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.