DB Pension Schemes – Government asleep at the wheel
The recent decision by Independent News & Media to wind-up the company’s pension scheme has brought the issue of Defined Benefit pension schemes back into sharp focus. What makes it particularly hard to stomach for the affected scheme members is the company’s statement in the same week that it also wished to re-introduce the payment of dividends to its’ shareholders. The quote ‘All animals are equal but some animals are more equal than others’ comes to mind.
This destruction of pension benefit entitlements as a direct result of this decision and the earlier decision to cut back benefits has been truly shocking. For those members most affected, up to 70% of what they believed to be safe benefits have been wiped out at the stroke of a pen. Very few people can deal with such a huge reduction in income without having to make major changes to their lifestyles. For those who are very close to retirement age, these changes may have to include quite drastic decisions such as the cancellation of their private health insurance or other valuable protection benefits such as life and illness cover. We all know what it is like to be dependent on the public health system in Ireland. This will hardly be a problem for the main INM shareholders.
Despite the establishment of the Pensions Authority as the primary regulator of group pension schemes, members of Irish based Defined Benefit schemes have very little real protection. The majority of these schemes have already been wound up and most of the small number which will eventually be left will be in the public sector and the semi-state sector. The reason for this is that pressure can be put on politicians to keep these schemes open as they are heavily funded by taxpayer’s money.
The writing has been on the wall for privately funded defined benefit schemes for many years. The combination of much longer life expectancy and prolonged periods of very low bond yields sent their funding costs through the roof and made them unsustainable except for the most cash rich employers. As we know, Irish governments would never win any awards for forward planning and they did what they usually do here – wait until they are dealing with a full-blown crisis and then try to scramble together a half-baked solution.
In the UK, an employer with a Defined Benefit scheme is not allowed to wind it up when it is insolvent. The UK regulator has the power to force a parent company to accept responsibility for the liability. This protection is not available in Ireland. The very limited protection for scheme members in Ireland is known as the ‘Double Insolvency’ and this requires both the company itself and the pension scheme to be insolvent before any financial compensation is made available to affected members. This is cold comfort for existing employees, in particular those who will also be losing their jobs.
The fall-out from the INM wind-up decision and the widespread media coverage has led some ministers to examine potential emergency legislation to prevent employers from winding up any scheme which is not at least 90% funded. Once again, this political initiative is completely reactionary. Rushed legislation can often cause more problems than it solves. We also need to remind politicians that they saw fit to contribute to this financial chaos at the worst possible time by introducing a substantial levy on these same schemes when they were already severely under water.
It will simply not be possible to reverse this trend of wind-ups in Ireland and it is just a matter of fact to state that DB schemes are just not suitable for the modern business world. In a few short years, the schemes that do remain in the private sector will just be legacy schemes from the past. It is simply inconceivable that any new employer in Ireland would ever set up a new DB scheme. It would be as daft as a new delivery company wanting to use a fleet of horse drawn carts.