Q&A by Charlie Weston
NEW rules that are expected to be law before the year end will allow for the cutting of existing private-sector pensions.
Q What is happening?
A The Government is putting in place new rules which could mean pensioners taking a hit where a private-sector defined-benefit pension scheme is in trouble.
The new rules will allow trustees to cut pensions in three circumstances:
* Where the fund and the sponsoring company are both insolvent.
* Where the scheme winds up.
* Where the scheme is restructured – a so-called section 50, where benefits are being cut for those yet to reach retirement age.
Q Why is the Government doing this?
A At the moment, where a defined-benefit scheme is in deficit – has not got enough funds to meet the pension promises for all its members – the hit is taken by those yet to retire. Pensioners get 100pc of their pension.
Now trustees will be able to force pensioners to share some of the pain when the scheme is being restructured or being wound up.
Those yet to retire will have to take a similar-sized hit.
Q How will this work?
A Where the scheme is bust, and where schemes are being restructured, trustees will have to ensure pensioners get €12,000. Any cuts over that amount will be limited to 10pc, for pensions up to €60,000.
Where both the scheme and the sponsoring company are insolvent, the new law will allow trustees to cut the pension in half, but only for amounts over €12,000. In this 'double-insolvency' situation, a person getting €20,000 a year from a private-sector scheme faces losing up to €4,000 of this.
Q Remind me what a defined-benefit pension is again and why are they in trouble?
A Defined-benefit schemes promise to pay a set pension for life, based on the final-year salary. But a combination of people living much longer, low investment returns and strict regulatory rules have meant that most schemes are unable to keep their pension promises.
There are some 190,000 people in the private sector paying into 800 defined-benefit schemes.
The schemes are disappearing rapidly. In the 1990s there were 2,500, now there are 800, with more closing every week.
Q I have an annuity. Will this impact upon me?
A No. This will only apply where the pension is being paid out of a private sector defined-benefit scheme. So if you have an annuity – an annual payment until you die – or a sovereign annuity, you will not be affected.
Q When will this come about?
A The new legislation is expected to be enacted the end of the year, according to the Department of Social Protection. And there will be no impact on the state pension.
Q I get a pension paid out of a defined-benefit scheme. It has already been restructured. Am I safe?
A In theory, this change will allow for cuts in your pension. But in practice, where a scheme has already been restructured with the approval of the Pension Board, trustees are most unlikely to bring the hassle on themselves of altering existing pension payments.
You could protect yourself by getting the trustees to purchase an annuity for you, instead of being paid out of the scheme.
Q I have a public-sector pension and my wife has her own defined-contribution scheme. Will we be impacted?
A This will have no impact on public-sector pensions. And there will be no impact on defined-contribution schemes – where the pension you get depends on what you pay in and the investment return.