I move: "That the Bill be now read a Second Time."
This Pensions Bill is the most important piece of legislation concerning occupational pensions to come before this House since the foundation of the State. Its purpose is to regulate occupational pension schemes, ensure that they are properly administered and that, above all, the pension rights of members and their dependants are adequately safeguarded. I plan to achieve this by setting down minimum standards in key areas and by providing a framework for the regulation and supervision of schemes. I wish to ensure that members can change jobs without forfeiting their pension rights; schemes are properly funded; employers deliver on the promises made to the employees; and members have full access to all information about the running of their schemes and the security of their pensions. The Bill also provides for equal treatment for men and women in relation to the scope and conditions of access to schemes, benefit rights and contribution levels.
The operation of occupational schemes to date has been governed mainly by 19th century trust law. This is the first time since the foundation of the State that comprehensive legislation to regulate the operation of these schemes has been introduced. The provisions of this Bill are in line with best international practice. Its enactment will put Ireland in the forefront internationally with regard to the regulation of occupational pension schemes.
The introduction of this Bill, therefore, marks a milestone in the history of the development of an overall system to provide for adequate and secure pension cover for our citizens.
At the outset I would like to review the developments which have taken place in relation to pensions and to highlight the important role of occupational schemes in the evolution of our national pensions system. The first priority of the State has been to ensure that the old, the widowed and the permanently incapacitated have an adequate basic income.
Initially this was provided solely by way of schemes of social assistance. Since then a comprehensive social insurance pensions system has been developed. This involved the introduction in 1935 of the widows and orphans contributory pensions; in 1961 the old age contributory pension and in 1970 retirement and invalidity pensions. Compulsory social insurance has been progressively extended to the various categories in the labour force. The most recent major development in this regard was the extension by me of social insurance pensions to the self-employed in 1988.
The basic weekly rates of pensions have been increased substantially in real terms, particularly over the past decade. In addition many pensioners qualify for free travel and allowances for electricity, telephone rental, TV licence, fuel and the living alone allowance. At present some 375,000 persons are dependent totally or to a significant degree on a weekly social welfare pension, or 473,000, if dependants are included. The overall cost of providing social welfare pensions will amount this year to some £1.25 billion, or 45 per cent of total social welfare expenditure of some £2.76 billion.
For much of our history old age, widowhood and permanent incapacity brought with them poverty, deprivation and dependency. The progress that has been made in developing the overall social welfare pensions system has meant that a reasonable, basic level of pension is now available. This was borne out by a recent ESRI survey on poverty which showed that the elderly, in particular, were no longer a high risk group.
To ensure that all citizens have a basic level of social welfare pension, the State has relied on occupational pension schemes to provide workers with a supplementary pension related to their pre-retirement income. These occupational pensions are normally provided as part of their terms of employment for employees in the non-commercial public sector. A comprehensive system of tax reliefs has been introduced to encourage the development of occupational schemes in the private and commercial semi-State sectors. The present tax treatment of occupational pension schemes is based on the provisions of the Finance Act, 1972. The objectives of such tax reliefs are two-fold. First, they promote formal arrangements for the provision of retirement pensions and for dependants in the event of death. These are designed to assist employees in maintaining the standard of living to which they had been accustomed while in employment. Secondly, they encourage national savings by the accumulation of pension funds.
This approach has been very successful. There are over 25,000 occupational pension schemes in existence in Ireland today. Some 550,000 employees or roughly two-thirds of the total number in employment are members of supplementary schemes. Pension schemes have also become a major vehicle in the national economy for savings and investment. There are no comprehensive returns of statistical and financial data for the pensions industry.
However, on the basis of the most recent estimates the assets of pension funds currently amount to some £10,000 million. Annual contribution income is in excess of £500 million while new investment income is of the order of £600 million. Benefit payments out of these schemes are estimated to be in excess of £250 million per annum.
I mentioned earlier the major part which the system of tax reliefs has played, and is continuing to play, in the development of occupational pension schemes. The cost of these reliefs in terms of revenue foregone is considerable. The National Pensions Board in their report on the tax treatment of pension schemes estimated that the cost of tax relief on contributions in 1989 would be £203 million. Tax relief on the investment income of pensions in 1989 was estimated at £162 million. However, these tax reliefs are in effect an investment in the future. They facilitate the provision of pensions which will result in employees during retirement and after death, their surviving dependants, being considerably less dependent on State funded services. This leaves the State with more resources to devote to those who have to rely mainly on State schemes for pensions and other essential services. In addition, of course, once the pensions become payable they are subject to income tax in the normal way.
Occupational pension schemes now have a major role in this country in the provision of pensions. This can be seen in the numbers covered, the value of pensions provided and the significant contribution being made by the State through the system of tax reliefs to the growth and development of privately funded occupational pension schemes. Acccordingly, it is in the interests of all concerned, not least the State, that a comprehensive and effective system for the regulation of occupational pension schemes is in place to ensure that members' pension rights are adequately safeguarded.
To assist Deputies in understanding the need for the regulatory system provided for in this Bill, I would like to describe briefly the nature of occupational pension schemes and the regulatory environment in which they currently operate.
Occupational pension schemes in the semi-State and private sectors are usually financed by setting aside funds during the working lifetime of the employees. These funds are normally placed in the control of trustees who hold and invest the funds under the terms of a trust deed. By creating a trust fund in this way the pension scheme becomes a legal entity separate from the employer's business. Schemes must be set up in this way in order to be exempt from income tax and capital gains tax in accordance with the Finance Act, 1972. Some schemes, notably public service schemes, operate on a pay-as-you-go basis meeting the cost of current benefits out of current revenue in much the same way as salaries and wages of current employees. Such schemes are referred to as unfunded schemes.
