Introduction

Defined benefit schemes (hereinafter DB schemes) provide members with retirement and death benefits based on formulae set out in the rules of the scheme. Benefits are often based on a member's salary at retirement age and on his or her pensionable service. The pension benefit under a DB scheme are often for a lump sum up to 1 ½ times final remuneration and for an annual payment up to 2/3 final remuneration. Sums greater than this are not as tax efficient. Very often account is taken of the State pension in calculating a members pensionable salary.

The trustees of a DB scheme must submit an actuarial funding certificate (AFC) to The Pensions Board at least every 3 years, signed by an actuary. The certificate demonstrates that the scheme complies with the funding standard under the Pensions Act, stating whether the scheme is capable of meeting specified liabilities in a statutory order of priority in the event of its being wound up on the date of the certificate.

The Funding Standard ensures that a DB scheme has sufficient funds to secure the pensions rights that members have built up should the scheme have to be wound up at any stage. To comply with the funding standard, a DB scheme must be able to meet certain liabilities, as set down in the Pensions Act.

The problem

Many DB schemes do not meet the funding standard required because of inter alia the worldwide market turmoil since 2007. The projected assets do not meet the projected liabilities. As a result many DB schemes have been closed off to new members after a certain date. Trustees are unsure what to do with the scheme going forward and members are unsure what benefits they can expect on reaching normal retirement age.

What happens when the DB scheme does not meet the funding standard

If a DB scheme doesn't meet the funding standard set out by the Pensions Act, the scheme trustees

must submit a funding proposal to The Pensions Board explaining how they intend to rectify the scheme's funding. The funding proposal must bring the pension into compliance with the funding standard within 3 years, or such longer period as determined by the pension board being the later of 21/12/23 or 6 years from the commencement of the funding proposal.

The trust deed should be analysed to see whether the employer has any obligation to contribute to any deficit. Some trust deeds allow the trustees to serve a contribution demand notice on the employer if the funding of the scheme is not sufficient. This might mean that the amount specified becomes a debt against the employer and can be enforced against the employer as a contract debt. In proceedings by some members against the trustees of the DeBeers/Element Six pension fund, currently awaiting adjudication before the Irish Commercial Court, one of the arguments is that the trustees failed to exercise their power to require the company to make a contribution to fund the full deficit. Much will fall on the interpretation of the trust deed in that case.

If the funding of the scheme is not sufficient to satisfy the Funding Standard, the Pensions Board can make a "Section 50 order" of it's own initiative or at the request of the trustees. Under such an order, accrued benefits relating to members' past service (excluding pensions currently in payment) can be reduced. Trustees must have asked the employer for the contributions necessary to sustain the scheme without benefit reductions, and the employer must have declined to pay those contributions. Members must be notified of the proposal and are allowed make submissions in relation to the proposal which submissions must be considered by the trustees. When relevant sections of the Social Welfare and Pensions (Miscellaneous Provisions) Act 2013 are commenced, prescribed persons (which term is likely to include trustees or members) will be able to appeal a section 50 order to the High Court. Also, the pensions board will be able to winding up a pension scheme (s.50.B order) where inter alia a scheme is underfunded but will have to consult with scheme members before making such an order.

Perhaps the last option is the winding up of the pension scheme. As to what happens to the funds on winding up, you should first look at the trust deed and the trust guidelines. Regardless of this, The Pensions Act 1990, as amended ('the Act'), requires that pension benefits be paid in the following order:-

  1. Benefits relating to additional voluntary contributions (AVCs), including AVCs that were transferred from another scheme
  2. Benefits owed to members who have reached normal retirement age (NRA) (excluding future pension increases).
  3. Benefits owed to members who haven't yet reached NRA
  4. Future increases on benefits.

This means that the benefits payable at 2. must be paid off in full before any benefit payable at 3. is paid. This could result in the persons in category 2. being given an annuity equivalent to say 70% of what would have been their full pension, with the persons in category 3 receiving nothing. This is criticised as being arbitrary but there is no legislation currently on the table to rectify this.

How to litigate for members who do not get their full DB pension entitlement

Just because a particular member does not get their full entitlement does not mean there is a good claim. However, if a member can show the trustees or employer acted in breach of the trust deed or the trust rules or the trustees acted in breach of fiduciary duty or the trustees or employer acted in contravention of a direction from the pensions board, then there might be a good claim.

A complaint can be made to the pensions ombudsman. It is a requirement to complete any internal dispute resolution (IDR) procedure before such a complaint is made. The pension ombudsman can order inter alia compensation to be paid by the employer or trustee to the claimant which order is without monetary limit and is enforceable in the Circuit Court. By analogy with case-law on the financial services ombudsman litigation, it is likely that a case brought to the pensions ombudsman estops the claimant from later bringing the same complaint before a court by way of plenary proceedings.

Alternative to the ombudsman route, court proceedings might be brought against the trustees or against the employer. For such a claim, the trust deed and rules should be analysed carefully. It is sometimes a requirement in the trust rules to litigate any dispute by arbitration.

If the DB scheme is wound up, members of the DB scheme who do not get their full benefit might take an action against the State. Article 8 of Directive 2008/94/EC (hereinafter the directive) provides inter alia that member states shall take necessary measures to protect entitlements of members under occupational pension schemes. The directive leaves to the member state to decide what form the protection should take. The directive only applies where there is a double insolvency - where the employer is declared insolvent and the pension scheme is declared insolvent.

The Irish State has adopted two measures to comply with the directive. First, the Protection Of Employees (Employers' Insolvency) Act, 1984 (hereinafter the 1984 Act) provides the employer insolvency fund will discharge any contributions due from the employer in the 12 months prior to insolvency of the employer. Second, the pension insolvency payments scheme (PIPS), introduced in 2009, allows the trustees of a DB scheme to pay a sum to the exchequer to cover the cost of paying pension benefits of pensioners (as distinct from active of deferred members) instead of buying annuities.

In Robins v Secretary of State for Work and Pensions C-278/05 the ECJ held that the UK did not adequately protect the interests of employees in accordance with Article 8 of the Insolvency Directive, where an employee would receive less than half of her pension entitlements on wind-up. After this, the UK introduced a Pension Protection Fund which gave around 90% protection to employees' pension entitlements in the case of a double insolvency, subject to a cap.

In Hogan v The Minister for Social and Family Affairs Case C-398/11 the ECJ held that Ireland did not adequately protect the interests of employees in accordance with Article 8, where the plaintiffs were likely to get between 18% and 28% of their full entitlements on one calculation and between 16% and 41% on another calculation. The matter has been returned to the High Court to determine just what percentage the plaintiffs should get.

In summary, if claimants can show that they will get less than half of their entitlements from the winding up in a double insolvency situation, they are likely to have a good action against the State for failure to implement Article 8. It is likely that even with the 1984 Act or having a PIPS in place, many members will still not get less than half of their entitlements from the winding up.

It is likely the State will introduce measures to ensure compliance with article 8 such as setting up a pension protection fund financed by levies on existing pension schemes or by imposing liability for a portion of the deficit on employers.

I will try to update this article as developments arise.

This article is for information purposes only and is not a substitute for legal advice.