An occupational pension scheme is usually established by a trust deed. A trust is a mechanism to separate nominal ownership of assets and the beneficial / economic entitlement to them. Under a trust, assets are held by a trustee for the benefit of beneficiaries on certain terms and conditions.
In order to qualify as an exempt approved scheme, it must be established as an irrevocable trust. The use of the institution of the trust has important consequences. The trustees hold title to the assets, but they are not entitled to them, and they cannot be seized by their creditors.
The terms of the trust and rules determine most issues that arise under occupational pension schemes. In some instances, there are statutory rights and rules, which take effect notwithstanding the terms of the rules. It is not necessarily the case that there should be separate pension trust and rules. The entire arrangements could be constituted in trust documents.
Commencement of Scheme
The deed of trust is usually executed by the sponsoring employer. It sets out the basic terms and conditions. The trust deed is the governing document which sets out the mechanics of the trust. There are usually more detailed trust rules, which set out, amongst other matters, the entitlement to benefits.
The deed must be approved by Revenue. It must be registered with the Pensions Authority. A Life Insurance Offices may provide standard documentation which is in a form which meets Revenue requirements.
There may be a simple declaration of trust, letter of exchange or a more formal definitive trust from the outset. Simple schemes may be established by a letter of exchange written on the basis of an intention to set up a trust later. The letter of exchange may contain a basic declaration of trust and rules. Many pension providers operate on the basis of a letter of exchange without the trust being set up, for some considerable time or indefinitely.
In addition to the formal legal documentation, there are obligations on employers and trustees to produce other documentation for the benefit of the members. They include statements in relation to terms of the trust and a scheme book explaining the terms of the scheme. There are ongoing to produce benefit statements, annual reports, accounts and actuarial reports.
Schemes may be established initially under an interim document, before being later established more formally under a trust instrument. The trust is usually supplemented by rules, which set out the entitlements of the pension beneficiaries. Schemes may be established by a letter of exchange with rules, pending entry into a formal trust deed.
The interim deed of trust may be executed before the final formal deed has been finalised. The precise basis for and nature of benefits may yet not be determined. Revenue may be prepared to approve the scheme and allow the commencement of favourable tax status, provided that there is a commitment to fully establish the scheme within a period.
Where an occupational pension is established under an interim trust deed, Revenue rules require an undertaking to execute a definitive trust within a certain period, usually up to two years.
Historically, some interim pension deeds were not followed up by the definitive trust deed. This may lead to difficulties where the scheme ceases or where the employer becomes insolvent prior to putting the definitive scheme in place. The commitment in the trust rules may be specifically enforced. Even where the rules are not specifically detailed, the trust will not be allowed to fail.
The announcement letter may set out the intended terms of the trust, although it is not a legal document as such. Announcements and booklets will not usually be given direct legal effect. The announcements and booklet will usually provide that they are subject to the terms of the trust deed itself. They commonly contain a disclaimer to the effect that their terms are not necessarily definitive. The trust documents and rules are generally constituted as the formal definitive documents.
It may be that there is an error in the rules and that the announcement correctly explains the correct position. In this case, the Courts may be prepared to rectify the scheme rules, if it can be shown that the intention is properly reflected in the booklet or announcement, but is not reflected in the rules.
The rules set out the entitlement to membership and benefits. They should be compatible with announcements made to the employees.
It is possible in principle for the booklet and announcement to prevail over the trust deed where the parties have acted on the assumption that the announcements are definitive. The announcement may bind the trustees and or the employer, depending on who has made it.
The trust deed will provide for the appointment of the initial trustees and for additional or replacement trustees. The employer may have the power to appoint trustees or may have a role in appointing the trustees. In the absence of powers of appointment, the use of the default statutory powers of appointment may be necessary. A court appointment of trustees may be necessary where the statutory powers are insufficient in the circumstances
Pension trusts commonly provide for a power of amendment. It may be necessary over time, to adapt the pensions scheme’s rules to changing circumstances. Provided that the power of amendment is clearly drafted, the courts will give effect to it, subject only to statutory limitations. An express power of amendment may be implied to be subject to limitations. The amendment must be within the terms of Revenue requirements and the Pensions Act.