Pension schemes can be divided into two basic types — defined benefit schemes and defined contribution schemes. In a defined benefit scheme the member's benefits are defined by reference to the member's salary or wage, an index, or a fixed amount. The cost of those benefits is borne either entirely by the employer — a non-contributory scheme — or by a combination of contributions by the employees themselves and the employer — a contributory scheme. Benefits on retirement at normal retirement age are typically a stated percentage of the member's pensionable salary, which may be salary at, or perhaps averaged to, retirement. The amount payable may be reduced to take account of pension entitlements acquired under statutory social insurance.
A defined contribution scheme is one in which the contributions to be set aside each year by the employer and, if contributory, by the employee in respect of each member are defined. The benefits payable under such schemes are not normally defined but are determined by reference to the amount of the defined contributions and the investment return earned on them.
I mentioned earlier that the development of occupational pension schemes has been strongly influenced over the years by tax reliefs. The requirements for tax approval have largely determined the extent to which the schemes are currently regulated. The retirement benefits district of the Revenue Commissioners is responsible for the approval of pension schemes under the Finance Act, 1972. Their supervision, however, is mainly limited to ensuring that tax exemptions are restricted to bona fide pension schemes and that the benefits paid and the contributions set aside to fund the promises made are not excessive, i.e. that the pension schemes are not being used for tax avoidance purposes.
Pension schemes with benefits provided out of separate funds are also invariably set up as trusts in order to qualify for tax reliefs. The administration of such schemes is subject to the general body of law relating to trusts and to the specific terms of the deeds under which they are established. The interests of the members are thus protected under trust law in two respects: the trust fund belongs in equity to the members to the extent that the assets are required to provide benefits for them and/or their dependants; the trustees are answerable to the members for any losses due to fraud or other breaches of trust and are obliged to disclose information about the general state of a pension scheme, if asked to do so by the members or beneficiaries.
If members of the scheme have reason to believe that their scheme is being mismanaged, they may sue through the courts for breach of trust or for an order removing the trustees. They may also seek to have their rights to information enforced through the courts, if necessary, in accordance with trust law.
There are a number of major shortcomings in the present system. The main body of the statute law in relation to trusts is contained in the Trustee Act, 1893 which was not passed with pension schemes in mind. The general nature of this law is such that it can be very difficult to assess if the trustees are performing properly and in accordance with trust law. If members of the scheme have reason to believe that their scheme is not being administered in accordance with the provisions of the trust deed or is being mismanaged, the redress currently is through the courts by suing for breach of trust or for an order removing the trustees. Members also have a right to information on their schemes under trust law, but legal proceedings may also be required ultimately to obtain redress in this area. The likelihood of long delays and the uncertainty as to the outcome, given the vagueness of trust law, will generally act as a major deterrent to members taking legal proceedings to enforce their rights, particularly given the substantial legal costs that could be involved. Even if successful action were taken against the trustees, it is doubtful if such action would redress the problems since in most such cases it is unlikely that there will be adequate funds available to the trustees. This would arise because of the insolvency of the employer, underpayment of employers' contributions, or poor investment performance of the fund, or by a combination of such factors. For evidence of this I need only refer to a number of unfortunate situations which have arisen over recent years. These were well publicised in the national media and concerned schemes where following the liquidation of the company, the assets were found to be deficient in terms of the members' justified expectations.
Another major shortcoming concerns the provision made for members of pension schemes who change jobs. The arrangements made to preserve the pension entitlements of early leavers where they move to another employment or to provide them with a transfer payment to the scheme of their new employer have been regarded as inadequate. Few schemes maintain the real value of preserved pensions. As a result, 90 per cent of pension scheme members who change jobs settle for a refund of their contributions, which in many cases is well below the value of the pension entitlements they have foregone. In addition, of course, the persons concerned at retirement or in the event of their premature death, their surviving dependants, may end up with a very inadequate pension.
It was against this background that the National Pensions Board was established in 1986 to report to the Minister for Social Welfare on the priorities for the regulation of occupational pension schemes and the general development of pensions for the future. Thus began a process which has culminated in the publication of this Bill. The first report of the Pensions Board made a series of detailed recommendations for the regulation of occupational pensions. I then asked for and received the views of the various interested parties on the recommendations made and in the light of the report and views received I prepared my proposals for Government. These were submitted in May 1989 and Government approval obtained for the drafting of legislation on the basis of these proposals.
In May 1989 also the board submitted its fourth report which dealt with the implementation of the principle of equal treatment for men and women in occupational pension schemes. That report provided me with sound guidance in drawing up the proposals for legislation in this area, which also form an important part of the Bill.
The drafting of the legislation proved to be a much more complex and time-consuming task than any of those involved had anticipated. Considerable technical assistance was given to my officials in this task by some of the top experts on occupational pensions in this country who are, or had been, members of the National Pensions Board. I would like to put on the record of this House my appreciation of the contribution made in the course of this whole process by these experts, and indeed by all the members of the National Pensions Board, who gave freely and unstintingly of their time and considerable expertise. I would also like to place on record my appreciation of the work done on this legislation by the officials in my Department.
This Bill, therefore, is the product of a process involving wide consultation and the harnessing of the considerable goodwill and expertise of all the various interests associated with occupational pensions in this country. As such it is, I believe, a model as to how Government can work with the various interested parties in the achievement of objectives which are for the benefit of all.
In formulating my proposals, I have been careful to strike a balance between on the one hand providing adequate safeguards for the protection of members' pension rights and, on the other hand, ensuring that the continued development of pension schemes is not put at risk by overregulation. I believe that I have succeeded in striking the right balance in this regard. I would now like to give a broad outline of the main objectives which I wish to achieve with this Bill.
