Wednesday 20 September 2017

Pensions Q&A

Q: What's this about company pensions being in trouble?

A: About 200,000 people pay into defined pension schemes. Another 200,000 are deferred members. Their employers also put money into these schemes, which promise a pension based on the salary at retirement and the number of years you have been in the scheme.



This means that in the private sector those with 40 years' service in a defined benefit plan were traditionally promised a pension based on two-thirds of their final salary. Most of these old-fashioned schemes are now closed to new members as they are too expensive to fund.



This is because people are living longer, meaning pensions have to be paid out for longer, and investment returns have not been strong enough to fund longer lives.



The risk that there would not be enough money to fund the scheme is borne by the employer. We have now arrived at a situation where 80pc of the almost 1,000 defined benefit schemes are in deficit.



This means that if they were to close down there would not be enough money to pay out pensions for all the members.



This has prompted companies to offer younger workers defined contribution schemes instead -- this is where the risk that the returns do not deliver is borne entirely by the holder of the pension.



Q: I have paid into a defined benefit pension for 20 years, will I get a pension?



A: That really depends on your scheme's financial state. If there is a deficit and it is big you may not get the full pension you had been expecting. The trustees and your employer will have to come up with a recovery plan by the end of this year, to eliminate the deficit. There are a number of scenarios that you could face:



- Your employer may be able to plug the deficit by paying more into the scheme, or offering a financial guarantee to plug the gap.



- You may also have to pay more into the scheme.



- Your pension, and other benefits, from the scheme could be reduced under what is known as a Section 50 restructuring.



- The scheme could be wound down.



- The scheme changes from a defined benefit one to a hybrid, with future pension benefits based on a defined contribution arrangement.



- A combination of the above.



Q: I am a pensioner. Is my retirement income safe?



A: Yes. Pensions in payment are protected in Irish law.



Q: Are public servants subject to the tough new Pensions Board rules?



A: Ah come on. The Pensions Board, and its sponsoring department, Social Protection, make the rules for others. They themselves have defined benefit pensions. These are unfunded and not subject to the new rules. They get a pension of half their final salary, and a tax-free lump sum, if they have full service.



Future public servants will get a pension based on their career average earnings at retirement. Yes, we in the private sector, pay for this.



Q: Will schemes close?



A: Probably. There are 1,000 defined benefit schemes and many may be restructured, which means reduced pensions at retirement. Others will just close. In a wind-up, priority over the assets is given to pensioners, with the rest getting a proportion of what is left.



The Government has dropped plans to cap the pensions for people in a scheme that has been wound up at €30,000. This would have hit high earners hard. Although not renowned for defending the little guy, IBEC yesterday criticised Minister Joan Burton's failure to reintroduce this reform.



Q: What's this about pension schemes investing in Irish state bonds?



A: Under the new rules, called a minimum funding standard, schemes will get credit for investing in risky Irish sovereign bonds.



Schemes that buy the Irish bonds will be rewarded by having their liabilities reduced by up to 20pc.



However, new laws mean that if the Irish state defaults on its debt commitments any loss will be borne by the scheme's members and its pensioners. Many trustees and scheme sponsors will consider this a risk too far.

Irish Independent

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