The key points to note in relation to the pension levy are:

  • a levy of 0.6% of the value of pension scheme assets (excluding contingent assets) will have to be paid on or before 25 September 2011 and annually thereafter for a further three years;
  • insurance companies are responsible for the payment where the assets are held in an insurance contract and have the power to reduce benefits as if the levy were an expense;
  • trustees/investment managers are jointly responsible for the levy in respect of assets which are not held in an insurance contract;
  • trustees will seek reimbursement from the employer in most cases and it is likely the employer will request the trustee to reduce benefits in proportion to the levy in most cases - the outcome will depend on the circumstances of the scheme and the employer.

Introduction

The Finance (No. 2) Act (the "Act") was signed into law on 22 June 2011 and introduces a four-year annual levy on private pension funds. The Government aims to raise approximately €470 million each year as part of its Jobs Initiative from a 0.6% levy on the assets of occupational pension schemes, Retirement Annuity Contracts and Personal Retirements Savings Accounts (except where under the RAC/PRSA the retirement lump sum has been paid and the annuity purchase deferred in which case the levy does not apply). The levy does not affect assets in insured annuities in payment, Approved Retirement Funds (ARFs) and Approved Minimum Retirement Funds (AMRFs) as they are not pension schemes for the purposes of the Act.

Mechanism

The levy is designed as a stamp duty on an asset statement which certain "chargeable persons" are required to deliver to the Revenue on an annual basis in each of 2011, 2012, 2013, and 2014. The amount of the stamp duty is 0.6% of the value of the assets (which includes debts i.e. outstanding contributions due but not contingent assets) held for the purposes of the scheme by the chargeable person.

The value of the assets is determined on 30 June in each year where the assets comprise an insurance contract and the chargeable person is the insurer (not the trustees).

For non-insurance contract assets the value of the assets is determined on 30 June or at the end of the previous scheme year ending in the 12 months immediately preceding 30 June for that year.

There is a degree of uncertainty in the legislation about responsibility for payment as it appears that each chargeable person must submit a statement (although that would lead to double charging which is inconsistent with the government's intention). It is also not clear whether the trustees or investment managers will lead this process and how payments will be co-ordinated. It is anticipated that trustees will organise and be responsible for the payment of the levy and that where trustees have submitted a statement, managers will not do so. Hopefully this will be addressed in guidance from the Revenue Commissioners.

Interest and penalties will apply to late payment. The penalty is a flat charge of €380 per day.

Overseas employments and insolvent employer wind-ups excluded

Scheme assets relating to employments wholly outside the State are not affected.

The levy will not apply to schemes where the trustees have passed a resolution to wind-up the scheme and the employer is insolvent.

Current queries

Do Members Pay?

Many companies are considering asking trustees to reduce members' (including pensioners') benefits. In the case of a defined benefit scheme and in respect of the very small amount of defined contribution assets not held under an insurance policy the Act provides a discretion for trustees to reduce benefits but does not compel them to do so.

While the Act seeks to disapply the Pensions Act and all other applicable rules of law it may be a challenge, depending on the circumstances of the scheme, for trustees to reconcile acting in members' interests with acceding to a request to reduce benefits in a balance of cost defined benefit scheme. If a stalemate occurs the members will not pay and the levy simply reduces the scheme's funding level.

Defined benefit pension schemes will need to obtain actuarial advice in relation both to the basis for calculation of liabilities and to ensure that the pension levy imposed on any member (if the cost is not being borne by the employer) does not exceed that member's pro rata share of the levy (calculated by determining the proportion of the member's liability to total scheme liability as required by the Act). In contrast, in an insured defined contribution scheme the insurance company (which is not constrained by fiduciary considerations) will most likely reduce benefits without consulting the trustees. If a stalemate occurs between the trustees and the employer company over possible reimbursement, the members will pay as the company cannot be forced by the trustees to reimburse the levy.

Ask the Employers?

Trustees of all schemes will no doubt request that the employer contributes to reimburse the scheme for the cost of the levy.

AVCs

Members accounts in insured AVC contracts will have the levy imposed by the insurance company. Trustees are not responsible for accounting for the levy on these assets.

Timing of payment

Insurance companies and defined contribution schemes must value the assets at 30 June but are not required to pay the levy until 25 September. It is not yet clear what will happen to the money in the interim and whether it is necessary to deduct the levy immediately on 1 July.

Timing of contributions

As the assets of a scheme include debts, the levy is payable in respect of contributions due but outstanding. If a regular contribution or funding proposal injection is due but has not yet been paid it should be counted in the assets for the purposes of the levy.

Clearly further queries will come to light including how benefits might be reduced particularly in defined benefit and hybrid schemes and the answers to these are not always straightforward.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.