Summer 2012

The Social Welfare and Pensions Act, 2012 (the "2012 Act") was passed into law in February of this year. The 2012 Act amends the Pensions Act, 1990 in a number of ways. The main changes are:

  • The introduction of a risk reserve into the funding standard. This will apply to the all schemes that did not meet the statutory minimum funding standard ("MFS") on 1 June 2012. The Department of Social Protection have issued a press release indicating that the requirement to provide for a risk reserve will take effect from 1 January 2016. The current statutory minimum funding standard, which has been in abeyance for some time, will be restored and will apply until 1 January 2016. The standard will be revised to provide an allowance for the purchase of sovereign annuities and bonds. The Pensions Board has published deadlines by which schemes that are in deficit must submit funding proposals. Such schemes must submit a funding proposal by the later of 31 December 2012 or within 12 months from their last scheme year end falling on or before 31 May 2012. Funding proposals should have a term of three years but the Pensions Board may consider a longer term in exceptional circumstances. The normal maximum term allowed by the Board will be six years or until 31 December 2023 if later.
  • The submission of an actuarial funding reserve certificate with effect from 1 January 2016 in addition to an actuarial funding certificate. If either certificate indicates that the scheme does not satisfy the MFS, the scheme must, except in certain circumstances, submit a funding proposal to the Pensions Board which will seek to restore funding by the next funding certificate date.
  • The extension of section 50 orders to reduce prior revaluations of a preserved benefit. Previously the extent to which preserved benefits (and revaluation increases to preserved benefits) could be reduced by section 50 was unclear. The resulting benefit (after the section 50 reduction) must still be revalued in future in line with Pensions Act requirements – but this can be taken into account in setting the level of reduction.
  • The 2012 Act permits the Minister the publish guidance in relation to the types of assets that can be used by trustees of pension schemes to meet all or part of their obligation to hold a risk reserve. The Pensions Board has published guidance to the effect that trustees may meet that risk reserve through a legally enforceable employer undertaking that satisfies the specific conditions set out in the Board's guidance. Employer undertakings may only be used to meet some or all of the risk reserve and may not be used to meet any part of the MFS. The self-investment and concentration of investment restrictions do not apply to these undertakings.

The Minister for Social Protection has indicated that these changes have been introduced because the Government wishes to support defined benefit pension schemes to become "more sustainable, stable and secure for the future". The Pensions Board has published statutory guidance to help trustees and their advisors understand the new rules.

Increase in State Pension age

The first change in the State Pension age will take effect from 1 January 2014. This will occur by removing the entitlement to the State Pension (Transition). This means that with effect from 1 January 2014 there will be a standard State Pension Age of 66 for everyone. People who qualify for the State Pension (Transition) prior to 1 January 2014 will remain entitled to it for the year between their 65th and 66th birthdays.

Pension schemes with bridging pensions or temporary supplements (payable between a normal retirement date of less than 65 and commencement of the State Pension) payable to members should start to look at the implications of the change in State Pension Age to their benefit structure.

Due to the current wording of the Pensions Act, it is unclear whether it will be possible to cease payment of the bridging pension or temporary supplement at age 65 where a member is not entitled to the State Pension until age 66 (or later). The Pensions Board and relevant Government Departments are currently reviewing the interaction between the change in the State Pension Age and existing legislation. It is intended that amending legislation will be prepared to address any anomalies that may occur. In the meantime, trustees and employers should begin considering whether it is necessary to amend their schemes and if so, how.

Case law update

There have been a number of recent UK pension cases which would be of persuasive authority in the Irish courts.

Seldon v Clarkson, Wright and Jakes – age discrimination case

In this UK case, a partner in a law firm claimed that a compulsory retirement age of 65 under the firm's partnership deed constituted direct age discrimination. The law firm did not dispute that Mr Seldon had been dismissed on grounds of age but said that this could be justified as a proportionate means of achieving a legitimate aim. The Supreme Court held that a justification for direct discrimination must have some public interest basis and that the basis must also be legitimate in the particular circumstances of the case. The Court held that the firm's aims of staff retention, workforce planning and avoiding performance management of older partners met this test.

However, even if the aim in question passes these tests, the employer must still prove that the proportionality test has been met (i.e. that there were no less discriminatory means available to the employers to achieve their aims) and as a result the matter has been referred back to the Employment Tribunal for the proportionality point to be considered.

Bradbury v BBC – contractual pensionable salary caps valid

The English High Court has found in favour of the BBC in relation to an appeal from the determination of the UK Pensions Ombudsman. Mr Bradbury complained that his employer, the BBC, had effectively coerced him into leaving his more generous final salary pension scheme by offering him a salary increase on the basis that the increase in his pensionable pay would be limited to 1% in each year.

The BBC argued the cap was necessary to reduce the substantial scheme deficit and it was entitled to determine what part of an employee's remuneration counted as pensionable salary. As an alternative, it argued a member's individual agreement to the cap would be binding. The judge found that the wording in the scheme was not wide enough to permit the BBC to determine which part of salary was pensionable and which was not. However, it did find that on the facts of the case an extrinsic agreement with the member could be effective to impose the cap notwithstanding the scheme provisions.

The issue of the implied duty of good faith between an employer and employee was raised by Mr Bradbury before the Pensions Ombudsman but was not included as part of the appeal to the High Court. The judge did note, that while a breach of the implied duties might invalidate an agreement between member and employer he emphasised that such cases would be rare.

The Procter & Gamble Company v Svenska Cellulosa Aktiebolaget SCA and another – transfer of rights on TUPE

The principles arising from the seminal cases of Beckmann v Dynamco Whicheloe Macfarlane Ltd and Martin v South Bank University have been considered by the English High Court for the first time.

The Beckmann and Martin cases determined that certain rights under occupational pension schemes transfer under the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 ("TUPE"). TUPE does not apply to employees' rights to old-age, invalidity and survivors' benefits under supplementary company pension schemes. The rights that do transfer are: (a) early retirement benefits contingent upon dismissal (on the grant of early retirement by agreement with the employer); and (b) benefits intended to enhance the conditions of such retirement, paid in the event of early retirement arising by agreement between the employer and the employee to employees who have reached a certain age.

The English High Court has clarified two of the queries arising from the original decisions: (1) if the rules of a pension scheme provide for early retirement to be available subject to the consent of the employer, then an employee's right to be considered for early retirement benefits in good faith transfers to the buyer under TUPE; (2) the buyer assumes liability only for the "pre-retirement" benefit (i.e. the enhancement over and above the deferred pension) – the liability for benefit from normal retirement age does not pass under TUPE and remains the liability of the transferor.

Where transferring employees become deferred members in the seller's scheme on the TUPE transfer, they cannot make a double recovery by claiming entitlement to a full early retirement pension from the buyer too.

Sadly, it remains unclear (from a case concerned with valuation of obligations rather than implementation) exactly how in practice the benefits will be provided if the employer consent is forthcoming and to what extent the receiving employer can refuse consent. The case against Beckmann indemnities on a TUPE transfer of employees is now stronger but they are still likely to be sought.

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.