Insolvency
Pensions Insolvency Payment Scheme (PIPS) Guidance note for scheme applicants
Introduction
1. This statement outlines the operation of Pensions Insolvency Payment
Scheme (PIPS) which is a scheme made by the Minister for Finance in
consultation with the Minister for Social Protection. PIPS is a cost neutral
scheme for the Exchequer which aims to reduce the pensioner liabilities of
defined benefit schemes which wind up in deficit with an insolvent
employer.
Policy background
2. Section 22 of the Social Welfare and Pensions Act 2009 provides for the
introduction of PIPS by way of secondary legislation. The scheme is being
operated on a pilot basis for 3 years from the date of its introduction,
following which there is to be a review. If the scheme were to close
during or after 3 years the schemes participating in PIPS at that time
would continue to have their pensions paid.
3. PIPS is a cost-neutral Exchequer scheme offering special payments in
cases where a defined benefit pension scheme is winding up in deficit1
and the sponsoring employer becomes insolvent – the “double
insolvency” criterion. In the case of multi-employer schemes, all
sponsoring employers must be insolvent for a scheme to qualify for
PIPS.
4. As a special measure to support pension schemes where the employer and
pension fund are insolvent, PIPS provides a cost neutral way of mitigating
defined benefit pension shortfalls in cases of double insolvency. Within the
constraint set by the 2009 Act that it be cost-neutral, PIPS is intended to
support pensioners of insolvent companies where the pension scheme is
winding-up so that more money is available for the pensions of those yet
to retire. At present, when a defined benefit scheme winds up and the
sponsoring employer is insolvent, the trustees of the pension scheme
usually buy annuities to pay for the pensions of retired scheme members.
5. Under PIPS, trustees of a pension scheme in this position may pay the
Government a lump sum which will cover the cost of paying the pensions of
retired members. On receipt of the capital sum into the Exchequer, the
Government will take responsibility for the future payment of pensions to
the beneficiaries covered by the scheme at the rate agreed by the Minister
1 On a Minimum Funding Standard basis.
in approving the application. It should be noted that PIPS expressly
excludes post retirement increases. As an anti-abuse measure, PIPS
makes provision under section 22(2)(b) of the Act for the exclusion of
schemes that have contrived a double insolvency or where in the view of
the Minister it is in the public interest or in the interests of the Exchequer to
exclude them.
Application process
6. There are three separate stages to the application process:
[1] A scheme’s trustees must first apply to the Pensions Authority to
become certified as an ‘eligible pension scheme’ as defined under PIPS,
[2] If the Authority approves the certification, the trustees may apply to the
Minister for Finance to become a participating pension scheme and qualify
for PIPS payments, and
[3] If the Minister for Finance approves the application and the Trustees
accept the offer and quote provided by the Minister, arrangements will be
made for the payment of the relevant amount into the Exchequer and for
the future payments to relevant pensioners.
Stage 1: Application to the Pensions Authority
7. The 2009 Act requires that pension scheme trustees receive appropriate
certification by the Pensions Authority before applying to the Minister to join
PIPS. This is in accordance with the Authority’s role as industry regulator,
under which schemes are required to report to the Authority at regular
intervals and to bring forward funding proposals to eliminate deficits.
8. Under the Act, schemes must provide independent proof of company
insolvency and evidence that the scheme is in deficit and has commenced
winding up at this point, so that the Authority can satisfy itself that the
“double insolvency” criterion is met before the application is considered by
the Minister. The Minister will not consider an application until the Authority
has certified that a scheme is eligible under the Act and the terms and
conditions of PIPS.
9. In submitting an application, trustees will be required to submit the following
(a) a completed application in such form as shall be determined and made
available by the Authority, together with such other information as may
assist the Authority in determining whether the scheme is an eligible
pension scheme,
(b) written confirmation by the trustees that the winding up of the pension
scheme has commenced, specifying the date of the commencement of the
winding up,
(c) a statement by the defined benefit scheme actuary that, at the date of
the commencement of the winding up, that scheme did not satisfy the
funding standard, as provided for by section 44 of The Pensions Act 1990,
(d) a statement of affairs of the insolvent employer,
(e) the notice of the appointment of a liquidator or receiver to the insolvent
employer, and
(f) a statutory declaration—
(i) by the employer concerned that that employer is insolvent for the
purposes of the Protection of Employees (Employers’ Insolvency) Act 1984
(No. 21 of 1984), and
(ii)by the trustees that all reasonable efforts have been made by the
trustees to ensure that, in so far as possible, the information provided is in
all material respects complete and accurate.
