Insolvency

General Insolvency issues I

The employers insolvency legislation may cover unpaid contributions, at least to an extent. The legislation covers a range of occupational pension schemes.  It covers pension arrangements which provide for benefits on retirement for employees.

The sums which may be payable from the Insolvency Fund (subject to the post 2007 amendments) are the amounts payable, but unpaid in the 12 months prior to insolvency or the amount required to meet the liabilities of the scheme on an actuarial valuation, if less.

The pensions insolvency scheme, details of which are set out below now applies.


General Insolvency Issues II

The insolvency scheme provides for a claim on the fund in respect of contributions which have been deducted but not paid, whether employer or employee deductions. Contributions due which have not been paid, are a preferential debt. They have priority in a liquidation, after the liquidator’s expenses and in a receivership, after expenses and before the claims of the floating charge holder.  They rank after the claims of fixed charge holders over assets.

Preferential payments abate proportionately with other classes of preferential payments, where there are insufficient funds available to pay the preferential creditors in full.

If a payment is made from the insolvency scheme, then the scheme will stand in place of the employees or trustees in terms of their entitlement.  The scheme may accordingly claim as preferential creditor.  The provisions apply in personal and corporate insolvency.


Insolvency Officer

If the employer is trustee, the question arises as to whether on insolvency, the receiver or liquidator succeeds to the powers of the company as trustee.  A receiver is unlikely to succeed, as a debenture is unlikely to effectively assign rights which are fiduciary in nature, to the receiver.

A liquidator succeeds more clearly to with the powers of the company (and its directors) including its powers as trustees. The liquidation may trigger the winding up of the pension itself.

The liquidator’s duty is to the creditors as a whole, whereas, the company’s duty as trustee is to the beneficiaries. The liquidator’s duty is to the creditors or the members where it is solvent. A receiver’s duties are owed to the appointing creditor.  Either  may claim an interest in a potential surplus. Acute conflicts of interest may arise in such cases. A court application would be likely to be necessary, for the proper exercise of trustee powers.


Solvency Experience

The dramatic collapse in the value of investments in the 2007-2012 financial crisis had a profound effect on the solvency of many pension schemes. Many schemes became insolvent. Prior to that, many schemes had become overfunded due to greater than expected investment return.

Subsequent to the crisis many insolvent schemes regained solvency, through improved investment performance, benefit adjustments or increased contributions.

Issues of formal pension scheme solvency do not arise in respect of pay-as-you-go public sector schemes.  The State established the National Pension Reserve Fund in order fund future public sector scheme obligations.  However, the fund was largely exhausted by requirements made of the State under the IMF/ECB/EU Commission “bail-out” of November 2010.


Priorities I

The trust document or other definitive pension instrument should provide for winding up and the distribution of pension funds. Subject to the rules of the scheme, the costs and expenses of winding up have priority. Any provisions in the rules are subject to the mandatory provisions in Revenue and Pensions legislation.

The Pensions Act provides for priorities on winding up of an insolvent scheme. The Revenue rules provide for securing benefits.

The legislation in relation to priorities has been amended in the last decade, as a consequence of a number of apparent injustices which were highlighted during the financial crisis.  The pre-existing provisions gave priority to existing retired pensioners over future pensioners. This position has been amended in the manner set out below.


Priorities II

Priority of entitlement is less of an issue in the case of a defined contribution scheme, provided that all the contributions have been made.  Entitlements under the scheme are usually proportionate to the contributions made by employer and employees.  Each member’s entitlement should be specifically identifiable.

The Pensions Act prescribes the order of entitlement on the winding up of a defined benefit scheme. Defined benefit schemes require specific funding for the targeted benefits.  The legislation was amended in 2013 to provide for a more equitable sharing of losses if the scheme is underfunded.

Priority of entitlement is less of an issue in the case of a defined contribution scheme, provided that all the contributions have been made.  Entitlements under the scheme are usually proportionate to the contributions made by employer and employees.  Each member’s entitlement should be specifically identifiable.


Single Insolvency

The single insolvency order of priority applies if the scheme’s employer is solvent at the date of winding up.