The primary objective is the establishment of a legal framework and a system for the supervision of occupational schemes, which will ensure that schemes are properly administered and that there are adequate safeguards for the pension rights of scheme members and their dependants.
This will be achieved by setting down clear statutory requirements regarding the disclosure of information to scheme members and other interested parties; setting out the duties and responsibilities of trustees, and providing that trustees who fail to comply with the requirements will be guilty of an offence and subject to substantial fines or, as a last resort, can be removed; and establishing a statutory pensions board to monitor and supervise compliance with the new requirements.
My next objective is to provide for the compulsory preservation of occupational pension entitlements and for their revaluation, in the case of members who change employments. As an alternative to preserved benefits, a member will have the option of having a transfer payment made to the scheme of his new employer or of purchasing an annuity from an approved life office.
My third objective is to ensure that the pension promises made in the case of defined benefit schemes are backed by adequate and secure scheme assets. Accordingly, the Bill provides for minimum funding standards which will require trustees to arrange for actuarial valuations every three and a half years, in order to establish that the assets of the fund are adequate to meet the pension promises made. To increase further the protection of members' pension rights in this regard, provision has also been made to enable me as Minister to provide, by way of regulations, that any self-investment or concentration of investments over a prescribed percentage shall not be taken into account by the actuary for the purposes of complying with the minimum funding standards.
A fourth objective is to provide for the progressive implementation of equal treatment for men and women in relation to occupational benefit schemes in line with the requirements of EC Directive 86/378/EEC on this matter. I also intend to take into account the recent judgment of the European Court of Justice of 17 May in the Barber case in relation to equal retirement ages. I will explain this in more detail later.
I would like at this stage to refer to the issue of member trustees. This has received a lot of attention in recent weeks. The Bill as currently drafted does not make provision for the appointment of member trustees. I would like to briefly outline the background to this issue.
The National Pensions Board agreed that the participation of members in the appointment of trustees is a desirable objective but differed in their view as to whether it should be a statutory requirement — a majority being in favour while a minority considered that it should be encouraged only through voluntary agreement between employers and members. Given the reservations expressed on the issue the board considered that progress towards the fulfilment of the objective should be gradual rather than immediate. For this reason the board recommended that statutory provisions in this regard should not come into operation until a period of three years has elapsed following the date of the enactment of the Pensions Act.
I agree with the National Pensions Board regarding the desirability of member participation in the appointment of trustees, particularly as it would improve the interest in and commitment of members to their scheme. However, I have to take into account the serious reservations of employers regarding statutory requirements in this area and, in particular, their view that such requirements could be an inhibiting factor in the extension of occupational pension schemes to employments where they do not already exist.
Accordingly, it is my intention to ask the new statutory board, as a priority, to take whatever steps are needed to encourage employers to appoint member trustees on a voluntary basis by, in particular, allaying fears in relation to such appointments employers may have. This would be very much in line with the functions of the new board as laid down in section 10 of the Bill regarding the issuing of guidelines, codes of practice and the setting of standards generally in relation to the duties and responsibilities of trustees. I would envisage that after a three year period the board would then report to me on the issue and advise me as Minister on the extent to which the right of members to participate in the appointment of trustees requires a statutory basis.
It was my intention initially to wait until then to make whatever statutory provision would be necessary. However, having consulted with the various interested parties I have decided that it would be more appropriate to make special provision in the Bill giving me powers as Minister for Social Welfare to prescribe by way of regulations for member participation in the appointment of trustees. This will ensure that when the three year period has elapsed there will be no delay in making the necessary provision. I will, therefore, be circulating the text of an appropriate amendment to the Bill before Committee Stage to provide for this.
I am determined to ensure that as far as possible the whole question of member participation in the appointment of trustees is dealt with in a way that will give members an effective and meaningful role in the administration of what are, after all, schemes designed for them. At the same time I want to ensure that legal requirements in this regard do not hinder the extension of occupational pension schemes to employments where they do not already exist.
As the explanatory memorandum circulated with the Bill is a comprehensive one, I do not propose to give a detailed account of the contents of the Bill. I will instead give a general overview of the main provisions of each of the seven parts with particular reference to those areas which are of major importance.
Part I of the Bill contains the usual general provisions and calls for few remarks except in relation to section 3. This section provides for offences and penalties for contravention of the provisions in the Bill. It also provides that a prosecution for an offence may be instituted by the new Statutory Pensions Board to be established under Part II. This is a very important provision. At present virtually all pension schemes are subject to the safeguards of trust law. However, as I mentioned earlier those rights can only be enforced by members instituting proceedings in the High Court, if they are prepared to meet the risks of litigation. Under the Bill it will now be possible for an aggrieved member to request the pensions board to take an action on his/her behalf against defaulting trustees or employers, rather than rely on his/her own resources. From the members' point of view this is a significant development as it affords them a readily accessible means of redress.
Part II of the Bill provides for the establishment of a new statutory board An Bord Pinsean — The Pensions Board. Section 10 sets out the general functions of the board. The primary functions of this new body will be to supervise the implementation of the new legislation. It will also have an advisory role to the Minister for Social Welfare on pension matters generally and on apppropriate standards for occupational pension schemes. The new board will be broadly representative of the main interests in pensions schemes, namely the trade unions, employers, the pensions industry and the Government. I believe that the composition of the board will enable them to be effective in performing the tasks set for them.
To fulfil their role it is essential that the board have the necessary powers and resources available to them. Sections 15 and 16 enable the board to appoint a chief executive and to employ their own staff. Section 18 provides the new board with the necessary powers to carry out inspections of a pension scheme's books and records and to obtain all the relevant information relating to the affairs of a scheme.
