Pension wind-up storm
Published 15/11/2012 | 05:00
THOUSANDS of people are caught in a pensions wind-up storm.
There are more than 197,000 people who are members of some 993 defined benefit pension schemes in Ireland.
A defined benefit used to be regarded as the Rolls Royce of pensions. They promised to pay a set level of pension based on your final salary and the number of years you have been in the scheme.
While some of these are financially lucky enough to have retired, many of them are within 10 years of hitting retirement.
A growing number of the people within a decade of retiring have recently been told, or are expecting to hear, that their pension scheme is to be wound up.
The high number of insolvent pension schemes have, by definition, insufficient money to meet the pension promises made to all members of these schemes.
Those members close to retirement are particularly concerned as to whether sufficient funds will be available when they come to retire.
The trustees of a growing number of defined benefit pension schemes have indicated to members that they will have to wind up the fund, indicating that the employer is not in a position to provide the necessary finance to close the deficit in the fund, according to Aidan McLoughlin, managing director of Independent Trustee Company.
"In most of these cases, it would prove inordinately expensive for working members of these schemes to attempt to bridge the gap with substantially increased monthly contributions," he said.
"When the scheme is wound up, all contributions cease and members' benefits are calculated to best protect members' accruals to date. A defined contribution scheme is usually established for all future service."
Mr McLoughlin explained that none of the money contributed by individual employees, or their employer, to defined benefit schemes was specifically ring-fenced in the name of any one employee.
What this ultimately means is that, in a wind-up situation, pension rules dictate that the entitlements of members already retired get absolute precedence. This can sometimes soak up much or all of the available funds.
It can also lead to a situation where there is little or no money left to provide the benefits promised to current workers when they retire, even if they're only months away from 65. He gave the example of a typical scheme that is insolvent.
It is being wound up with one-third of workers already retired.
In simple terms, it has enough money to fund 70pc of the total promises made to retired and worker members.
When the fund is wound up, the one-third of members already retired will receive 100pc of their benefits, with their future pensions being fully funded before any consideration is given to those still working.
The rules on dividing the funds of the pension fund are based on current legislation, which states that retired members must be fully satisfied before anyone else's benefits are considered.
The two-thirds of members still working will get to share what is left in the fund. This will be in proportion to the benefits they have accrued, Mr McLoughlin said.
"In a typical situation like this, they'll probably get somewhere between 25pc and 40pc of what they were promised," he said.
This means that those workers could lose out on 60pc or more of the benefits they are expecting.
For any worker, that is a pretty serious threat to their retirement. For those with 20 or more years to go to retirement, there is still an opportunity to recover some or all of the lost ground.
However, for those closer to retirement, this loss is much more immediate and unlikely to be recovered. This loss is all the more difficult to stomach when it is realised that a 65-year-old that retired last month receives his full entitlement, while his 64-year-old colleague with whom he worked side by side for 40 years will receive less than half the benefit he expected.
What employees should do:
Check the scheme
Step one is to check the solvency position of the scheme.
Step two is to find out where you are in the pecking order and to see if you can improve your position.
This is possible if, for example, early retirement is permitted by the scheme.
By triggering retirement at (say) 60, rather than 65, you will ensure that your benefits are locked in much earlier.
Alternatively, you may be able to transfer to a new defined contribution company pension plan where all of your and your employer's contributions will be ring-fenced in your name.
Principally, you're now going to have to give greater priority to the level of money you save for retirement, potentially looking at hitting the maximum amount that you can contribute to a pension in a given year and claim tax relief on. This is determined by your age and your income. From age 50, you can contribute up to 30pc of relevant earnings, increasing to 35pc at 55 and hitting the max of 40pc at 60.
Relevant earnings are limited to €115,000 per annum and are broadly identical to your income from employment.
What you can expect
Step three is to see what you can expect from your employer, Mr McLoughlin said.
All employers are required by law to ensure their company employees have some access to a pension arrangement. So, it cannot be a case of walking away from responsibilities.
Companies will have to consider restructuring their pension offering, which will involve establishing some type of defined contribution structure.
Employers and employees are increasingly looking at other pension arrangement options.
These might include one-member pension trusts or Personal Retirement Saving Accounts (PRSAs) to avoid the risks of under funding and to bring some sense of equity, fairness and transparency to their pension provision, which they do not perceive as being possible under the defined benefit structure.
These structures also allow an individual and employer to control the cost of pension provision.
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