Termination of Scheme Cover
The Pensions Acts provides minimum rights to preserved of benefit for persons who leave service before their expected retirement date. The legislation has increased the minimum preserved benefit and has reduced the option to withdraw contributions. The preserved benefit apply to service to the date of termination only. They do not apply to future service.
Originally, the period of qualification for preserved benefits was five years under the Pensions Act, 1990. This period was reduced to two years by the Pension Act, 2002. Membership of schemes in the same employment, related schemes and successor schemes count for the purpose of computing the qualifying period.
The Pensions Act requires the preservation of benefits in relation to service completed while the person is a full member of the scheme. This requires that the person is not a member, only in respect of death in service benefits. He must be entitled to long service benefits in respect of his service.
Transfer or Refund for Early Leaver
A pension scheme member who leaves service is usually entitled to preserve all or a proportion of his pension benefits under the scheme. The member may be given the option of leaving the contributions within the scheme, for the purpose of buying benefits at a future date. He may be allowed or required to transfer his contributions out to another scheme, PRSA or buy out bond.
Prior to the Pensions Act, the position was largely governed by the trust deed and rules. The deed and rules now take effect subject to the statutory rights to preserved benefits. They provide minimum rights and may override the trust deed and rules.
A refund of contributions may be an option in some cases. The refund of the member’s contributions may be with or without interest. The member’s rights and the extent of the refund depends on the scheme rules. Tax is chargeable on the refund.
The extent to which contributions can be refunded has been progressively curtailed, by the Pensions Acts,. If the member is entitled to a preserved benefit, a refund cannot be made. Where the member has completed two years’ service, the benefit is preserved and the rules may not permit a refund of contributions.
Continuity of Membership
The preserved benefits legislation applies where there is a “termination” of employment to which the pension scheme applies, prior to the normal retirement date. A person may terminate employment with the benefit of a scheme when he ceases to be a member of the scheme. There may be a termination where the employment continues, but the scheme itself ceases to exist and is not replaced.
An employee does not terminate employment for this purpose, where he continues as a member of a pension scheme with another group or successor employer. Employment continues where an employee is re-employed with another group or related employer or with a successor employer who has received a transfer from the former scheme, of a value not less than the preserved benefit.
Membership may continue during a non-temporary absence. This is subject to the scheme rules. The legislation on preserved benefits deems employment interruption or termination to be temporary, in the case of absences of less than a month, industrial relations disputes, pregnancy and confinement. Continuity is conditional upon resumption of service.
The period of absence itself is not reckoned, unless the trustees at their discretion, are permitted and elect to do so. Upon termination of membership the above sense (whether in the context of termination of employment, termination of the scheme or otherwise), the benefits no longer accrue.
DB Preserved Benefit
In the case of a defined benefit scheme, the statutorily preserved benefit is a proportionate amount of the retirement benefits that would otherwise have accrued. The basic preserved benefit is in effect, the proportion of such benefits, that the actual service to date (after 1991) bears to the hypothetical service to normal pensionable date. This must be at least equal to the value of contributions paid by the member together with interest since the commencement of pensions legislation.
The benefits are calculated by reference to the estimated final salary. Preserved benefits under a defined benefit scheme must be valued from the date of termination of pensionable employment, until the normal retirement date in accordance with formulae, which prescribe the notional rate of inflation. The preserved benefit must be revalued annually during the deferral period by the published percentage.
The preserved benefit may be affected by later changes in the pension benefits under the scheme rules. This will not affect the amount of the preserved benefits in themselves but may affect the future state of the account and the sum ultimately available on retirement.
Where the membership of a defined benefit pension scheme ends within five years of the normal retirement date, the member must receive benefits worth at least 120% of the ordinary contributions plus interest. Where the period is less than five years, the minimum is scaled back to 100% proportionately.
DC Preserved Benefit
In the case of defined contribution schemes, the calculation of the preserved benefit is relatively straightforward. The preserved benefit is the value of the contributions made in respect of the member, either by the member or by the employer. The value of those benefits (including investment returns) should be reflected in the member’s account, in that same way as at retirement.
