Pension Changes - the "Ladybird" version

By Eoin Fahy, Monday, 27th April 2009 | 0 comments

Today's announcement that the government is about to take various technical steps to help pension funds was just that - technical.  But it would be wrong to overlook this announcement for that reason.  One of the largest problems that Ireland faces is the huge deficits in private sector pension funds, and the announcement today could make a real difference to those funds.

But let's get the health warning out of the way first - I am an economist, not an actuary, so this is very much a layman's guide to the new rules.  In the days and weeks ahead we will, no doubt, get detailed and definitive advice from people much more qualified than I am in this field.  But while we are waiting for that, I will give you a "Ladybird Guide" to the changes (you can read the announcement in full by clicking on this link). 

First and perhaps foremost, pension funds that are in financial difficulty because the employer has gone bust will in future be able to go to the NTMA and essentially "buy" pensions from the NTMA for its retired workers.  Insurance companies already do this of course, but it's expected that the NTMA will be able to do this much more cheaply - I believe the Minister said on radio this morning that the cost reduction will be between 8% and 18%.  What this means is that there is an "extra" 8% to 18% of money to go towards the pensions of other workers in the company who might otherwise get little or no pension despite many years of service - as has actually happened recently in Ireland.

But there is another aspect of this which is also important.  When an actuary is working out whether a pension fund has enough assets to pay pensions, if it was to close down, they may now be able to assume that the cost of pensions in a wind-up situation will be substantially cheaper than previously, and so the overall deficit for ALL funds, not just those whose employer has gone bust, could fall substantially. Needless to say, this can only be good news, if indeed it is confirmed that actuaries will do their calculations in this way.  We don't yet know this for sure.

The Minister also announced another, very significant, change to pension rules.  Right now, if a pension scheme is wound up (usually, though not always, because the employer has gone bust), all of the money in the fund must be used to pay the pensions of people who have already retired AND to pay for future increases in those pensions.  Only once enough money has been put aside to pay for all that, is there any money at all for people who have not yet retired.

What this means is that if a fund winds up today, with a deficit, somebody who retired yesterday is in a vastly better position than somebody who has worked in the company all their life, but is not due to retire until tomorrow.  The person who is to retire tomorrow will not get a single penny of pension until the full pension of the person who retired yesterday has been provided for, and all future inflation or salary linked pension increases over the lifetime of that person have also been provided for.

Under the new rules, however, any money left in the pension scheme when it winds up will still go, first, to pay pensions of people who have already retired.  But it will NOT now have to also pay for future pension INCREASES for those retirees.  Instead any funds left over will be shared pro-rata between those who have retired and those who have not, which does seem like a much fairer arrangement (though not to those who have already retired!).

As I said earlier, these changes are technical and not exactly the most interesting thing you will read this week. But at a time when there is a real and genuine crisis in Irish defined benefit pension schemes, these measures will reduce at least some of the problem.  We will continue to await the fine print, though, to see just how big the impact will be.

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