Pensioners face losing up to half of their income under planned rule changes
THE impact of radical changes to pension rules is far more severe than previously thought – as retirees could face losing up to half their payments out of private sector schemes.
Calculations by actuaries done for this newspaper show how someone with a pension of €36,000 – the same as the average industrial wage – could end up with an €18,000 cut.
These calculations, based on information provided by the Government so far, are much worse than was originally realised.
Elderly support groups said they would fight to get an official mechanism to appeal moves by pension fund trustees to impose severe pension cuts.
The Cabinet has signed off on new rules to allow existing pension payments to be hit in schemes that go bust or have to be restructured.
The new rules are part of an attempt to share out losses in troubled pension schemes between pensioners and those yet to retire.
Once the law takes effect, schemes that are in trouble will be able to cut pensions when the schemes are being restructured or wound up. This will mean more money for those yet to retire, when a defined-benefit scheme is underfunded.
But it is the first time that pensioners will have been hit – people who have no ability to make up the lost income.
Up to now, pensioners in private schemes had their pensions fully protected in the vast majority of cases, even when schemes had to slash pensions benefits to those who were still working.
One of the leading groups representing older people is set to seek a right of appeal to decisions that lead to them taking heavy cuts to existing pension payments.
Chief executive of the Senior Citizens Parliament Mairead Hayes said her members would fight to get an official mechanism to appeal moves by pension fund trustees to impose severe pension cuts.
"Pensioners are former workers who are now in receipt of a benefit for which they and their employer paid during their working lives," she said.
Ms Hayes said membership of defined benefit schemes was compulsory for most workers.
It came as actuaries in Mercer worked out that some pensioners could lose half their payments, in a doomsday scenario where both the pension scheme and the sponsoring company go bust.
The new rules mean the €36,000 pension could be cut by up to €18,000 in this worst-case scenario.
The State will guarantee paying at least €12,000 of such a "doubly insolvent" defined benefit pension.
But this will still mean heavy losses for those with pensions greater than this.
State contributory pensions payments will be unaffected.
A person on a pension of €36,000 whose pension scheme is wound up, or restructured – but where the employer is still in business – faces lower cuts.
But this person could still see such a pension reduced to €32,400.
At the moment, if a defined benefit scheme does not have sufficient funds to meet its pension promises to all members, the pensioners still get 100pc of their pension.
But most defined benefit schemes are under-funded.
Social Protection Minister Joan Burton expects to have an amendment to pensions legislation enacted by the end of year to allow trustees to force cuts on pensioners paid out from private sector schemes.
Pensioners will be guaranteed that they will get up to €12,000 from their private pension fund.
But if both the scheme and the company are wound up, then the pensioners face cuts of up to 50pc on their total pension.
This would see someone on a €20,000 pension facing a cut of up to €8,000 in their retirement income. Where the scheme is insolvent, but the employer is still operating, the pensioners will lose 10pc of their total retirement income from the scheme for amounts up to €60,000.
The same will apply to schemes that are being restructured.
This would mean a person on a defined benefit pension of €20,000 could lose up to €2,000.
The majority of schemes are now in trouble because people are living so long that it is impossible to deliver the pensions people expected.
Chief investment officer at IFG Pensions Samantha McConnell said that the majority of pensioners being paid out of defined benefit schemes were on €12,000 or less. Some 45pc were getting more than €12,000 a year.
People in the public sector, those with annuities, and those with defined contribution schemes, will be unaffected by the proposed changes.
Charlie Weston Personal Finance Editor