INTRODUCTION TO PENSIONS
A pension was traditionally understood as a payment from the date of an employee’s retirement until the date of his/her death. In a sense, it’s a form of deferred pay. For the most part, pension law is somewhat distinct but yet overlaps employment law as pension funds are typically created under trust law mostly for tax purposes. So, an employee will often have access to a pension scheme under his/her employment contract but the scheme provides equitable entitlements under a trust often governed by a board of Trustees. A trust is a legal arrangement under which trustees hold the assets of the pension scheme in a trust fund for the benefit of the members of the scheme and their dependants, and for the purpose of providing income in retirement.
Saving for retirement is extremely important. People are living longer and leading more active lives in retirement. As a result, it is more important than ever for you to think about where your income will come from when you retire. In Ireland, pension saving is one of the few areas where you can still get tax relief. Only about half of the people currently working in Ireland are members of pension arrangements.
TYPES OF OCCUPATIONAL PENSION SCHEMES
1. Final salary defined benefit (DB) schemes are occupational pension schemes that provide a set level of pension at retirement, the amount of which normally depends on your service and your earnings at retirement or in the years immediately preceding retirement. (e.g., 1/60th x Final Pensionable Salary x Pensionable Servicef). The benefits are fixed, and the contributions must be adjusted from time to time to make sure that the correct amount is being accumulated to provide for them. Generally speaking, employers bear the risk in funded defined benefit schemes, although if the employer cannot fund the scheme, the investment risk ultimately falls back on the member and promised benefits may have to be reduced. Career average defined benefit (DB) schemes are a variation of the traditional defined benefit design. The level of pension at retirement is based not on the earnings close to retirement, but rather on the average earnings throughout the member’s entire career.
2. A Defined Contribution (DC) scheme has a set contribution for the employee and a set contribution for the employer. For example, in some DC schemes, the employer and the employee each contribute 5% of the member's earnings, or 10% in total.
DC schemes are occupational pension schemes where your own contributions and your employer’s contributions are both invested and the proceeds used to buy a pension and/or other benefits at retirement. The value of the ultimate benefits payable from the DC scheme depends on the amount of contributions paid, the investment return achieved less any fees and charges, and the cost of buying the benefits.
Some DC schemes allow members to choose the level of contribution they wish to pay, with a related employer contribution. Contributions are invested on behalf of each scheme member. On retirement, the fund is used to buy either an Annuity or an Approved Retirement Fund for the member. Unlike with a DB Scheme, all the risk under a defined contribution scheme rests with the employee as you are not guaranteed any specific level of retirement benefit. Factors that will influence the level of benefit that you will receive are likely to include the following:
- The length of time for which contributions are made
- The level of your contributions
- The level of your employer’s contributions
- Investment performance
- The level of annuity rates when you retire
3. Additional Voluntary Contribution (AVC) is a contribution with a scheme member can make in addition to any mandatory employee contributions payable under the terms of the pension scheme. An AVC can apply in either a DB or a DC scheme.
STATE (CONTRIBUTORY) PENSION SCHEME
A significant number of pension schemes make an allowance for the State pension when providing a pension from the scheme. This is known as "integration" in the private sector. An integrated scheme looks at the State pension as part of the total pension package promised to employees on retirement.
The State Pension (Contributory) is paid to people from the age of 66 who have enough Irish social insurance contributions, i.e. PRSI. It is not means-tested. You can have other income and still get a State Pension (Contributory). This pension is taxable similar to an occupational pension but you are unlikely to pay tax if it is your only income. In 2018, the State pension in Ireland for a person aged 66 or over is €12,651 per annum – it is usually increased in the annual Budget. Could you survive on the State pension alone, and what will your finances look like in retirement?
RECENT DEVELOPMENTS AND FUTURE OUTLOOK
Many Irish DB pension schemes commenced in the 1960’s and 1970’s when life expectancy was much lower that today. Vast improvements to life expectancy or ‘longevity’ has resulted in the basic funding premise of many DB schemes becoming totally obsolete.
The ‘noughties’ delivered the “perfect storm” for pension funds, i.e. low interest rates, which raise the value of pension liabilities, coupled with huge stock market declines during the early years of the 2000s of in excess of 35%. These developments resulted in many employers closing their DB plans to new members as they tried to manage risk and exposure. As it became more expensive to fund pension liabilities, the migration to DC pension plans accelerated. DB Pension Scheme Trustees were obliged to seek additional funding from the sponsoring employers in many cases and were obliged to submit a ‘Funding Proposal’ to the Pensions Authority setting out how the DB scheme would be returned to solvency in an agreed period of time. These plans had to be agreed with the employer and the actuary.
The whole funding position with many DB pension schemes remains problematic. As financial sustainability continues to pose problems, this remains a highly contentious area for the trade union movement. Significantly, the Irish legislation regarding the protection of DB scheme members is quite weak.
Going forward, the adequacy of pension benefits at retirement in a growing DC plan environment is also highly contentious. Employer contribution rates vary widely across the food & drink industry with employers generally paying significantly lower contributions to their DC plans than to their DB schemes.
The long-term retirement age extends out to 68 in 2028. With a view to increasing private pension coverage and pensions adequacy in Ireland, the State is now proposing the introduction of ‘auto-enrolment’ from 2022 with phased contribution increases until 2028. This development, if it reaches fruition, will have a significant impact of many occupational DC plans in the years ahead.
For up to date guidance of Pension law rights and entitlements, you are advised to consult the Pensions Authority website in the first instance. For more specific advice, contact the DEA Head Office on
01-6761989
https://www.pensionsauthority.ie/en/LifeCycle/Homepage/