10. The applicant pension scheme may include some or all of its pensioners
in its PIPS application, as in some cases certain annuities may be more
cheaply bought on the open market, for example, impaired annuities.
11. The Pensions Authority will not consider incomplete or ineligible
applications. The Authority may, at its own discretion, decide whether an
application is incomplete or ineligible.
12. Where the Authority concludes that the applicant scheme meets the
necessary requirements, it may then certify the scheme as an ‘eligible
pension scheme’, clearing the way for an application to the Minister.
13. A decision of the Pensions Authority on the certification of eligible pension
schemes will be final and there will be no recourse to an appeal.
Administrative arrangements
14. The aim is to administer the scheme in a straightforward way which
minimises start-up costs, has low risk of error, facilitates orderly wind-up
of the scheme and which reflects the pilot nature of PIPS. In the pilot
phase, the existing payment administrator of participating schemes or an
alternative payment administrator nominated by the trustees will be
retained. Where a payment agent is not already in place – for example
where payments had been handled through the (now insolvent)
company’s payroll – the trustees will be asked to nominate a payment
agent for the purposes of PIPS. This arrangement will be kept under
review during the pilot phase and new arrangements may be introduced if
appropriate.
15. The cost of administering PIPS will be charged to participating schemes
so that the scheme would remain cost neutral for the taxpayer, as
required under the 2009 Act. The Minister will request trustees to state
the administration costs for the pensioner payments into the future as
agreed with their chosen payment administrator. NTMA will convert this
to net present value and factor it into the PIPS quote, along with a small
charge to reflect the Minister’s fixed costs, given to the trustees by the
Minister.
Stage 2: Application to the Minister
16. Once certified as eligible, the trustees may then apply to the Minister by
submitting the information below:
(a) a completed application in such form as shall be determined and made
available by the Minister;
(b) the certification by the Authority that the defined benefit scheme
concerned is an eligible pension scheme;
(c) a statement, in writing that the trustees agree to comply with and be
bound by the terms of PIPS, should the eligible pension scheme be
certified as a participating pension scheme by the Minister in accordance
with PIPS;
(d) a statement from the eligible pension scheme’s actuary of the value of
the scheme’s assets, on the basis of the assets’ realisable market value on
the date the assets were valued;
(e) a completed payment administrator nomination in such form as shall be
determined and made available by the Minister;
(f) such information as will enable the Minister to assess the cost of
making payments under PIPS in respect of the eligible pension scheme
should it become a participating pension scheme;
(g) such other information as may assist the Minister in deciding whether
the eligible pension scheme should become a participating pension
scheme; and
(h) a statutory declaration by the trustees that all reasonable efforts have
been made by them to ensure that in so far as possible the information
provided for the purposes of the application is in all material respects
complete and accurate.
17. PIPS provides that the Minster may exclude schemes, businesses and
employers that, in the Minister’s opinion, have contrived the qualifying
conditions for PIPS or have wilfully contributed to the pension scheme
deficit or employer insolvency.
18. Once all the information is provided, the Minister will request the National
Treasury Management Agency (NTMA) to calculate the actuarially
assessed cost in net present value terms of providing pension payments
to the pensioners of the scheme, taking account of the cost of
administration. The pricing will be done on a cost neutral basis for the
Exchequer in that it will reflect the net present value of the future stream
on PIPS payments for the lives of the pensioners concerned.
19. Clearly, important factors will be the choice of interest rate and the
mortality assumptions. The interest rate is the yield-to-maturity on Irish
Government bonds closest to ten years in duration, which stood at about
4.7% in January 2010. The mortality assumptions are based on the
applicable professional guidance issued by the Society of Actuaries in
Ireland in relation to retirement benefit scheme transfer values and reflect
the standard industry practice. In accordance with standard practice in
Ireland, these mortality tables will be applied without any adjustment to
take account of local or other factors.
20. The Minister will provide this quotation in writing to the trustees of the
applicant scheme and the quote will remain valid for two weeks.
21. The quotation will:
[a] specify the amount of pension to be paid to the individual pensioners
or relevant survivors or dependents on receipt of the payment by the
trustees
[b] state the associated administrative cost which will be charged by the
Minister
[c] guarantee that this pension will be paid to those pensioners or relevant
survivors or dependents for their lifetime, and
[d] request the trustees to indicate acceptance or rejection of the offer in
writing within 14 days.