The single insolvency order is as follows;

  • additional voluntary contributions (“AVCs”), transfers in of AVCs, defined contribution (“DC”) benefits and transfers in of DC benefits;
  • pensioner benefits (excluding post-retirement increases), in accordance with the following limits: if the annual pension is €12,000 or less, 100% of the pension; if the annual pension is more than €12,000 and less than €60,000, the greater of €12,000 and 90% of the pension; and if the annual pension is €60,000 or more, the greater of €54,000 and 80% of the pension;
  • 50% of active and deferred benefits, excluding post-retirement increases;
  • remaining pensioner benefits, excluding post-retirement increases;
  • remaining active and deferred benefits, excluding post-retirement increases; and
  • any remaining benefits, including post-retirement increases.

Double Insolvency

The double insolvency order of priority applies if the scheme’s employer is insolvent at the date of commencement of formal insolvency.  In a multi-employer scheme, all participating employers must be insolvent for the double insolvency order to apply.

The double insolvency order is as follows;

  • AVCs and transfers in of AVCs, DC benefits and transfers in of DC benefits;
  • 50% of pensioner benefits, including post-retirement increases;
  • 50% of active and deferred benefits, including post retirement increases;
  • pensioner benefits up to a maximum of €12,000 per year, excluding post-retirement increases;
  • remaining pensioner benefits, excluding post-retirement increases;
  • remaining active and deferred benefits, excluding post-retirement increases; and
  • any remaining benefits, including post-retirement increases.

In a double insolvency, if the scheme does not have enough assets to pay for the benefits under priorities 2, 3 and 4, the Minister for Finance is to provide the necessary money to make up the shortfall, subject to criteria set out in legislation.


Reductions in Benefits

With effect from 25 December 2013, the Pensions Act permits reductions in pensioner benefits currently in payment and not just future increases in benefits. There are limits on any such reductions;

A minimum / floor of €12,000 applies. No reduction may be made from an annual pension of €12,000 or less, and no reduction may be made which reduces an annual pension to below €12,000.

If an annual pension is over €12,000 and less than €60,000, a reduction may be made by a percentage no greater than 10% and to an amount which is no less than €12,000.  If an annual pension is €60,000 or more, a reduction may be made by a percentage no greater than 20% and to an amount which is no less than €54,000.

The 10% and 20% are maximum reductions. The extent of the reduction which is necessary will depend upon the particular scheme deficit and will be a matter for the scheme trustees.


Initial Changes 2009

The Social Welfare and Pensions Act 2009 amended the order of priority of payment of liabilities on the winding up of a defined benefit pension scheme.  The Act followed a number of high-profile cases of insolvent pension schemes, where the existing rules had operated to the detriment of members in service.

The purpose of the change was to achieve a greater level of fairness between various classes of persons interested in the scheme by deferring the claims to increases for members, after preserved benefits.The new rules applied to schemes after May 2009.

Additional voluntary contributions retained first priority.  Next in priority were pensions in payment which had been secured.Increases for pensions both existing, active and deferred ranked, after all preserved benefits for deferred and current members.

The Pensions Board could direct the trustees of the scheme to reduce the benefits to the deferred members and on pensions in payment, where the scheme die not meet the statutory funding requirement.


2013 Reforms

The Social Welfare and Pensions (No. 2) Act 2013 changed the manner in which the resources of a defined pension scheme are distributed on the winding up.  It allows a wider range of benefits to be reduced, where the scheme is being restructured because it does not meet the statutory minimum required funding.

The previous priority order required distribution to meet pension in payment liabilities before any resources were available to meet the liabilities of current or former scheme members.  The provisions differentiate between windup where the employer is solvent and insolvent.

The Pensions Board may direct the trustees of a defined pension scheme, to reduce the benefits of current and former pension scheme members and post-retirement increases in benefits for pensioner members, where the scheme has failed to meet the statutory funding requirements.  The category of benefits that can be reduced is extended.


The Priorities Where Scheme Only Insolvent

The previous priority order sets out four levels of priority. The 2013 provision provides for six levels of priority, as follows: —

  • the first priority is given to additional voluntary contribution benefits and defined contribution benefits;
  • the second priority is given to pensioner benefits of up to €12,000 if the annual pension is €12,000 or less; the greater of €12,000 and 90% of the annual pension if the annual pension is over €12,000 and less than €60,000; the greater of €54,000 and 80% of the annual pension if the annual pension is €60,000 or more. This excludes post-retirement increases;
  • the third priority is given to fifty percent of current and former scheme members’ benefits, excluding postretirement increases;
  • the fourth priority is given to remaining pensioner benefits, excluding post-retirement increases;
  • the fifth priority is given to remaining current and former scheme members’ benefits, excluding post-retirement increases;
  • the sixth priority is given to remaining pensioner, current and former scheme members’ benefits, including postretirement increases.