The principles of interpretation of pension trusts are broadly similar to those applicable to contracts and trusts.
The trust deed will provide for the trustees’ powers. In the absence of specific powers, it may be necessary to make an application to Court which may be expensive, time-consuming and uncertain in terms of consequences.
See generally the sections on trustee powers, including, in particular, their powers as to investment, the appointment of advisors and delegation. The trustees’ powers must be exercised in accordance with their terms and purposes.
The trust deed may make provision limiting the liability of trustees for negligence and breach of duty, provided that they have acted in good faith. It may provide for an indemnity, supported by the trust assets.
The pension trust may allow for adherence by other employers, such as in the case of a group of companies or in the case of an acquired company or business.
Trust law creates very strict duties for trustees. They must not benefit from the trust, other than as expressly allowed. They must act in the utmost good faith. They must not make secret profits or have undisclosed actual or potential conflicts of interest.
The pension trustees are nominal holders of the assets and have powers to deal with them. They have strict and significant duties and obligations arising from trust law, tax and pensions legislation. In the case of certain directly invested schemes with over 50 members, the members have a right to select trustees.
Terms of Scheme
The design of pension schemes and their rules are strongly guided and directed by the Revenue Pensions Manual. The Revenue pensions rules have been in place for many years, in broadly the same format. But for the benefit of taxation exemptions, the provision of pension benefits for the benefit of an employee, would be taxable.
There is considerable variation in relation to the terms of occupational pension schemes. Subject only to what is provided by trust, revenue and pension law, there is a considerable freedom to draft the terms of a pension scheme as the sponsoring employer desires.
There are limitations on the contributions and benefits that may be paid and provided, under tax law, in order to preserve favourable taxation treatment. Failure to secure and retain this treatment would have catastrophic financial consequences. There would be an immediate and significant charge to tax/
A key issue in pension design is the nature of the pension promise. A defined benefit pension usually provides for an annuity on retirement linked to the level final salary. A defined contribution pension promise provides for the purchase of an annuity, based on the value of the pension fund accumulated at retirement. An option to take an ARF may be available to certain persons.
Benefits which may be provided under a revenue approved scheme, include pensions, lump sums, sums paid on retirement, death in service, sums in consideration of past services, death in retirement and sums given in connection with a change in the nature of the service of the employee. They do not include any payment made by reason solely of the death or disability of an employee resulting from an accident in the course of employment.
Employers must make a meaningful contribution to the pension scheme. Pension schemes can be set up in such a way that the employer makes the entire contribution. Alternatively, the bulk of the contribution may by be way of employee contribution. More commonly, there is a mix of employee and employer contributions.
Hybrid schemes have become increasingly common in the last 10 to 15 years, in particular since the financial crisis. The cost of maintaining defined benefit schemes has proved excessive for many employers and few now offer them. Hybrid schemes have been offered by some larger scale employers, who seek to reduce the cost of pensions without removing the defined benefit aspect entirely.
Hybrid schemes have developed as a halfway house between defined benefit schemes and defined contribution schemes. They involve greater risk sharing between employer and employee. From the employer’s perspective, they reduce the risk of a sudden unexpected increase in funding obligations, which may be damaging to the employer business.
Hybrid Scheme Benefits
Hybrid Schemes may provide a combination of defined benefit and defined contributions elements, which together provide retirement benefits. Alternatively, they may be constituted as a defined benefit or defined contribution scheme with characteristics of the other type of schemes.
The defined benefit scheme may refer to part of the employee’s salary only. The employer’s unconditional commitment may be, for example, limited to benefit refer referable to a cap. The employer may agree to make further pension contributions in respect of salary over the cap without any undertaking in respect of how it will relate to that element of final salary.