The preserved benefit includes the value of transfers inwards by the member from other pensions and additional voluntary contributions made by him. They are added to the member’s accounts and their investment returns should be reflected in the member’s account.
The member’s entitlement is based on the value of employer and employee contributions plus future investment returns on the assets within the scheme. The preserved benefits under a defined contribution schemes will accrue, provided that the underlying investments increase in value.
Additional Preserved Benefits
Additional voluntary contributions and payments in from other schemes are also preserved. In the case of a defined contribution scheme, they are simply preserved. In the case of a defined benefit scheme, the additional benefit, which would have been received on retirement is preserved, in the proportion of the number of years of service relative to the number of years of service (post 1991) which there would have been, if the member had continued in service until normal retirement age. Similar provisions apply to benefits transferred in from other schemes.
Defined benefit schemes may provide by their rules for the proportionate accrual of benefits with reference to the number of years from the commencement of service until termination. The scheme may provide a higher level of benefits.
The member may be entitled to an additional statutory preserved benefit, based on the greatest sum derived under a number of measures.
This relevant measure is broadly the higher of
- the additional benefits which would be allowable under the scheme rules less the basic preserved amount;
- the preserved benefit applicable prior to the 1990 legislation (based on service to 1991), proportionate to the expected retirement income completed prior to the legislation; or
- the actuarial value of the contributions paid, with interest on the same, less the basic preserved amount
The deferred pension may be payable from normal retirement age or such earlier age as may be allowed generally, above 50 years. A pension scheme member who retires early is entitled to the same protection for his deferred benefits, as an early leaver.
Benefits are paid under the scheme in accordance with the rules at the date of termination of employment. Benefits which are preserved by legislation must be maintained. They are not subject to variation by amendment of the scheme.
Where the former member who is entitled to a preserved benefit dies, the Pensions Act requires that a lump sum is paid to his estate. This is the value of the deferred preserved benefit, including the value of transfer payments and AVCs paid in. In a defined benefit scheme, it is the actuarial vale calculated in the above manner. The legislation requires that the payment is made to the personal representatives.
There may be an option to pay a pension to a spouse or dependent, instead of a lump sum, in certain cases. This applies to a defined benefit scheme, which provides for a spouse / dependent’s pension on death in service. The relevant beneficiary must be entitled to that pension under the terms of the scheme. The trustees may the pension in accordance with the rules of the scheme. The pension may be based on a percentage of the expected retirement pension.
Where a person ceases to be in pensionable employment, either by reason of leaving service or the cessation of the pension scheme or his membership of it, he must be given certain information in relation to his options. Generally, the options may include a deferred pension, an option to transfer the value to the fund of a new employer, buyout bond or a PRSA.
A person leaving pensionable employment must give notice of the exercise of options within two years or longer if the scheme rules so allow. If the fund is transferred to a new scheme, the trustees of the new scheme must accept the transfer, if the member is entitled to join the scheme. Otherwise, they must consent. The new scheme may provide benefits on a totally different basis to the older scheme.
Where the fund is less than the prescribed amount (€10,000) or where the Pensions Authority so specifically permits, a transfer out may be made, notwithstanding that the member does not consent. Prior notice must be given to the member. In such case, the trustees may purchase a buyout bond, transfer to another scheme or to a PRSA.
The actuarial value of the deferred pension, the preserved benefit may be transferred to
- the scheme of a new employer;
- a buy out bond;
- to a PRSA (see 15 year rule);
- or on retirement, to an ARF (provided and to the extent the scheme is eligible for an ARF transfer)..
A buyout bond is a life assurance policy or other approved, to which the contributions are paid on transfer and which accrue thereafter until maturity at retirement. It must be a Revenue approved policy or contract. Life assurers and other Revenue approved providers issue the policy contracts. There are some variants. It may be a deferred annuity and may have quasi pension elements, such as unit linked investments.
A deferred pension may be immediately payable if the member is over the normal retirement age or qualifies for an early retirement age in the limited cases, where it is available generally. Where his service is less than two years, he may be entitled to refund of contribution, where the benefit is not preserved.