Scheme and Employer Insolvent

The 2013 provision made changes to the manner in which the assets of a defined benefit pension scheme are distributed on the winding up of a scheme where the employer is insolvent. The amendment provides for seven levels of priority.

  • the first priority is given to additional voluntary contribution benefits and defined contribution benefits;
  • the second priority is given to fifty percent of pensioner benefits;
  • the third priority is given to fifty percent of current and former scheme members’ benefits;
  • the fourth priority is given to pensioner benefits of up to €12,000, excluding post-retirement increases;
  • the fifth priority is given to remaining pensioner benefits, excluding post-retirement increases;
  • the sixth priority is given to remaining current and former scheme members’ benefits, excluding post-retirement increases
  • the seventh priority is given to remaining pensioner, current and former scheme members’ benefits, including postretirement increases.

Each category of benefits in the winding up priority orders, the benefits  rank equally between each other and shall be paid in full, unless the resources of the scheme are insufficient, in which case they shall abate in equal proportions between each other.

Where a scheme has insufficient resources to discharge the liabilities under the second, third and/or the fourth priority of subsection, the Minister for Finance shall provide for the shortfall in the resources of the scheme to discharge the liabilities under those priorities


Permitted Reductions

The categories of benefits which can be reduced, where a defined benefits scheme is restructured or where it does not meet the statutory minimum funding are broadened by the 2013 Act. The Pensions Board may direct the trustees to reduce the benefit of current and former scheme members or post-retirement increases in benefits for pension members, where the scheme does not meet the standard funding requirement.  There is provision for the reduction of the benefits payable to pensioners by a certain percentage and within limits.

There is a prohibition on the reduction of an annual pension which is less than €12,000 p/a.  For those greater than €12,000 p/a, a reduction up to 10 percent can be made between €12,000 and €60,000. A reduction of 20 percent can be made, where it exceeds €60,000 p/a. The legislation prohibits any reduction which would reduce the pension to below €12,000 or which reduce the pension to below €54,000 if the annual pension is €60,000 or more.


Pension Insolvency Scheme I

A pension insolvency payment scheme was established in 2010. The scheme is reviewed every three years.  The scheme is administered by the State.Pension Insolvency Scheme

The scheme was designed to enable benefits to be secured, where the scheme is underfunded, and the employer was insolvent. The scheme applies to defined benefit schemes which have commenced winding up and do not have sufficient resources to meet their liabilities.  The employer must be covered by the Protection of Employees (Employer’s Insolvency) Act.

The scheme is designed to facilitate benefits for members without the requirement to purchase annuities in the open market.  No increases in pensions are provided for. Trustees must pay certain amounts to the scheme as determined by the Minister.   By relieving the trustees of the requirement to purchase annuities, there is a level of savings in the overall scheme so as to provide greater funds than would otherwise be available in the winding up.

There is provision for an appeal to the High Court on a point of law, in relation to a direction of the Pensions Board to restructure a pension scheme.


Pension Insolvency Scheme II

The Minister is empowere, after consultation with the Minister for Social and Family Affairs, to make a Pensions Insolvency Payment Scheme providing for the payment, in accordance of monies to or in respect of relevant pensioners. The Pensions Insolvency Payment Scheme contains such provisions as the Minister shall determine.

Upon the application of the trustees of an eligible pension scheme, the Minister may, at his discretion and in accordance with the Pensions Insolvency Payments Scheme, certify, in writing, that that scheme is a participating pension scheme. The Minister shall not certify a pension scheme under this section unless

  • he or she is satisfied that the pension scheme concerned is an eligible pension scheme;
  • the trustees of the pension scheme agree, in writing, to comply with the terms of the Pensions Insolvency Payment Scheme, and
  • the trustees of the pension scheme agree to pay to the Minister such sum as may be specified by the Minister.

The  sum in respect of each participating pension scheme is calculated by the Minister in accordance with the terms of the Pensions Insolvency Payment Scheme.


