer.

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 for the long-term.

Rather than implementing a solution of 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 level through 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 of the Bill proposes that the Pensions Authority prepare a report on the feasibility of changing the Minimum Funding Standard for defined benefit pension schemes and establishing a pension protection scheme within 6 months.

I have no objections to this so I will request the Pensions Authority to carry out this analysis and report within 6 months and make it available to all Deputies.

My overriding priority, and that of the Government, is to ensure that pensioners and other members of pension schemes are protected in so far as possible and that the future viability and sustainability of their schemes is ensured and made safer.

In conclusion, I do not doubt the sincerity of those proposing this Bill this evening but unfortunately their Bill does not pass the test of good law and indeed presents real dangers for members of such schemes – pensioners, actives and deferreds. I am therefore opposing the Bill.

I will in the near future bring forward my own proposals, carefully thought out and fully analysed to help alleviate some of the difficulties currently being experienced by defined benefit schemes and their tens of thousands of members. This rather than the flawed approach suggested by this Bill is the best way to help defined benefit scheme members.

ENDS​​​​