In theory, only the preserved benefit may be transferred out. In practice, Revenue rules require the transfer of all benefits which arise under the rules to be paid to the new scheme, PRSA or buyout bond, etc. The benefit must be either retained or be paid out in full.
A transfer to a PRSA may be permitted, provided that the member has not been a member of the occupational scheme for more than 15 years.
In principle, a transfer may be made to an overseas pension scheme, established under the EU IORPS Directive. The trustees must be satisfied in relation to the benefits that are to be provided by the overseas scheme. It must be authorised in the relevant jurisdiction, in a manner analogous to a domestic pension scheme.
Once the transfer is made, the trustees of the former scheme are discharged from their obligations to provide benefits to which the transfer relates. The pensions benefits derive from the new scheme. The rules and the applicable benefits may differ in the case of a transfer to another occupational scheme. The benefits must be of equivalent actuarial value.
Transfers are not permitted out of unfunded schemes. The only mostly public sector, both central and local government pension schemes. Such schemes are excluded from most of the above option. However, equivalent benefits are provided, generally by way of preservation and deferral of benefits.
Occupational pension schemes and PRSAs may transfer to another EU state under the IORPs Directive. Transfers outside the EU may not be made unless the pension beneficiary is employed in the state of transfer.
The providers or trustees must satisfy the Pensions Authority that the retirement benefits under the overseas arrangement, qualify as retirement benefits. They must obtain confirmation from the trustees or administrators of the overseas scheme, which must itself be an entity which is subject to the relevant EU regulatory authority. The overseas scheme must be operated under the IORPs Directive and established within the EU.
Where the transferring scheme is insolvent or underfunded, the amounts transferred may be reduced. Where a defined benefit scheme is insolvent or underfunded in accordance with the latest actuarial funding certificate, the amounts must be scaled back accordingly.
The scheme actuary must advise that he is reasonably satisfied, that if an actuarial certificate was prepared as at the date of transfer, there would be a scaling back on insolvency. In this event, the amount to be transferred may be reduced in the proportion which they would be reduced on a winding up, having regard to the priority rules on insolvency.
References and Sources
Irish Pensions Law & Practice Buggy, Finucane & Tighe 2nd Ed (2005) Ch.12
Pensions; Revenue Law and Practice (ITI) Dolan, Murray, Reynolds, McLoughlin (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)
Revaluation Rules made under Section 33:
Occupational Pension Schemes (Revaluation) Regulations 2015
The Occupational Pension Schemes (Revaluation) Regulations 2014
The Occupational Pension Schemes (Revaluation) Regulations, 2013
The Occupational Pension Schemes (Revaluation) Regulations, 2012
The Occupational Pension Schemes (Revaluation) Regulations, 2011
The Occupational Pension Schemes (Revaluation) Regulations, 2010
The Occupational Pension Schemes (Revaluation) Regulations, 2009
The Occupational Pension Schemes (Revaluation) Regulations, 2008
The Occupational Pension Schemes (Revaluation) Regulations, 2007
The Occupational Pension Schemes (Revaluation) Regulations, 2006
The Occupational Pension Schemes (Revaluation) Regulations, 2005
The Occupational Pension Schemes (Revaluation) Regulations, 2004
The Occupational Pension Schemes (Revaluation) Regulations, 2003
The Occupational Pension Schemes (Revaluation) Regulations, 2002
The Occupational Pension Schemes (Revaluation) Regulations, 2001
The Occupational Pension Schemes (Revaluation) Regulations, 2000
The Occupational Pension Schemes (Revaluation) Regulations, 1999
The Occupational Pension Schemes (Revaluation) Regulations, 1998
The Occupational Pension Schemes (Revaluation) Regulations, 1997
Regulations made under Section 37:
Occupational Pension Schemes (Preservation of Benefits) (Amendment) Regulations, 2009
Occupational Pension Schemes (Preservation of Benefits) Regulations, 2002
Occupational Pension Schemes (Preservation of Benefits) (Special Calculations) Regulations, 2002
Occupational Pension Schemes (Preservation of Benefits) (Amendment) Regulations, 2000
Occupational Pension Schemes (Preservation of Benefits) (Amendment) Regulations, 2010