Section 25 provides for the imposition of fees on pension schemes. I would like to emphasise that the purpose of these fees, which were recommended by the National Pensions Board, is to meet the administrative expenses of the new board. The scale of the fees and the basis for their determination will be set down in regulations under this section. The level of the proposed fees will be determined by me in consultation with the members of the new board.
The success of this legislation in safeguarding the rights of pension scheme members is crucially dependent on the board operating with the maximum efficiency. I believe that this can be best achieved by having the administrative expenses financed by the occupational pension schemes. They will have a direct and ongoing interest in the successful and cost-effective operation of the board. In addition, given the scale of the tax reliefs available to occupational schemes, I do not consider that taxpayers should also be asked to finance the cost of the regulatory system for the protection of members' pension rights.
I referred earlier to the fact that one of the major shortcomings in the present arrangements for occupational pension schemes is that few private sector schemes make adequate provision to protect the pension entitlements of those who change jobs, particularly in relation to maintaining the real value of these entitlements. As a result many members who leave to take up other employment settle for a refund of their contributions. This results in the pension entitlements they have acquired on reaching retirement being considerably less than their periods as members of pension schemes should have conferred. Lack of protection of pension entitlements on leaving can also be a major barrier to mobility between employments, particularly in the case of persons aged from mid-30 upwards. At this stage people are much more conscious of pension cover and of their responsibilities for dependants. It is essential today to have adequate pension cover in view of the fact that people are living much longer in old age and the rising costs of maintaining a decent standard of living after retirement. Today's 30-year-olds must plan realistically for some 15 years of retirement and possibly more. The average will be 15 years and I should like to state that people will need to make provision for those years.
Having examined the present arrangements, and their shortcomings, I have decided that the best way forward would be to introduce a proper system of preservation of pension rights with an option to transfer the equivalent value of members' entitlement to another suitable scheme. Accordingly, Part III of the Bill contains the necessary provision for the protection of members' pension rights in the event of their leaving a scheme before normal retirement age.
Section 27 of the Bill provides for a statutory entitlement to preserved benefit in respect of service after the commencement date in the case of a member who leaves a pension scheme before retirement age, provided he/she satisfies the following minimum qualifying service requirements. He must have at least five years qualifying service of which at least two years fall after the commencement date. The requirements in this regard are simple to operate and are broadly in line with current practice.
Sections 28 and 29 deal with the levels of benefit to be preserved. A distinction is made in the Bill between benefits provided under defined benefit schemes and those under defined contribution schemes. In the case of the former, schemes will be obliged to preserve an appropriate part of any benefit earned for service after the commencement date. In the latter case the amount of preserved benefit shall be equal to the actuarial value of the contributions accumulated on behalf of the member at the date of payment in respect of such service.
Under section 31 refunds of members' contributions will no longer be permitted for periods of service in respect of which members are entitled to preserved benefits. This is essential, since to do otherwise would not result in any improvement in the existing situation. These provisions also apply to any additional voluntary contributions made by the member.
I wish to emphasise that the preservation requirements only apply to service after the appointed day. This means that members will still be entitled to opt for a refund of contributions paid in respect of periods up to that date, January 1991. Moreover, refunds of contributions will also be payable in respect of periods after that date, in cases where members do not fulfil the qualifying service requirements for preservation, for example less than five years in the scheme.
A number of pension scheme members who intend leaving full-time employment early, for example, on marriage or to look after their children on a full-time basis, have planned to opt for a refund of their contributions to help finance house purchase or other expenses associated with setting up a home. They have expressed concern that this may no longer be possible. I wish to take this opportunity to assure them that contributions paid to date will not be affected by the provision concerning preservation.
A system of compulsory preservation on its own would do little to solve the problem of the "early leaver". Any proposal which hopes to achieve a real and meaningful improvement in this area must incorporate a provision whereby preserved benefits are revalued between the date of leaving and eventual retirement. Otherwise, the preserved pension loses value in real terms. Section 32, therefore, makes provision for a minimum revaluation of preserved benefits from a date five years after the commencement date or the date of leaving, if later, up to retirement age.
The minimum annual rate of revaluation proposed in the Bill is the lesser of the increase in the consumer price index or 4 per cent per annum. The National Pensions Board had proposed in addition that where the rate of inflation is greater that 4 per cent but less than 10 per cent an additional increase of half the excess over 4 per cent should be provided, thus giving a maximum increase of 7 per cent. Many of the interested parties which I consulted felt that the board's formula for revaluation was unduly high and would in any event give rise to very real practical problems for pension schemes. For example, trustees of a scheme may wish to purchase a deferred annuity contract for an early leaver to be revalued in accordance with the requirements laid down in legislation. However, insurance companies are only geared to providing such contracts at fixed rates of revaluation. There are no contracts available on the market which will automatically revalue in relation to a variable rate of inflation. It would also cause difficulties for schemes in their effort to satisfy the proposed new minimum funding requirements under Part IV.
I believe that the proposed revaluation formula set out in section 32 is a reasonable compromise. It is easier to administer and is aimed to fully match any increase in inflation up to 4 per cent. Provision is made in the section to vary by regulations the 4 per cent ceiling if this is found necessary.
I would like to stress that this proposed rate will be the statutory minimum requirement. If schemes can afford to do better, then there is nothing in the Bill precluding them from doing so.
Section 33 of the Bill gives a member of a funded scheme who builds up an entitlement to a preserved benefit the right to take a transfer payment as an alternative to his preserved benefit entitlement. The transfer payment shall be the equivalent to the actuarial value of the member's preserved benefit including an appropriate element for revaluation. A member may choose to have the transfer payment made to the scheme of his new employer or used to purchase a deferred annuity contract from a life office.
