Employment and Pensions
An occupational pension scheme is one established for the benefit of employees. Subject to Revenue Commissioner’s approval and compliance with Revenue requirements, an occupational pension scheme may qualify for significant tax benefits. See the relevant other articles in relation to the tax benefits at the contribution stage and the benefits within the pension scheme fund itself.
The terms of an employee’s rights in respect of a pension will depend on his employment contract and the terms of the pension scheme. A pension promises in an employment contract or in pre-contract discussions, literature or negotiations, can be costly for an employer. The cost of funding pension promises can be very significant.
The retirement age is a critical part of the equation. Earlier retirement causes a steep increase in the funding requirements.
If the pension promise is expressed or provided in terms that are overly rigid, their potential cost is exacerbated, by the inability to vary the contracted benefits in response to circumstances. The employer may wish to have the power to amend the scheme or cease contribution. An amendment or change on contributions may be necessary by reason of changed financial circumstances.
Employment Contract Terms
It is usual and desirable from the employer’s perspective, that the employee is (merely) entitled under the terms of his employment contract, to become a member of the pension scheme, subject to its terms and conditions. The pension scheme is usually a separate arrangement set up under a Revenue approved trust. Generally, the scheme is capable of being amended by its terms, from time to time.
From an employer’s perspective, it may be preferable that there is no implication in the employment contract, that there will always be a pension scheme and that the employer will always contribute to it. An employer will commonly wish to retain the right to stop making contributions. It In this case, contributions made to the relevant date will preserved, but no further contributions will be made. Employee contributions may continue.
An employer will commonly have the right to wind up the scheme. In this case, benefits must be preserved and transferred another pension “vehicle”.
The pension trust documents may specify what a member is entitled to, on leaving employment. A person who leaves is entitled to take deferred benefits under the scheme. In an unfair dismissal claim, the future value of pension benefits may be taken into account. There is, however, an overall limit of 104 weeks remuneration.
Revenue approval and the Pensions Act disclosure requirements require that information regarding the pension scheme, be announced and disseminated to the members. Revenue requires that there be an explanatory announcement or booklet, setting out the main features of the pension. The disclosure regulations contain similar requirements. The employees must be given details of the pension provision, upon commencement of employment. Pension trustees must disseminate information to members from time to time.
The booklets and guides will invariably provide that their terms are not definitive. The wording of the trust and other pension documents will be stated to take precedence. The booklet should be merely a guide and should refer members to person documents and other sources, from whom more information can be obtained. They will often deal with a wider variety of matters, than benefit entitlement. The booklets, information and announcement should be consistent with the terms of the scheme.
The employer may be estopped from denying that a particular position applies, where members and prospective members have acted on the basis of the announcement and booklets, where the trust deed does not reflect the announced position. The promise must be clear. The reliance by the parties must be reasonable in the circumstances.
Employment contracts will generally provide for the employee’s membership of the pension scheme as constituted under the rules, subject to the trustees’ powers, including the power of amendment. Trust deeds will generally be capable of being amended.
In some (unusual) cases, the employer may make a contractual promise in terms that are inconsistent with the powers in the trust deed, including powers of amendment. The announcements may become binding on the employer by the terms of the employment contract or by way of an announcement which has been relied on. However, it may be that the contract or announcement does not bind the trustees of the scheme.
Contributions to an unapproved pension scheme are taxable benefits, as regards the employee, notwithstanding that there is no immediate financial benefit. For this reason, occupational pension schemes are almost invariably established as Revenue approved schemes. They are usually established under trusts. The trust will usually contain common template terms, reflective of what the Revenue permit.
The extent to which the employer contributes to the scheme will depend on its terms. The employer may, but need not necessarily contribute to the scheme, beyond an obligation to contribute to its establishment and operation.
Formerly, an employer was obliged to contribute not less than one sixth of the costs of the benefits. It is now sufficient that the employer bears the cost of establishment, ongoing operation costs and the cost of death on service benefits. Alternatively, contributions of not less than ten percent of the ordinary contributions are sufficient for Revenue approval.
