Tuesday 23 January 2018

Changes to your pension scheme that could affect you

Double insolvency

Q John is a 67-year-old retired worker who has an occupational defined benefit pension of €14,000 from Company A and a state contributory pension of €12,000.

His scheme is to be wound up and his company also goes bust – this is what is known as a double insolvency.

In this situation, John's state pension would be unaffected.

Once the changes to the priority order come in, John will be guaranteed at least €12,000 of his company pension. If the scheme is unable to pay this, the money will be provided by the State, through the levy on private sector schemes.

If the scheme has more funds, John's pension will be further increased.

This situation will mean John will still have his state pension, but his overall pension benefits will fall to €22,000.

This is down from €26,000 previously.

Pension scheme is insolvent

Q Tracy is a 68-year-old who has a private sector defined benefit pension of €40,000 from Company B and a state contributory pension of €12,000.

Her pension scheme is in deficit – it has not got enough funds to meet the pension promises made to the members. But the employer is solvent and continues to trade.

Up to now, Tracy would have continued to receive 100pc of her occupational pension.

Under the proposed changes to the priority order, Tracy's state pension would be unaffected.

And the first €12,000 of her occupational pension would also be protected.

However, the remainder of the occupational pension would be reduced by €4,000 (10pc of €40,000).

Reducing higher-level pensions in payment in this manner in Company B will ensure improved funding is available to be distributed so that employees who have yet to retire get a fairer income upon retirement, according to the Department of Social Protection.

If there are sufficient funds in the scheme, the reduction in pensions may be less as funds are distributed under the priority order. Scheme is restructured

Q Jimmy is a 55-year-old employee of Company C facing a reduced pension entitlement because the scheme is underfunded.

Company C restructures its scheme – in other words, it cuts the benefits that it will pay to its members.

This could see existing pensioners of the scheme losing 10pc of their pensions for amounts greater than €12,000.

Company C redistributes some of the assets being used to pay higher-paid pensioners above €12,000. This is to ensure Jimmy does not lose out so heavily when he retires.

Company C has a high number of pensioners with average pensions of €25,000, but it is underfunded. The trustees are able to determine that a 5pc reduction in pensioner benefits can be redistributed to the current employees and increase the employees' expected benefits by about 15pc.

Trustees will have discretion as to the level of reduction up to the limits in the legislation.

Case studies adapted from examples provided by the Department of Social Protection

Irish Independent

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