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!
