Posted by Jill Kerby on November 26 2013 @ 09:00
DEFINED BENEFIT PENSIONERS COULD LOSE INCOME FROM NEW LEGISLATION
Are you a pensioner whose defined benefit pension scheme is in deficit and might be wound up? Are you a DB pensioner whose company is in serious financial difficulty?
You could be in for an unpleasant Christmas present from the government, one you would have preferred not to receive: new legislation that could cut your pension income in order that there is a more fair sharing of the remaining money in the scheme if such a winding-up or company collapse should happen. l
About half of all private pension fund members are in defined benefit or final salary pension schemes; 85,000 pensioners receive their monthly income from such schemes.
About 60% of all DB schemes – which promise workers a pension income proportionate to their final salary and years of service – are in deficit. Only a year of so ago, 80% were in deficit, meaning their assets could not meet the cost of all the benefits that have been promised to the members. (Rising stock market returns have reduced those losses.)
Unfortunately, these pension schemes are unaffordable and unsustainable. We are living much longer. Stock market returns are not consistently high enough. Bond prices are too high and yields too low. Strict accounting rules mean most companies can no longer afford the generous retirement promises that typically amounted to 50%-66% of final salary if the worker served their full 40 years service. (Or 25%-33% if they only worked 20 years.)
Nearly all DB schemes are closed to new workers who are switched into ‘defined contribution’ ones where the pensioner’s income reflects the amount put into their pension fund and its accumulated investment value.
Typically, DC schemes pay a pension that is a fraction of the value of DB ones. For example, someone retiring on €35,000 salary after 40years will be very lucky to accumulate a DC fund worth €150,000. This might buy them an annual income of €6,500 a year, and their widow, 50% of that. DB pensioners with full service could expect a pension of €17,000-€23,100 and the 50% widow’s benefit.
Some unsustainable DB schemes have been restructured, requiring more savings and lower benefits. Those that close altogether result in existing pensioners getting the largest cut of the value of the fund and workers and deferred members sharing what is remaining, often in the form of a ‘buyout bond’ that they collect at retirement.
Where both the DB scheme and host company have failed only the existing pensioners’ pensions have had to be honoured because the government failed to implement the EU directive to compensate such pensioners (and workers/deferred members).
Waterford Glass workers who found themselves in just this position took their case to the European Court of Justice and won – hence the new legislation. The new rules are complicated, but you can find details on www.pensionsboard.ie
But what impact will the new distribution and compensation regulations have on existing pensioners who might be affected?
In essence, if only your company pension scheme is in deficit and is either restructured voluntarily or must be wound up, your existing pension will be honoured up to €12,000. If there is insufficient money left to meet the cost of your entire pension after taking into account the rights of worker members and deferred members to a share of the fund, then any other cuts that effect you will be no more than 10% of your pension up to maximum pension value of €60,000.)
Where both your pension scheme and the company are insolvent and shut down, the new law allow trustees to cut the existing pension in half, but only for amounts over €12,000. If you have been receiving €20,000, you will now only receive €16,000.
If the scheme is so insolvent that even this amount cannot be paid, state compensation will kick in, but private pension holders will have to contribute 0.15% of the annual value of their pension fund savings even if their fund is losing money.)
If you are worried that you are a pensioner member, or even a worker or deferred member of a defined benefit pension scheme that is in deficit, is currently trying to restructure the scheme because it is in deficit or might be wound up, speak to the company pension administrator, trustee or your trade union representative.
If you are near retirement and there is a risk that your company was going to go bust, this legislation is good news for you. But a maximum €12,000 annual income may be much, much less than you were counting on if you had stacked up nearly 40 years of service.
You need to get this information about your scheme and then speak to a good, fee-based financial adviser who specialises in pensions.
You may have some serious lifestyle adjustments to make.