Employers rethink as legislative ground shifts
The restructuring of company pensions has been a live topic ever since the late 1990s as it began to become clear that for a variety of reasons, a growing number of employers could no longer afford to live up to the obligation entered into by them to provide traditional goldplated, copper- fastened defined pension arrangements to employees on retirement.
The great financial meltdown in 2008 provided a further dramatic impetus to this process of change. Many firms were faced with financial melt down just at the point when pension schemes were falling further and further into the red.
Over time, the number of traditional defined benefit arrangements has shrunk greatly in number and pension restructurings have increased in number and range. Belatedly, the trade union movement has awoken to the threat posed to its members’ interests as once proud companies tumbled into insolvency or at least into difficulty.
Pensioners, deferred pensioners and ‘active’ pension scheme members have all found themselves in the cross hairs while trustees, charged with protecting the interests of scheme beneficiaries have been under growing pressure.
Scheme members not already in receipt of pensions have borne the brunt of changes introduced, a particularly striking example being that in Water ford Glass.
Employees who lost out in the 2009 liquidation of the business were forced to take a legal case to Europe before a compromise deal was reached after several years.
The government stepped in introducing legislation to rebalance the position as between existing pension recipients, and active, or deferred members ( people who have moved on to other employments while remaining in the workforce ).
More recently, Independent News & Media found itself making the news in a manner hardly foreseen, a few years back, when the trustees of its two pension schemes were faced with a proposal to reduce significantly the size of the company’s retirement packages.
The company had entered into a restructuring agreement in 2013. Under this deal, the company was to put €61m into the main scheme in return for staff agreeing to a 39% cut in their accrued benefits. By last December, just over €31m remained to be paid, according to Industrial Relations News.
The‘ second bite of the cherry’ restructuring plan was too much for the INM trustees and staff. Protests ensued.
The trustees sought improved terms and a compromise was reached which apparently protects the already reduced position of the scheme members.
Under the compromise, an extra €50m is to be paid in by the employer over a six-year period.
Sadly, the situation at INM is far from unique, particularly in the many sectors now facing into economic and financial gales as a mix of international events, such as Brexit and technological transformation threaten to up end business models.
The situation is by no means one that is unique to Ireland. Pension funds are being restructured worldwide, an interesting recent example being that concluded by Ta ta Steel, the owners of British Steel.
Last month, a new deal was signed off between Tata, the trustees of the British Steel pension scheme, the UK pensions regulator and the Pensions Protection Fund which is acting as a ‘lifeboat’ for failed UK retirement schemes. Under the deal, the Indian group Tata, has agreed to inject £ 550m (€615m) into the £15bn scheme.
A new defined benefit scheme is being set up which provides for reduced guaranteed pay outs to retirees. It is also agreed that a one third stake in Tata UK will be held by the pension trustees on behalf of the members.
A key consideration for many employers is that where company schemes’ liabilities exceed the assets to a considerable extent, not merely do they run the risk of facing legal action from the regulator or the trustees, but they also face the prospect of would- be business partners, lenders or takeover suitors being deterred. Pension schemes that are financially underwater can no longer be hidden away like the proverbial mad relative in the attic.
In Ireland, the ructions at INM — following on from similar problems at Aer Lingus a few years back — have sparked a political reaction.
Already, the Pensions Act 1990 imposes an obligation on the employer and the trustees to ensure that there are sufficient assets in the scheme to meet ongoing funding requirements. There is an onus on the trustees to have the scheme actuarially valued at least once every three years so as to ensure that the minimum funding standard is being reached.
Since mid- 2012, trustees have been obliged to submit annual data returns.
In 2009, the Social Welfare & Pensions Act gave the Pensions Board (now Authority ) power to direct that the benefits of‘ active’ ,deferred members and pensioners be reduced in certain circumstances.
Now, the legislative pendulum appears to be swinging back in the direction of pensioners and other scheme members.
Late last year, Fianna Fail’s social welfare spokesman, Willie O’Dea, TD introduced a private members’ bill with cross party support. This provides, among other things for an appeal mechanism to be available to members when the process of winding up their defined benefit scheme has been initiated.
The bill would also make it illegal for a solvent company to wind up a pension scheme without the consent of the Pensions Authority.
It is also proposed that where a scheme’s liabilities exceeds its assets, the deficit should be treated as a debt owed by the company, with the possibility that consent to any changes be withheld until the shortfall is made up to the trustees.
In May of this year, the former Minister of Social Protection (now Taoiseach) Leo Varadk ar, published what was then described as a ‘ general scheme’ or initial draft of a new Social Welfare Pensions Bill 2017. This suggested that employers would be required to give a year’s notice before ceasing contributions into a defined benefit scheme and the employer would also be required to enter into negotiations with the trustees in cases where the minimum funding standard is not being satisfied.
In July, the full version of the Bill was published. According to solicitors, Arthur Cox, no reference to a 12 month notice period requirement or to the proposal that a fund deficit be treated as company debt was included in this updated version.
The Bill will now be debated by TDs and Senators so further revisions can be expected. What seems clear is that the problems will not go away. The challenges which are posed by Brexit are considerable and one expert — David France of A& L Goodbody solicitors—has warned that“funding difficulties may trigger fresh scheme reviews.”
Restructuring of schemes will continue to be a feature of life, with investment returns no longer sufficient to meet promises regarding income in retirement made to members.
The best one can hope for is that the gradual reduction in benefits, related in large part to advances in life expectancy, can be handled in a manner that is humane.
Lawyers advise that in the absence of member consent to restructuring proposals, a direction from the pensions authority will be required.
The parties involved may need to consider various options ranging from an increase in active member contributions, a cessation of future accrual of benefits and a freeze or cap on pensions.
In too many cases, top management have protected their own retirement nest eggs while throwing their employees and retirees to the wolves, having enjoyed, in the good years, the benefits of a lapse in contributions.
Such approaches are increasingly discredited. The issue of pension provision is now a hot IR issue and by extension a hot political one, also. It is only right and proper that this should be the case.
However, a careful balancing act is required. The future of essentially solvent business entities should not be put at risk by an excessively rigid approach to the management of rising pension fund liabilities,
It is in no one’s interest that conflict is allowed to fester to the point where the parties find themselves in the courts and racking up huge expenses.
Failing defined benefit pensions are being restructured worldwide; in the UK, pension trustees Tata are to inject £550m into the £15bn British Steel pension scheme.