22. Following receipt of the Minister’s offer, it will be a matter for the trustees
to decide whether or not to accept the quotation by the stated date. The
Minister and the Department will not negotiate on the stated offer. If,
consequent on receiving a PIPS quote, the Trustees find that there are
residual funds to distribute and that higher payments can be afforded, it
will be open to them to seek a revised quote from the Minister and a new
14 day period will apply. The NTMA may also revise its quote during the
14 day period, in which case a fresh 14 day period will apply from the date
of the new quote. The Minister reserves the right to determine that any
new proposal or information submitted by the trustees amounts to the
submission of a new application.
Stage 3: Payment into PIPS
23. Before payments can be made by the Minister under PIPS, the trustees
must pay the quoted price to the Minister by electronic funds transfer.
The Minister will not accept payment in the form of bonds, equities or
other assets. The pension regulations have been reviewed by the
Minister for Social Protection to ensure that there is no legal impediment
to the trustees joining PIPS. Failure by a pension fund to adhere the
conditions laid down by the Minister will invalidate the offer.
24. Once this payment has been made, the Minister will activate the
necessary administrative arrangements through the payment
administrator and the trustees will be deemed to have discharged their
liabilities in respect of the relevant pensioners covered in their PIPS
application.
25. The Minister will have to enter into a contract with the payment
administrator setting out the arrangements for making PIPS payments as
well as the payment of the administrator’s costs by the Minister on an
ongoing basis. Payment will be made from the Central Fund under the
authority of the Social Welfare and Pensions Act 2009 rather than voted
expenditure and as such are guaranteed.
Review
26. PIPS must be reviewed within three years of its introduction. At that
stage, any schemes which are already participating will continue. The
Government may at that stage decide to discontinue the scheme or to
continue with it, modified or otherwise.
Department of Finance
Social Welfare and Pensions (No. 2) Act 2013 Guidance
Information Note
Last updated 8 January 2014
Disclaimer
While the Pensions Authority has made every effort to ensure that the information
contained within this guidance document is correct and accurate nevertheless it is
possible that errors or omissions in the content may occur from time to time.
No liability whatsoever is accepted by the Pensions Authority, its servants or
agents for any errors or omissions in the information or data or for any loss or
damage occasioned to any person acting or refraining from acting as a result of
the information or data contained within this guidance document.
To ensure that you have an up-to-date and unaltered copy of this document, you
should download it directly from www.pensionsauthority.ie.
Page 2 of 5
Social Welfare and Pensions (No. 2) Act 2013
Information Note
The Social Welfare and Pensions (No. 2) Act 2013 (“2013 Act”) came into force on 25
December 2013. It introduces two new wind-up priority orders and expands the type of
benefit reductions which the Board may direct under section 50 of the Pensions Act 1990.
This information note provides general information on the changes introduced by the
2013 Act to the Pensions Act 1990. It is intended to assist trustees and scheme
members. It aims to summarise what are complex and technical points of pension
legislation and should not be taken as legal advice or interpretation. It is the
responsibility of trustees to ensure that they comply with their statutory obligations.
Wind up priority orders under Section 48 of the Pensions Act 1990
For all schemes which start to wind up on or after 25 December 2013, one of two priority
orders will apply:
– The single insolvency order will apply if the scheme’s employer is solvent at the date
of wind up.
– The double insolvency order will apply if the scheme’s employer is insolvent at the
date of wind up.1
In a multi-employer scheme, all participating employers must be
insolvent for the double insolvency order to apply.
1
Insolvency is defined in the Protection of Employees (Employers’ Insolvency) Act 1984 and can include (for
example) liquidations, receiverships, resolutions to wind up a company.
Examples
The Bloggs pension scheme started to wind up on 24 December 2013. The new wind
up priority orders do not apply to this scheme.
The Murphy pension scheme started to wind up on 24 December 2013 but had not
started to pay out the benefits on 25 December 2013. The new wind up priority orders
do not apply to this scheme.
The Smith pension scheme started to wind up on 26 December 2013. The Smith
company was solvent at that date. The single insolvency priority order applies to this
scheme.
The Jones pension scheme started to wind up on 26 December 2013. The Jones
company was insolvent on 26 December 2013. The double insolvency priority order
applies to this scheme.
Page 3 of 5
Single Insolvency Order
Benefits will be distributed in the following order of priority:
1. Additional voluntary contributions (“AVCs”) and transfers in of AVCs; and
defined contribution (“DC”) benefits and transfers in of DC benefits.
2. Pensioner benefits (excluding post-retirement increases), in accordance with the
following limits:
(a) if the annual pension is €12,000 or less, 100% of the pension;
(b) 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
(c) if the annual pension is €60,000 or more, the greater of €54,000 and 80%
of the pension.