Section 36 enables the Minister to make regulations excluding from the application of the proposed preservation requirements schemes already having a comparable system of preservation and revaluation for early leavers under their own rules. It is my intention to exclude public sector schemes who operate the public service transfer network from these requirements. Such schemes cater for those employed in the Civil Service and the broader public service, including the vast majority of semi-State companies. Persons who leave such schemes before normal retirement are entitled to preserved benefits which are more generous than those provided for under this Bill. Revaluation of preserved benefit entitlements under such schemes is linked to salary increases which are normally more favourable than the formula linked to increases in consumer prices as proposed in the Bill. It is not proposed, therefore, to change the basis of revaluation for such schemes in order to comply with the new requirements. There is also in existence an extensive transfer network whereby full credit for past service is provided to employees moving within public sector organisations.
Many current scheme members who intend to remain in full-time employment but may wish at some future date to change jobs have expressed concern that no provision has been made requiring preservation in respect of periods prior to the commencement date. I wish to stress in this regard that the National Pensions Board estimated that the cost of preservation in respect of future service on the basis of the conditions they recommended would approximate at most to 1 per cent of pensionable salaries and would be substantially less in the case of schemes with a relatively low level of membership turnover. The overall cost of preservation on the basis of the conditions set out in the Bill is likely to be marginally less, given the fact that the conditions are somewhat more restrictive than those recommended by the pensions board. Moreover, one of our leading actuaries has estimated that the additional cost of extending the preservation provisions to the past service of existing scheme members may not amount to more than 0.5 per cent of pensionable salaries. In view of these considerations I urge employers to follow the lead given in the Bill and to provide for preservation in respect of past service rights where this is the wish of members. It is not my intention at this stage to make this mandatory but I will be keeping the situation under review.
Trustees and sponsoring employers will have a variety of options open to them to meet the costs of preservation. Some schemes will have no difficulty in meeting these costs given the favourable rates of investment return in recent years. Others could increase the contributions from employers and employees or both. Non-contributory schemes could be changed to contributory ones or changes could be introduced in the scheme's benefit structure by, for example, taking social welfare benefits fully into account or changing the benefit formula.
I would now like to turn to Part IV of the Bill which provides for the introduction of a funding standard. The main objective of the new funding requirements is to prevent employers from making pension promises which they are unlikely to be able to afford, and to enhance the security of the promises already made.
Section 40 provides that the new minimum standard shall apply to all defined benefit schemes. Scheme trustees will be required to submit to the pension board at regular intervals actuarial funding certificates prepared by the actuary to the scheme. These certificates will certify whether the standard is being adhered to.
An initial actuarial funding certificate will be required within a period of three years after the commencement date. I propose that this commencement date will also be 1 January 1991. This certificate must state that sufficient assets exist within the scheme to cover 100 per cent of the liabilities relating to pensions in the course of payment, additional voluntary contributions made, transfer value entitlements and the benefits which have accrued in respect of post commencement date service. The latter benefits are those which must be compulsorily preserved in respect of future service under Part III (including appropriate provision for revaluation). It will also need to certify the degree of solvency achieved in respect of accrued benefits relating to service prior to the commencement date.
Subsequent actuarial funding certificates must be submitted every three and a half years after the effective date of the previous certificate. Certificates which have an effective date not more than ten years after the commencement date will, in effect, be required to certify that the solvency level of the scheme has not deteriorated in the meantime below the level initially certified.
After a transition period of ten years every defined benefit scheme will be required to have reached a funding standard which will enable it to fully discharge the accrued benefit expectations of its members. Accordingly, certificates which have an effective date more than ten years after the commencement date will need to certify that total assets at that date are at least sufficient to secure 100 per cent of all the liabilities of the scheme. These are transitional phasing arrangements to make it feasible to meet the new statutory requirements.
The proposed funding standard provided under section 43 differs from that recommended by the National Pensions Board, in that full protection is given to the entitlements of current pensioners. From the beginning schemes must certify that there are adequate assets in the fund to provide for the benefits of current pensioners in respect of service prior to the commencement date as well as service after that date. In the event of wind up, provision is also made for the first priority to be given to current pensioners. Under the board's original proposals circumstances could be envisaged whereby these benefits could be put at risk in the event of a winding up in order to fully secure other benefits provided under the scheme. I am glad to say that under the provisions of the Bill benefits paid to pensioners are to be given maximum protection and must be fully funded at all times.
The funding standard will not add to the overall cost of benefit provision — no augmentation of benefits levels are imposed and by definition no additional financial commitments arise. They will, however, have an impact on the pace of funding for many schemes because of the need to accelerate contribution payments to conform with the solvency targets. The effect on existing contribution levels will depend on the funding policy currently adopted for each scheme. The general impression within the pensions industry is that the funding policies adopted by the majority of schemes are such that compliance with the proposed new standards should not give rise to any significant extra costs.
It is interesting to note that the accounting bodies have recently taken an interest in this area and have recognised the importance of pension liabilities within company accounts. They have recently published a statement of standard accounting practice No. 24 dealing with disclosure of pension costs in the accounts of employers. The provisions of SSAP 24 — as it is called — apply in full to Irish registered companies which are quoted on the UK and Dublin Stock Exchanges for accounting periods commencing on or after 1 July 1988. Non-quoted Irish companies will be obliged to implement in full the financial provisions of the standard during the accountancy period which commences on or after 1 January 1993.
