The merger process – HR challenges and opportunities
The ‘Transfer of Engagement’ process will usually involve some change to the employment relationship and terms & conditions of employment. Therefore it has the potential to give rise to issues that may make the merger process more complex and / or disagreements that may end up in an Employment Tribunal.
However, the merger process also provides the opportunity to update and develop organisational, employment and contractual arrangements in line with new financial services legislation and Central Bank regulations.
The Link Credit Union project was completed over a 10 week period and presented a number of challenges:
- Introduction of new organisation and management structure
- Harmonising pay and benefits
- Reviewing and updating employment policy
- Preparing new contracts and terms of employment
- Keeping key staff on board
Organisation and management Structure
The report of the Commission on Credit Unions identified the issue of governance as at the core of strengthening the regulatory framework for Credit unions. The 1997 Act as amended by the 2012 Act, sets out comprehensive governance requirements that are designed to provide a framework for improved governance standards, with a particular focus on the Board of Directors and management structure.
The new standards emphasise the importance of the separation of authority and responsibility between the Board of Directors (governance and oversight functions) and the management team (implementation of policy and the operational functions)
The Due Diligence investigation should seek to understand the current structure and consider future governance and management issues for the new entity.
The law relating to ‘transfer of undertakings’ derives from a European Directive which was designed to safeguard the rights of employees when organisations are sold or taken over.
The directive has been implemented in Ireland by the Transfer of Undertakings Regulations 2003.
The employees and their rights and obligations under the contract of employment automatically transfer to the new owner.
It will usually be clear who transfers with the business but in some cases there may be some employees in respect of whom it is not so clear. There are obvious uncertainties about the nature of employment where a written contract is not in place or where there are breaks in the employment period.
The contractual rights do not automatically transfer where the original employer is bankrupt or insolvent. It usually follows in these cases that the employees are made redundant.
Employee pension rights do not automatically transfer to the new employment because group pension schemes often have more than one participating employer.
However where there is a pension scheme in place at the time of transfer, the legislation provides that, the new employer must ensure that pension rights are protected.
Changing the terms of employment
A contract of employment is a legal agreement between the employer and the individual employee and any changes to the existing agreement needs the employee’s consent.
Employers are generally required to treat employees with consideration and respect in contract negotiations. An Employment Tribunal will consider the conduct of the employer by the standard of the ‘reasonable employer’ facing similar challenges; whether that is reducing payroll costs or restructuring the business.
Pensions – the under funding crisis!
Employers are switching from the established ‘Defined Benefit’ schemes (DB) to the more secure ‘Defined Contribution’ schemes (DC).
DB schemes are suffering from an under-funding crisis and a number of high profile cases hit the headlines – Irish Times, Aer Lingus, ESB, Independent Newspaper, Waterford Glass, Ryanair.
The switch usually requires that the employer protects the accrued entitlements in the DB scheme and offers incentives to members to transfer to the new DC scheme.
The two case studies below provide examples of the options available to employers:
- Top-up payments to ensure the DB scheme is properly funded
- Enhanced transfer values
- increased contribution rates
- Purchase annuities for retired members
Case Study 1) Ryanair
Ryanair’s Defined Benefit scheme was wound up in December 2013 with the company fully funding the scheme deficit of €9.7 million. The payment resulted in Ryanair eliminating the DB scheme liability from its Balance sheet.
The scheme only covered 1.5% of the company’s 9000 employees as the scheme had been closed to new members from January 2000.
Pension benefits for the 121 active members (current employees) and 200 deferred members (former employees not yet retired) was converted into a transfer value and enhanced by lump sum payment (€2.8 million) which was transferred to the new DC scheme.
The old scheme also had 20 retired members who had annuities purchased on their behalf to guarantee their pension entitlements into the future.
Case Study 2) Irish Times
The DB scheme was wound up with effect from February 2015; annuities were purchased for existing pensioners and active members and deferred members have had their pension benefits transferred to the new DC scheme.
In September 2014 it was estimated that the deficit on a minimum funding standard (MFS)basis was €5 million for active and deferred members, which meant that the scheme was 95% funded. The transfer valve is to be enhanced by €11 million, to be added to the new scheme over a 7 year period, estimated to boost the transfer value to 115%.
The €11 million was calculated as follows:
- €7M to improve the transfer value by 7.0% to 102% MFS
- €3m to active members bringing the minimum funding standard to 107%
- €1M for some members whose transfer value was less than the amount contributed
The contribution rates to the DB scheme were – employee 9% / employer 20%.
The new DC scheme provides a range of options for existing staff:
* 5.0% 9.0%
* 6.0% 10.0%
10.0% 15.0% (available to employee over 55 only)
*New entrants to the DC scheme from 2015 have access to the first three options only.
Extended Retirement Age
The transfer allows active members to extend their retirement age to 66 in line with the increase in the State pension age.