Pension Insolvecny Scheme Terms

The scheme may make provision in relation to

  • the conditions for the application of the Pensions Insolvency Payment Scheme to eligible pension schemes;
  • the exclusion from the application of the Pensions Insolvency Payment Scheme of such schemes or classes of scheme, employers or classes of employer, or businesses or classes of business, as may be specified in the Pensions Insolvency Payment Scheme,
  • the payment of monies to relevant pensioners under the Pensions Insolvency Payment Scheme including the conditions upon which those monies are paid;
  • the terms upon which such monies shall be paid and the conditions in relation to which compliance is required in order for such monies to become payable or for any entitlement to the payment of such monies to accrue;
  • the terms relating to the calculation by the Minister of such sums payable by the trustees of a participating pension scheme as, in the opinion of the Minister, will fund in full the payment of monies under the Pensions Insolvency Payment Scheme to or in respect of relevant pensioners of the participating pension scheme;
  • terms and conditions relating to the payment of sums;
  • such other terms and conditions as the Minister considers necessary to ensure that the payments and expenses advanced out of the Central Fund in respect of a particular participating pension scheme will not be greater than the sum paid, in accordance with the Pensions Insolvency Payment Scheme, by the trustees of that participating pension scheme to the Minister;
  • such terms and conditions as the Minister considers necessary for the protection of the Central Fund and the growing produce thereof;
  • terms and conditions relating to the repayment to the trustees of a participating pension scheme of sums paid by them to the Minister.

Where the trustees of a participating pension scheme fail or refuse to comply with the terms of the Pensions Insolvency Payment Scheme, the Minister may, by notice in writing, inform them that the pension scheme is no longer a participating pension scheme. Upon the service of the notice, the pension scheme shall cease to be a participating pension scheme.

The Pensions Insolvency Payment Scheme may not make provision for future increases in benefits to relevant pensioners.


Enhanced Powers

The Pensions Authority has power to wind up a pension scheme, in circumstances where it is underfunded, and the trustees and employers are not in a position to adopt a funding proposal or where the trustees fail to comply with a direction to restructure the scheme benefits.

Prior to giving a direction to wind up a pension scheme, regulations may require notification of the proposal to wind up to the Authority.  Scheme members are to be forwarded an opportunity to make submissions to the Authority in respect of the direction proposes.

Details of a direction to wind up a scheme must be given in a national newspaper, within 21 days of the making of the direction. The making of the direction may be the subject of an appeal to the High Court.

The Pensions Authority has the power to apply to the High Court to seek an order requiring a person to comply with the direction to wind up or restructure scheme benefits.


Administration

The Minister for Finance may, after consultation with the Minister for Social and Family Affairs, appoint such person as he or she considers appropriate to make payments, in accordance with the Pensions Insolvency Payment Scheme, to or in respect of relevant pensioners.

Sums required to be paid by the trustees of an eligible pension scheme, as a condition of its being certified to be a participating pension scheme are paid into or disposed of for the benefit of the Exchequer in such manner as the Minister directs.  All monies required for the making of payments in accordance with the Pensions Insolvency Payment Scheme and for the payment of expenses incurred in connection with the administration of the Pensions Insolvency Payment Scheme are paid for out of the genreral State budget.

The Minister shall, not later than 3 years after the making of the Pensions Insolvency Payment conduct a review of its operation. The Minister may make a scheme amending or revoking the Pensions Insolvency Payment Scheme.


Key Concepts

The date of the winding up of a defined benefit pension scheme is the date of the doing of such act, the happening of such event, or the making of such decision as, under the rules of the scheme, requires that the scheme be wound up.

An eligible pension scheme is a defined benefit scheme as defined

  • the winding up of which has commenced;
  • the resources of which are insufficient to discharge the liabilities of the scheme on the date of the commencement of the winding up;
  • which is certified in writing by the Pensions Board as being compliant with such requirements as may be prescribed by regulations, and
  • where the employer concerned is insolvent for the purposes of the Protection of Employees (Employers’ Insolvency) Act 1;

A relevant pensioner means, in relation to a participating pension scheme, a person who immediately before the date of the winding up of the scheme was in receipt of benefits under the scheme, or had reached normal pensionable age (within the meaning of the Principal Act) and was entitled to receive benefits under that scheme.


References and Sources

Irish Books

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)

Website

www.pensionsauthority.ie

UK Books

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)

Statutes

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)