The express or implied terms of the employment contract may bear on the employer’s right to terminate contributions. The employer must act in good faith. They must not act in manner that breaches the implied duties of confidence and trust between employer and employee.
Role of Employer
The role of the employer will depend on the circumstances. The pension scheme will normally exist separate from the employer. The trustees manage the scheme, hold the funds and appoint investors, advisors and administrators. The employer may have power to appoint and remove trustees. In smaller cases, the employer may be a trustee, although this is not best practice, in view if the likely conflict of interests.
The power to admit additional members, may rest with the employer or with its consent. The employer’s consent will usually be required to increase or vary the benefits. There may be a power to amend the scheme with the consent of the employer. The trustees and employer will be usually being required to consent to a variation.
Exercise of Discretion
Employers may have discretion in relation to a range of matters under the terms of the pension scheme. They may, for example have discretion in admitting new members, to vary benefits to reduce or cease contributions or to wind up the scheme.
If the employee is a trustee it, will be obliged to act in good faith and for legitimate purposes, in exercising its discretion under a pension trust deed. Even if the employee is not a trustee, where the scheme provides for discretionary benefits, the courts have held that the employer must usually act in good faith in the use of their discretion.
The express or implied terms of the employment contract may affect the exercise of the employer’s discretion under the pension scheme. Generally, the employer must not act in manner that breaches the implied duties of confidence and trust between employer and employee. The courts take account of the employee’s legitimate expectations and the quasi- proprietary nature of the pension.
Generally, employers may not vary benefits, other than in good faith. Accrued rights and benefits cannot be taken away. The courts will not readily permit changes that have any retrospective element or affect legitimate expectations and entitlements. The terms of the pension trust will be critical.
Material amendments must be notified to employees under the disclosure regulations and under terms of employment legislation.
Certain non-residents who have taxable employment or trading income in Ireland may receive tax deductions for their contributions to the foreign scheme. “Migrant” workers may be given Irish tax relief on contributions to overseas pension schemes. Migrant workers are persons resident in Ireland, who were previously resident outside Ireland for at least three years in another EU State prior to coming to Ireland.
The foreign employment income must be pensionable employment in order to qualify. The employee must procure that the administrator of the foreign funds furnishes certain information to the Revenue. The migrant must have made pension contributions to an arrangement equivalent to a domestic occupational pension scheme or personal pension in that state, which was tax-deductible in that other EU State.
Pension Surplus I
The pension fund maxima apply to both defined contribution schemes and defined benefit schemes. They effectively limit the extent which investments may be made in the favourable tax environment of a pension scheme
There may be a surplus or shortfall within a pension scheme. Questions may arise as to the ownership of the surplus. The surplus may facilitate an employer in taking a contribution holiday.
A surplus may arise on a part or full sale of the employer company or its business. The vendor may be compensated for the benefit of the surplus, within the company.
The question as to whether there is or is not a surplus, may itself be complex. They will depend on the future assets and future liabilities of the scheme. This will be dependent on assumptions as to investment returns, from the date concerned until the date on which the liabilities to pay pensions and other benefits mature. Experience in the first decade of the Century shows that apparent funding surpluses may disappear and reverse when investment markets turn.
Pension Surplus II
The entitlement to the surplus will be determined by the terms of the trust deed and by general principles of law. The surplus may belong to the members, on the true interpretation of the trust deed. The employee contributions are likely to be vested, so that they belong to them unconditionally.
The employer’s obligations under a defined benefit scheme may be to pay the additional contributions required to pay the promised benefits. The trust deed may specifically allow the employer to claim the surplus. Provided that the wording is clear, the employer may claim to the surplus. However, very clear wording is required.
The trust deed may allow for a contribution holiday rather than a repayment, where there is a surplus. This will be more readily inferred where there is no provision or where ambiguous provision is made. The trust deed may require that the trustees consent to cessation of contributions for a period.