The characteristics of each type of scheme are combined and typically apply to different bands of income. There may be a floor of basic retirement benefits which are provided on a defined benefit basis. The balance of benefits may be provided on a defined contribution basis. Additional voluntary contributions may be made by the pension beneficiary.
Hybrid Scheme Issues
The defined benefit element may be funded in whole by the employer, although this need not be necessarily so. The defined contribution element may be funded with contributions by the employer and employee. The employer contributions may be fixed or variable, depending on the terms.
There may be greater investment choice offered in relation to the defined contribution element, so that the employee can choose the desired level of risk for this incremental element.
Different legislative rules apply to defined benefit schemes. This requires the segregation of that element of a hybrid scheme. The defined benefit element may relate to part of the pension benefit. Other limits on the pension promise may apply. Above these limits, defined contribution scheme benefits may be provided
Death in service and death on retirement benefits may be provided. Death in service benefits will generally be insured. Death in retirement benefits will depend on the scheme assets and may be part linked to final salary.
Under certain hybrid schemes, there may be scope for an employee to make additional voluntary contributions within revenue limits so as to secure additional benefits within the remaining Revenue maximum.
There may be different categories of scheme members. This is subject to the requirements of equality legislation.
Schemes are generally established by a single employer. It is possible for a number of employers to establish a single scheme, for the benefit of multiple associated corporate employers. Some occupations have industry-wide schemes.
Revenue may approve multi-employer schemes, subject to conditions. Multi-employer schemes most commonly involve associated companies. They are commonly group companies or companies with a sufficient degree of association. There may be a formal joint venture or other community of interest. It may be sufficient that there are interlocking common shareholdings, management or other interchangeable elements.
The associated company may adhere to an existing scheme of the principal employer. Each employer contributes in relation to its own employees, subject to the normal pension benefit conditions. If the association ends, the assets must be segregated proportionately. The scheme may be wound up and its assets transferred. On winding up, the assets are generally apportioned on the basis of contributions.
Revenue may approve industry-wide schemes. Industry-wide schemes have been established in a number of sectors. The association which sponsors the scheme, must be representative of the industry and those who would wish to participate. They may be established as a trust retirement annuity contract.
There must be reasonable prospects of continuity and sufficient scale. All participating employers must have the scheme as their basic scheme. Restrictions required by Revenue limits will be effected outside the scheme.
A prominent example is the General Medical Service pension scheme for medical practitioners, applicable to pensionable income from the HSE. The member’s income is treated as being in the nature of employment income. AVCs of 5% of salary are required.
Single Member Schemes
It is possible to have an occupational pension scheme for one person. They are defined contribution schemes for the benefit of a single particular employee. Such schemes are commonly established because they enjoy privileges in relation to investments and leverage, that do not apply to personal pension schemes and other occupational pension schemes.
Single-member retirement schemes are registered with the Revenue as with other occupational schemes. They may be operated by insurance companies and other providers other. They are exempt from many of the general occupational pension scheme requirements. In some respects, their treatment is similar to that afforded to retirement annuity contracts. Funding limits do not apply to the scheme. The limitations operate at the contribution level only.
The Revenue Commissioners may approve a generic single member retirement benefits scheme as they see fit and subject to the conditions they think appropriate to the approval. The retirement benefits scheme (in effect a single member scheme) set up under an approved retirement benefits product is deemed to be an approved retirement benefits scheme.
Deeming the retirement benefits scheme to be an approved scheme (deemed established under irrevocable trusts) means that they are considered “exempt approved schemes” for the purposes of the tax reliefs on contributions and fund growth.
References and Sources
Irish Pensions Law & Practice Buggy, Finucane & Tighe 2nd Ed (2005) Ch.4
Pensions; Revenue Law and Practice (ITI) McLoughlin, Dolan et al (2013) Ch.11
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)