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Pensions Update and Recent Developments
PRACTICE AREA GROUP: Employment, Pensions and Benefits
Pensions Update and Recent Developments
- Government announcement on the future operation of defined benefit pension schemes
- Sovereign Annuity Proposal
- Deferral of deadline for Defined Benefit Funding Proposals
- Civil Partnership
- Government Announcement on the future operation of defined benefit pension schemes
On 13 October last, the Minister for Social Protection, Éamon Ó Cuív TD, announced that the Government has agreed to expedite the implementation of a "new" defined benefit model as outlined in the National Pensions Framework.
The National Pensions Framework, published in March 2010, recognised the significant difficulties with the typical design of funded defined benefit schemes and proposed an alternative approach. This new structure, detailed in the Framework, involves fixing employer and employee contribution rates, with the result that benefits must be flexible in the event of investment losses or other adverse experience. As contributions would be fixed the restructured scheme would consist of core benefits which would be guaranteed and non-core benefits, which would be flexible depending on economic conditions. Our National Pensions Framework Client Update issued in March can be accessed by clicking here.
The Minister said the Department will aim to introduce the new defined benefit model no later than 1 July 2011 following legislative changes. It is understood that, as part of this review, the Department will look at issues regarding the governance of defined benefit schemes and the basis for the funding standard (including areas such as risk management, smoothing out effects of changes in the bond markets and strategies for transitioning schemes to this new model).
The Minister also stated that in considering further changes, "thorough consideration is being given to the Sovereign Annuity proposal into which significant work has been put by the Irish Association of Pension Funds and the Society of Actuaries in Ireland".
On the basis of the Government announcement, the Pensions Board announced the extension of the current deadline for the submission of Funding Proposals to allow schemes to take account of the new approach to defined benefit provision.
Sovereign Annuity Proposal
The Irish Association of Pension Funds (IAPF) and the Society of Actuaries in Ireland made a joint sovereign annuity proposal to the Government during the summer. The proposal involves the investment of at least €10 billion in Irish Government Bonds allowing defined benefit schemes to lower their deficits and to set aside less money to cover their liabilities in the event of a scheme winding up. The State would underwrite a national annuity bond, ‘a sovereign annuity’ at no extra cost to the State. The joint proposal suggests that commercial insurers would manufacture and sell the sovereign annuity that would be invested in and priced off Irish sovereign bonds. The advantage of this is that the new annuities would be an acceptable alternative to conventional annuities for the purposes of the Minimum Funding Standard and for buying out pensioner liabilities for both ongoing schemes and schemes in wind-up.
Deferral of deadline for Defined Benefit Funding Proposals
All defined benefit schemes in deficit currently have a deadline for submitting a funding proposal that falls between 30 November 2010 and 31 May 2011. As a result of the Government announcement regarding the new defined benefit model, the Pensions Board deferred this deadline for all schemes. Currently, the Board is not in a position to announce a revised deadline and any new date will have to take account of the legislative changes intended by the Government. The new deadline must also allow schemes time to prepare new submissions in the light of any changes.
The indefinite extension of the November deadline could prove problematic for scheme trustees where the preparation of a funding proposal has already been deferred a number of times. The uncertainty created by the announcement will also undoubtedly impact the negotiation of funding plans and could leave the trustees of many schemes in a difficult position. Therefore, it is important the proposed measures are implemented as soon as possible.
The Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 (the “Act”) was signed into law by President McAleese on 19 July 2010 but is unlikely to come into force before Spring 2011. The commencement date of the Act will depend on when the necessary changes are made to the tax codes and social welfare legislation.
The Act provides:
- a statutory mechanism for the registration of same-sex partnerships, setting out the duties and responsibilities of registered civil partners and the consequences of the dissolution of these partnerships;
- the recognition of cohabitant agreements between unmarried same-sex and opposite-sex couples and between unregistered cohabiting same-sex couples; and
- protection of financially dependent cohabitees at the end of cohabiting relationships who have not entered into cohabitant agreements.
The Act deals with the civil registration of same-sex partnerships (“civil partnerships”) which, once registered, give couples rights, obligations and protections comparable to those enjoyed by married couples. A civil partnership will end on death or on its dissolution by a court. The Act specifically provides that a benefit under a pension scheme which is provided for the spouse of a member is deemed to be provided equally for the civil partner of a member. This means that if a pension scheme provides for a spouse’s pension, the registered civil partner is entitled to the same benefit. This will be done by the Act itself and no amendment to the governing documentation of the pension scheme will be necessary./p>
In circumstances where a civil partnership is dissolved, the court may make a pension adjustment order in favour of the non member civil partner which is broadly comparable to those currently available to a spouse on judicial separation and divorce. The difference between pension adjustment orders made on judicial separation and divorce to those made on the dissolution of a civil partnership is the absence of any reference in the Act to the position of children or dependents of civil partners.
Cohabiting couples are not accorded the same rights as married couples or registered civil partners. However, the Act imposes certain rights and obligations on both opposite-sex and same-sex cohabiting couples who have not specifically opted out of the protections afforded by the Act. The Act provides protection to the financially dependent party at the end of a long-term cohabiting relationship in that the non-member cohabitant can apply to court for a pension adjustment order. To avail of such an order, a qualified cohabitant must have been living with another cohabitant as a couple for 5 years or for 2 years where there is a child of the relationship.
The Act is expected to come into force early next year and will fundamentally change the law in relation to civil partners and non-married couples in Ireland. Employers and pension scheme trustees should be aware of this legislation and its implications and, if necessary, update the rules of their pension schemes to provide for the provision of benefits to a member’s civil partner and ensure that all such benefits are properly funded. In addition, on a practical level, employers will need to take greater care when collecting personal data of members regarding their marital / civil status in order to ensure that the scheme caters for this new class of beneficiary.