3. 50% of active and deferred benefits, excluding post-retirement increases.
4. Remaining pensioner benefits, excluding post-retirement increases.
5. Remaining active and deferred benefits, excluding post-retirement increases.
6. Any remaining benefits, including post-retirement increases.
N.B. The benefits which scheme members receive in a wind up will depend upon the
scheme assets which are available for distribution.
Examples
The Smith pension scheme is underfunded and can cover only priorities 1 to 3. John,
Mary and Tom are all pensioner members of this scheme. Cara is a deferred member
of this scheme.
John is receiving a pension of €11,000 per year. After the wind up, John will
continue to receive a pension of €11,000 per year under priority 2. Any postretirement
increases payable to John after the date of wind up are not
covered.
Mary is receiving a pension of €15,000 per year. After the wind up, Mary will
receive a pension of €13,500 per year under priority 2. This is the greater of
€12,000 and 90% of her current pension (i.e. €13,500). Any post-retirement
increases payable to Mary after the date of wind up are not covered.
Tom is receiving a pension of €62,000 per year. After the wind up, Tom will
receive a pension of €54,000 per year under priority 2. This is the greater of
€54,000 and 80% of his current pension (i.e. €49,600). Any post-retirement
increases payable to Tom after the date of wind up are not covered.
Cara is a deferred member with a preserved benefit of €20,000 per year. After
the wind up, Cara will receive a transfer value in respect of €10,000 per year
under priority 3. Any post-retirement increases payable to her after the date of
wind up are not covered.
Page 4 of 5
Double Insolvency Order
Benefits will be distributed in the following order of priority:
1. AVCs and transfers in of AVCs; and
DC benefits and transfers in of DC benefits.
2. 50% of pensioner benefits, including post-retirement increases.
3. 50% of active and deferred benefits, including post retirement increases.
4. Pensioner benefits up to a maximum of €12,000 per year, excluding post-retirement
increases.
5. Remaining pensioner benefits, excluding post-retirement increases.
6. Remaining active and deferred benefits, excluding post-retirement increases.
7. Any remaining benefits, including post-retirement increases.
N.B. The benefits which scheme members receive in a wind up will depend upon the
scheme assets which are available for distribution.
However, 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 will provide the
necessary money to make up the shortfall, subject to criteria set out in legislation.
Examples
The Jones pension scheme is underfunded and can cover only priorities 1 to 4. Anne,
Cormac and Jane are all members of this scheme.
Anne is receiving a pension of €11,000 per year. After the wind up, Anne will
continue to receive a pension of €11,000 per year. This is because she will
receive €5,500 per year under priority 2 and the remaining €5,500 per year under
priority 4. Any post-retirement increases payable to Anne in respect of the first
€5,500 are covered.
Cormac is a deferred member with a preserved benefit of €14,000 per year.
After the wind up, Cormac will receive a transfer value in respect of €7,000 per
year under priority 3, including any post-retirement increases payable to him.
Jane is receiving a pension of €15,000 per year. After the wind up, Jane will
receive a pension of €12,000 per year. This is because she will receive €7,500
under priority 2 and a further €4,500 under priority 4. A maximum of €12,000 per
year is protected under priority 4. Any post-retirement increases payable to Jane
in respect of the first €7,500 are covered.
Page 5 of 5
Benefit reductions under Section 50 of the Pensions Act 1990
With effect from 25 December 2013, the Pensions Act 1990 permits section 50 reductions of
pensioner benefits currently in payment and not just future increases in pensioner benefits.
There will be limits on any such reductions, as outlined below:
– 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.
N.B. 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.
Examples
The ABC pension scheme is underfunded. Its trustees apply to the Pensions Board for a
section 50 direction in order for the scheme to meet the funding standard. Brian, Carol,
Diarmaid and Emma are pensioner members of the scheme.
Brian is receiving a pension of €12,000 per year. The trustees may not reduce
Brian’s pension.
Carol is receiving a pension of €13,000 per year. The trustees may reduce
Carol’s pension to no less than €12,000 and therefore may not reduce her
pension by 10% because that would reduce her pension to below €12,000.
However, they may reduce her pension by a lesser percentage which does not
reduce her pension to below €12,000.
Diarmaid is receiving a pension of €40,000 per year. The trustees may reduce
Diarmaid’s pension by any percentage up to 10%.
Emma is receiving a pension of €62,000 per year. The trustees may reduce
Emma’s pension to no less than €54,000 and therefore may not reduce her
pension by 20% because that would reduce her pension to below €54,000.
However, they may reduce her pension by a lesser percentage which does not
reduce her pension to below €54,000.