Reprioritisation of Benefits: the real winner is…?

5 years into the financial crisis that destroyed the Balance Sheet of almost all DB schemes  (and 18 months after a comprehensive solution backed by IBEC, ICTU and certain pension bodies was presented to the Minister) action has finally been taken to restructure the Priority Order.

Why that is necessary can be illustrated by looking at a scheme with 2 members (1 pensioner, 1 active), an insolvent employer and a fund value of €500,000:

A. Before Financial Crisis

Value of Pensioner liability   €350k

Value of Active liability        €150k

Funding for Actives             100%

B. After Financial Crisis

Value of Pensioner liability   €500k

Value of Active liability        €150k

Funding for Actives              0%

The deterioration was primarily caused by the decline in bond yields in Germany which meant annuities became more expensive and therefore more of the fund was allocated to pay pensioner benefits.

The new rules now mean (in scenario b above) that where both the employer and pension scheme is insolvent (Double Insolvency) the balance will be rejigged as follows:

C. After Minister’s announcement

Value attributable to Pensioner    €425k

Value attributable to Active         €75k

Shortfall                                     €125k

Earlier this year the European Court of Justice ruled that the Irish State had failed to provide adequate protection to members of such schemes. The net effect of this was that, under scenario b above, the State was facing a liability of at least €75k. This liability will now be Nil – the pensioner is picking up the tab.

Note that in the recent budget the Minister for Finance also raised an additional levy on pension funds to pay for this liability –money he can now use for other purposes.

The real winner is the Government!