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Employer Debt Legislation on the Horizon

  • Ireland
  • General

12-05-2017

The Minister for Social Protection Leo Varadkar has announced this week the publication of the General Scheme of the Social Welfare and Pensions Bill 2017 (the “Draft Bill”). It proposes to introduce a number of measures which the Minister states “should offer greater safeguards to people who are members of DB [Defined Benefit] schemes”.

A summary of the main aspects of the Draft Bill which may impact on DB pension schemes follows below:

1. Mandatory notice period to cease contributions

The Draft Bill proposes that all DB scheme sponsors will now be required to give 12 months’ notice where they intend to cease payment of contributions. The notice must be served on both the DB scheme trustees and the Pensions Authority (the “Authority”). This provision will override a scheme’s trust deed and rules and it explicitly states that a scheme may not enter wind up until after the expiry of that notice period. If a scheme is in deficit, the employers and trustees are required to enter into discussions to agree a funding proposal before the 12 month period expires.

The Draft Bill allows employers and trustees to agree a reduced notice period where the trustees believe it is in the members’ best interests, but this is subject to a requirement to consult with the members.

The obligations of the employer, as well as the obligations and powers of the trustees under the deed (excluding the power to wind-up the scheme) continue during the notice period. Therefore, it would still be within the trustees’ remit to make a contribution demand during the notice period, where such a right exists under the scheme rules.

2. The Authority’s ability to determine schedule of contributions

It appears that if a DB pension scheme does not satisfy the funding standard or funding standard reserve or there has been a failure by an employer to either enter into negotiations for a funding proposal or make contributions due under the terms of an existing funding proposal, the Draft Bill provides that the Authority shall determine a schedule of contributions that will satisfy the funding standard and funding standard reserve. However, the wording of the Draft Bill means that there is ambiguity as to whether these are alternative conditions.

The amount determined shall be deemed a statutory debt owed by the employer to the trustees. However, the Draft Bill provides for a 3 month grace period before the determination becomes effective.  This is aimed at allowing the trustees and employer to submit a valid funding proposal in lieu of the amount determined by the Authority.

3. Time limit to submit a Funding Proposal

The Draft Bill introduces a six month time limit for trustees of a DB scheme in deficit to submit a funding proposal to the Authority.  This time limit runs from the date of the actuarial funding certificate which confirms that the Scheme does not meet the funding standard.

Observations on the Draft Bill

It remains to be seen how the Draft Bill will fare at the various Oireachtas Committee and Report stages, but it would appear that there is significant political momentum behind this legislative drive to introduce a certain level of statutory protection for members of DB schemes which enter wind up. Minister Varadkar has already stated his belief that the proposed measures should be implemented as soon as possible and he is keen to see them enacted before the Dáil’s Summer Recess.

If enacted, the Draft Bill will tilt the balance of power in favour of trustees for those DB scheme which at present can be wound up by the employer serving a termination notice which is effective immediately.

The requirement for an employer to participate in a process of trying to agree a funding proposal having served a termination notice is unusual. Employers may simply choose to ignore that process in the knowledge that their potential exposure is limited to bringing the scheme up to solvency by reference to the funding standard and the funding standard reserve based on a determination by the Authority.

This assumes that the trustees don’t have the power to raise a contribution demand themselves on wind up. In those cases, employers may face the prospect of a contribution demand for a sum in excess of the funding standard deficit on wind up. This is risk some employers already faced if the scheme rules provided for a notice period. However, for schemes which previously could be wound up on immediate notice, this a significant shift of the balance of power in favour of trustees who may have had such strong contribution powers but were exposed to the risk of a termination notice becoming effective immediately.

Trustees and employers will therefore need to carefully review the relevant provisions of the Draft Bill and assess the potentially far reaching implications for their respective schemes.

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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