SSAP 24 adopts as its basic objective that the costs of pensions should be charged against an employer's profits on a systematic and rational basis over the period during which the employer derives benefit from the employee's service. This requires the actuarial assessment of an annual pension cost for a defined benefit scheme which is expected to remain substantially level over a period of time.
SSAP 24 does, of course, deal only with the recognition of pension costs in company accounts and does not have any direct effect on the funding programme which the employer adopts for his pension scheme. Nevertheless, it seems inevitable that, in most instances, the SSAP 24 pension costs will be reflected in actual contribution payments to the pension scheme. The SSAP 24 provisions, therefore, require the adoption of funding policies for pension schemes which are fully in line with the requirements of the Pensions Bill.
Part V of the Bill deals with the disclosure of information in relation to pension schemes. It is often said that occupational pension rights are the biggest investment an employee holds; worth far more than any investment he controls personally including even his home. It is only right, therefore, that full information is available to the individual about this major asset. Indeed, the view has been expressed that many of the difficulties experienced to date in relation to pension schemes result from a lack of information on the part of the scheme members.
I have already referred to the serious deficiencies in the legal protection afforded the members in this regard and to the fact that one of the main objectives of this Bill is to provide members with effective and comprehensive rights to obtain full and necessary information in relation to their pension scheme. There are two broad requirements provided for in this area. First, the trustees must obtain specified financial and actuarial information on the scheme under their control. Secondly, the members must be provided with adequate information to enable them satisfy themselves about the running of the scheme, its financial soundness and the security of their benefit entitlements.
Sections 53 to 57 set out the general disclosure requirements and provide that the more detailed requirements be covered by regulations. Some commentators have expressed disappointment at the lack of detail concerning the new requirements and the difficulty of assessing their effects on individual pension schemes. I was very much guided by the National Pensions Board in this regard which recognised that the requirements in this area, by their very nature, would be fairly detailed and may not be appropriate for primary legislation given that their application to particular types of schemes would have to be kept under constant review. The board recommended that the more general requirements should be set out in the Act with provision for the more detailed requirements to be included in regulations. In drafting the Bill I have adopted this approach. It is my intention, as soon as the Bill is enacted, to publish the more detailed requirements in regulations.
During the course of our consultations on the board's proposals, it became clear that there is widespread agreement on the need for full disclosure of information along the lines recommended by the board. Therefore, I intend to waste no time in bringing these into effect. For the benefit of Deputies I would like to set out clearly what these requirements entail. Different requirements will need to be set for different types of schemes. For example, the essential information only will be required from unfunded schemes. There will be reduced requirements for defined contribution schemes and schemes with fewer than 50 members.
Section 55 requires trustees of schemes to obtain at periodic intervals actuarial valuations and audited accounts. In the case of defined benefit schemes an actuarial valuation must be carried out every three and a half years. This is in line with current good practice. The actuarial funding certificate to be prepared for the purposes of the new funding standard will be completed at the same time as the actuarial valuation. The valuation must be carried out by a qualified actuary and must be made available for inspection by members and their trade union representatives.
It shall also be a requirement for schemes to produce annual audited accounts prepared by a qualified auditor — surprisingly, there is no current legal requirement for pension schemes to have an independent audit of their accounts. The objective of the accounts shall be to give employers and scheme members a true and fair view of the nature and magnitude of the financial transactions of the scheme for the scheme year and the nature and disposition of its net assets at the accounting date. Therefore, the audited accounts will outline the financial assets and liabilities of the pension scheme and the way in which the trustees have discharged their stewardship responsibilities during the period. Unfunded schemes, death benefit schemes and frozen schemes will be exempt from these requirements.
In recent years there have also been developments in accountancy practice, relating to pensions accounting and disclosure. A Statement of Recommended Practice — SORPI — on pension scheme accounts was issued in May 1986 by the Accounting Standards Committee. This statement represents the accountancy profession's guidance on current best practice on the form and content of such accounts. Although it is not mandatory, pensions schemes are encouraged to follow it. Our detailed requirements in this area which I propose to outline in regulations will be similar to these professional guidelines. Accordingly, schemes which already follow the guidelines should have little difficulty in complying with the regulations. In fact it will be a requirement for the accounts to contain a statement that they have been prepared in compliance with the professional guidelines and, if not, to provide an indication of material departures from this.
Section 54 requires trustees to provide an annual report in respect of each scheme year after the commencement date. This report shall normally consist of: a report by the trustees; an investment report; the audited accounts and a copy of the latest actuarial funding certificate.
The report by the trustees shall include basic information in relation to the scheme such as: (a) the names of trustees and any other persons or organisations acting for the scheme such as actuaries, auditors, solicitors, and investment managers; (b) a statement of the number of members, pensioners and persons with preserved benefits; (c) a statement of any amendments to the scheme over the past year; (d) details of any increases in pensions granted during the year or of any ex gratia payments made and (e) a review of the financial development of the scheme and likely anticipated future developments.
The investment report shall include a statement of the investment policies pursued during the year and any material changes in these policies during the year or in comparison with the previous year. A comment on the investment performance of the fund shall also be made.
As I mentioned earlier, there will be reduced requirements for defined contribution schemes and smaller schemes with fewer than 50 members. As recommended by the board, these will be less onerous than the full details I have just outlined. In place of the full requirements for annual trustee reports and annual audited accounts such schemes shall have the option of issuing a shortened report prepared by either an independent accountant or the insurance company managing the scheme. This report shall include the following information: (a) a general statement indicating the basis on which contributions to the scheme are calculated; (b) a statement indicating how the assets are invested including the extent of any self-investment or concentration of investment; (c) confirmation that the contributions paid in the relevant period represented the amount due as set out in (a) above or, alternatively, a note of the amount received where this is different from that due; and (d) in the case of "small" defined benefit schemes, a copy of the most recent actuarial funding certificate.