Pension Surplus III
It has been held that employees may have a reasonable expectation that in dealing with surpluses, employers will have due regard to their interests. This approach follows from the trust setting, the employment relationship and the purpose and objectives of the scheme. Where, for example, there is a discretion as to how the assumed surplus is to be dealt with, there may be a reasonable expectation that the powers will be exercised in a manner that is fair and equitable, having regard to the purpose of the scheme.
The courts have emphasised that pension schemes operate in the context of employment, which creates a relationship of trust and confidence. This may import an obligation for the employer, insofar as it has powers and rights under the scheme, to act in the manner that will not damage this relationship. The duty may be in the nature of the duty of good faith. However, the duty to have regard to the employee’s interests and to act in good faith does not necessarily prevent the employer from acting in its own interests.
Where a fund is overinvested to the extent of 10% of assets, Revenue require it to be adjusted under their pension rules. They require the surplus to be used in order to safeguard the approved revenue benefits. This may be done by increasing benefits within the Revenue limits or by a holiday contribution. Refunds are contemplated by Revenue practice in very limited circumstances only.
Insolvency will usually cause the winding up of the pension scheme. Unpaid pension contributions are a preferential debt in liquidation and receivership. They also have priority over floating charge holders.
If the employer has failed to make the contributions which are due, payments may be made by the social insurance fund. The total sums payable, is the lesser of amounts payable in the 12 months preceding insolvency and the amount certified as necessary to meet the liabilities of the scheme.
Employers have a range of obligations under pensions legislation. They must pay or remit contributions agreed to be made. If there is no occupational pension scheme, employers must provide access to a Personal Retirement Saving Accounts. See the sections on PRSAs.
There may be a group pension scheme for all companies in a group. The Revenue will permit group schemes for the companies are associated.
The promise is commonly to entitlement to membership to the scheme, subject to its terms and conditions from time to time.
The pension promise is limited, for example, to entitlement to membership of the employer’s pension scheme, subject to its terms and conditions from time to time.
References and Sources
Irish Pensions Law & Practice Buggy, Finucane & Tighe 2nd Ed (2005)
Pensions; Revenue Law and Practice (ITI) McLoughlin, Dolan et al (2013)
Trustee Handbook the Pensions Authority 5th Ed 2016
Statutory Guidance the Pensions Authority (Various)
Pensions Law Handbook 12 Ed Nabarro Nathanson Bloomsbury
Corporate Insolvency 6e: Employment & Pension Rights (6th Revised edition)
Occupational Pensions (Subscription) Lexis Nexis
Pensions Law and Practice with Precedents (Subscription) Sweet & Maxwell
Sweet & Maxwell’s Law of Pension Schemes (Subscription)
The Guide for Pension Trustees World Economics Ltd
The Guide for Pension Trustees website, you can:
Tolley’s Pensions Law Looseleaf Service (Subscription)
Pensions Act, 1990
Pensions (Amendment) Act, 1996
Pensions (Amendment) Act, 2002
Pensions (Amendment) Act, 2006
Social Welfare and Pensions Act, 2005 (Part 3)
Social Welfare Reform and Pensions Act 2006
Social Welfare and Pensions Act 2007
Social Welfare and Pensions Act 2008
Social Welfare (Miscellaneous Provisions) Act 2008
Social Welfare and Pensions Act 2009
Social Welfare and Pensions (No. 2) Act 2009
Social Welfare (Miscellaneous Provisions) Act 2010
Social Welfare and Pensions Act 2010
Social Welfare and Pensions Act 2011
Social Welfare and Pensions Act 2012
Social Welfare and Pensions (Miscellaneous Provisions) Act 2013
Social Welfare and Pensions Act 2013
Social Welfare and Pensions (No. 2) Act 2013 49/2013
Social Welfare and Pensions Act 2014
Social Welfare and Pensions (No. 2) Act 2014 41/2014
Social Welfare (Miscellaneous Provisions) Act 2015 12/2015
Social Welfare and Pensions Act 2015 (Part 3)