I would like also to refer to section 53 which is an important provision in itself. While sections 54 and 55 impose obligations on trustees to produce annual reports and other financial documents, section 53 places a general requirement on them to disclose these to members, prospective members, their spouses and trade unions representing the members together with a comprehensive range of additional information. This additional information shall include: details about the constitution and rules of the scheme; certain basic information about the scheme and details about an individual's benefit entitlements and options under the scheme.
Some concern has been expressed about the cost of implementing these disclosure requirements, in particular the administrative costs. I do not consider that the costs involved will be significant in terms of the resources of many schemes. Many schemes already provide their members with comprehensive information. Those which follow good practice will find that they have little or no extra burden to bear as a result of the legislation. Moreover, the option of shortened reports for smaller sized schemes will go a long way towards mitigating any extra costs for such schemes.
Combined with the new minimum funding requirements in Part IV, I believe that these new measures will greatly enhance the security of members' pension rights. It will improve the rights of members to access to information on the level of funding of pension schemes and thus the extend to which future benefits are secured. Members will be much more aware of their rights under the schemes and the basis on which their pension expectations are founded. It will also enable them to satisfy themselves that schemes are being run in their best interests.
Part VI of the Bill contains a number of specific provisions affecting trustees of pension schemes. I have already referred to the absence of any specific statutory provision covering the duties of pension scheme trustees. Such duties are subject to general trust law and to the trust deed of the pension scheme. The only general obligation on trustees is to look after and manage the trust assets and to use them to make provision for the beneficiaries. It can therefore be difficult to assess if the trustees are performing properly in accordance with trust law. Furthermore, if members believe that their scheme is being mismanaged, the only redress currently is through the courts by suing the trustees for breach of trust or for an order removing the trustees. Such a case would normally be heard by a Chancery judge of the High Court and the substantial costs involved would normally make it prohibitive for members to contemplate such action.
The Bill deals with both these shortcomings. First, it clearly defines the duties and responsibilities of pensions scheme trustees and, secondly, it provides an appropriate means of redress for the individual member. Section 58 outlines the main duties of trustees as follows: (a) to ensure that the contributions due to the scheme are paid into the fund and are properly invested; (b) to ensure that the benefits of the scheme are paid as they become due; and (c) to ensure that proper membership and financial records are kept.
Section 3 of the Bill, to which I referred earlier, provides that trustees who fail to comply with the new requirements will be guilty of an offence which shall be punishable by a system of fines. Section 61 in this part of the Bill provides that the High Court may order the replacement of the trustees, if following a request made to it by the pensions board, it considers that such action is necessary in the interests of the members of the scheme.
It is envisaged that a member's remedy for non-compliance with the new requirements would initially take the form of an approach to the trustees either directly or through his trade union or staff representative. If this approach or informal contact does not produce the desired result the member, or his/her trade union, could make a complaint to the board which would then investigate the allegation on the member's behalf. It is hoped that the involvement of the pensions board would normally be sufficient to achieve the required action. If this course of action fails to provide satisfaction the board would then use its power to take legal proceedings on behalf of the member against the defaulting trustees or any other culpable person.
Part VII of the Bill represents an important step in providing equal treatment for men and women in occupational benefit schemes. It implements in full the requirements of EC Directive 86/378/EC on this issue. The main schemes covered are occupational pension and sick pay schemes and long-term disability schemes. Optional benefits, single member schemes and personal schemes are excluded in line with the provisions of the EC Directive in this regard.
The provisions in the Bill will override any differences in the treatment of men and women in occupational schemes in relation to: eligibility for membership; the obligation to contribute; levels of contributions payable by members and employers; and benefit rights. There are special safeguards for those absent from work by reason of maternity or for family reasons.
I wish to state that I am fully committed to the elimination of all discrimination between men and women in occupational social security schemes. In line with the approach being adopted at EC level in this regard, I consider that there is a need for schemes to have transitional periods before full compliance with the principle of equal treatment is required. This is necessary to enable employers and/or trustees to meet in a planned way any extra costs arising from the implementation of the principle of equal treatment and to ensure that the entitlements already acquired by existing members, both men and women, are protected. This approach was also recommended by the National Pensions Board in its fourth report.
Accordingly, in line with the timescale laid down in the EC Directive, schemes will have up to 1 January 1993 to comply in full with the equal treatment provisions in the Bill. Discrimination in contracts of employment and collective agreements must also be removed by that date. The deadline is extended to 30 July 1999 in the case of employee's contributions, where the rates differ by reference to the use of different actuarial factors for men and women. The Directive also permits member states to defer compulsory application of the principle of equal treatment for pensionable age and survivor's benefits, at the latest until a further Directive requires equality in this area. This is also reflected in the Bill.
The 1985 ESRI survey on occupational pension schemes showed that in only 13 per cent of schemes was the retirement age for women lower than for men. These schemes would invariably be longer established schemes. In virtually all new schemes and in the case of new entrants to existing schemes, equal retirement ages are normally provided for. Inequality in this respect does not occur therefore, in the vast majority of schemes in this country. This is mainly due to the fact that there is equality in this regard under the basic social welfare schemes which have a major influence on the way occupational schemes are designed.
Equality of treatment in this area could involve having an equal retirement age at either the later age which normally applies to men or at the earlier age which normally applies to women. On grounds of cost it is likely that schemes would equalise at the later age. The National Pensions Board stated in its Fourth Report that this is a reasonable and practical means of achieving equality of treatment, particularly having regard to the financial implications.
The net effect of equal treatment in this regard in the vast majority of cases, therefore, would be to worsen the position of women who can now retire at the earlier age, with no corresponding advantage being given to men. For these reasons I decided that equal treatment in this area should not be made mandatory until this was provided for in the next EC Directive. I expected that transitional arrangements would be provided for in that Directive which would protect the position of women who are currently eligible to retire at the earlier age.
I considered that it would be important that Irish legislation be fully in line with the requirements of the next EC Directive in this area. Otherwise the Irish women concerned could be worse off than their counterparts in the other EC countries, if the provisions of the Directive were more favourable to them than Irish legislation. Alternatively, the schemes might have to alter their rules further, if Irish legislation in this area did not fully comply with the provisions of the next Directive and, as a consequence, had to be changed to provide for such compliance.
Since the publication of the Bill, however, the European Court of Justice in its recent judgment of 17 May in the Barber case appears to have ruled in effect that compliance with Article 119 of the Treaty of Rome requires equal treatment in relation to retirement ages under occupational schemes. The court also ruled that Article 119 of the Treaty may not be relied on to claim entitlement to a pension in line with its judgment in this case, prior to the actual date of the judgment, except in the case of workers or those claiming under them who have before that date initiated legal proceedings or raised an equivalent claim under the applicable national law.
I am at present having this judgment examined within my Department. Prima facie, it would appear that with effect from 17 May, the date of the judgment, differences in the treatment of men and women in relation to retirement ages under occupational schemes are contrary to Article 119 of the Treaty. If, having examined the matter, I am satisfied that this, in fact, is the case, I will bring forward an amendment on Committee Stage to bring the appropriate provisions in the Bill into line with the court judgment. I want to avoid the situation where the provisions of this Bill when enacted would be contrary to the jurisprudence of the European Court of Justice.
The EC Directive also permits member states to postpone compulsory application of the principle of equal treatment in relation to survivor's pensions. The National Pensions Board in their report made specific recommendations for the progressive implementation of equal treatment in these schemes. I have found their recommendations broadly acceptable. However, for similar reasons to those I have outlined in relation to retirement ages, I decided that the compulsory application of equal treatment in relation to survivor's pensions should be dealt with in the context of the next EC Directive dealing with this matter.
The cost of providing for equal treatment in this area was also an important consideration. The National Pensions Board estimated that it could give rise to an increase in pension costs varying from 3.4 per cent to 15.8 per cent, depending on the male-female composition of the workforce. Requiring schemes to meet these extra costs at the same time as they will have to meet the extra costs of complying with the other provisions of the Pensions Bill would be difficult to justify, especially when EC member states are permitted to defer compulsory application of equal treatment in this area under the terms of the Directive. It could also lead to a reduction in pension cover for survivor's pensions, where schemes could not fully meet the extra costs involved. This would adversely affect women engaged full-time on home duties, who are totally dependent on the widow's pension in the event of the death of their husband.
My intention is to provide for equal treatment in this area in accordance with the terms of the next Directive and within the timescale it lays down. The recommendations of the National Pensions Board will be fully taken into account in establishing the Irish position on the terms of the proposed Directive in relation to this issue. However, I intend to keep the situation in this regard under review. If within two years there does not appear to be any immediate prospect of the next Directive being adopted by the Council of Ministers, I will at that stage bring forward proposals for the compulsory application of equal treatment in relation to survivor's pensions, in which full account will be taken of the recommendations of the National Pensions Board.
I would now like to refer to a number of provisions of this part which may be of interest to Deputies. Section 63 defines the term "occupational benefit scheme". This definition includes occupational schemes other than occupational pension schemes such as occupational sick pay schemes and long-term disability benefit schemes. Section 67 outlines specific exemptions from the principle of equal treatment. The most notable of these are those which I have referred to — pensionable ages and survivor's benefits. Section 69 of the Bill deals with the implementation of the principle of equal treatment. It provides that where any rule of a scheme does not comply with the principle it will be overridden by this part of the Bill and the more favourable treatment provided to persons of the one sex shall be provided to persons of the other sex. Trustees of schemes or where appropriate the employer shall be obliged to take the necessary steps to ensure compliance.
Sections 73 to 78 deal with the resolution of disputes in regard to equal treatment. In this connection a clear distinction is made in sections 73 and 74 between those concerning occupational pension schemes and those involving other types of occupations benefit schemes. In the case of pension schemes it is proposed that disputes between members and trustees-employers will be determined by the proposed new pensions board along the same lines as those applicable to the other requirements contained in the Bill. Failure by any party to comply with the principle will be an offence under section 3. It is proposed that disputes concerning other occupational schemes will be dealt with by equality officers and the Labour Court on the same basis as for equality of treatment in the employment field. The procedures for the resolution of such disputes are set out in sections 75 to 77 and are similar to those contained in existing equality legislation, that is the Employment Equality Act, 1977, and the Anti-Discrimination (Pay) Act, 1974.
I trust the House has found my explanation of the objectives of the Bill and of its major provisions useful and helpful. Due to its length I regret that I was unable to go into more detail but in my reply to the debate I will try to respond to any points or queries raised by Deputies.
As I said at the outset, this is a major and historic piece of legislation. I believe that it strikes the right balance between the need to provide for adequate safeguards for members' rights and expectations under pension schemes and the avoidance of over regulation of such schemes, which could jeopardise their further development.
We have managed to balance a large number of adverse factors. I believe the Bill is very well balanced. I feel privileged to bring this historic legislation before the House because for generations to come workers will be glad to acknowledge the value of the legislation we are enacting in 1990.
Before concluding, a Cheann Comhairle, I welcome Deputy Flaherty on her return to this House after the recent birth of another son and I congratulate her on that event.