I move: "That the Bill be now read a Second Time."
The Social Welfare and Pensions (No. 2) Bill and the measures contained in it will not in any way affect people who are in receipt of either the contributory or non-contributory State pension. The measures I am outlining relate to defined benefit pension schemes only and the need for greater fairness when such schemes run into difficulty. It is important to stress that these measures will apply only in a limited set of circumstances, meaning the potential number of schemes affected will be small. The aim of the Bill is to ensure in such circumstances a fairer deal for workers and sufficient protection for pensioners while allowing employers and trustees to tackle their pension problems. The legislation is in keeping with the series of steps I have taken in recent years to deal with the issues affecting defined benefit schemes.
I want to detail some of those steps and set out the defined benefit context as it currently stands. Last year, for example, I brought in legislation introducing a risk reserve into defined benefit pension schemes and that legislation was broadly welcomed. The risk reserve is essentially a mechanism to ensure schemes do not take on too much risk and to prevent the same difficulties from arising again. It is worth remembering that the OECD, in its recent study on pensions in Ireland, pointed out that Ireland's occupational schemes lost more funds during the financial crisis than any other OECD country because of the high level of risk being carried by the schemes.
Following the introduction of the legislation last year, the funding standard was reintroduced and schemes had to return their funding position to the Pensions Board by the end of June this year. The Pensions Board suspended the funding standard in 2008 after the bank guarantee scheme was introduced in the mistaken belief that it would be possible to reinstate it by Christmas, but of course that never happened.
Schemes got into greater difficulty in the aftermath of the bank guarantee and the crash. I am happy to report to the House that the position is somewhat better than expected. We now know that over 40% of schemes are fully funded. Other schemes are working on the funding arrangements. Although 20% are poorly funded, many of these schemes have submitted funding proposals to the Pensions Board to get them back on track. The Pensions Board is now working with them on an individual basis to help them get over the line and to a sustainable position on pension schemes. The aim is to continue to nurse these schemes into a good funding position. When schemes are well funded, there will be no need to fall back on the provisions in this Bill.
However, for schemes that are underfunded, the provisions in this Bill address difficult issues of equity and fairness and have been under careful consideration for some time. The provisions ensure a fairer deal for workers and sufficient protection for pensioners. Defined benefit schemes are private pension schemes where those contributing to the scheme - the employer and the members - pool their contributions, which are then invested in order to pay pensions on retirement. Employers establish defined benefit schemes to provide their workers with income in retirement. They sponsor and contribute to them in good faith, taking on a considerable amount of the risk. Employers also provide the employment opportunities in the first instance. The primary role of the employer, as the sponsor in these schemes, is an underlying principle informing this legislation. So too is the protection of pensioners in these schemes, given the importance of security of income in retirement. Members of occupational pension schemes contribute to them in the expectation of the pension promised to them being delivered in the future. The Bill acknowledges their role in the scheme and realigns their role to an extent.
The stakeholders share the benefits and also, in principle, the risks of the fund. Many of these defined benefit schemes were established years ago and some have more pensioners than contributing workers. The State's role as regulator is to watch over these private occupational schemes and ensure they can live up to their promises. The State recognises that it has obligations under EU law and it will address these obligations. This legislation does that. The State also has a policy role to try to ensure that all people have an adequate income in retirement.
In this Bill, I introduce changes to the existing priority order. The priority order comes into play when a defined benefit schemes winds up. It basically outlines, on a step-by-step basis, the order in which the assets of the pension scheme are distributed when the scheme is winding up. Existing legislation comes from a time when defined benefit schemes were carrying surpluses. There is no issue with a scheme winding up when the scheme is funded, as all benefits can be met, which is the critical issue. If the scheme is properly funded the measures are not at issue because the scheme has sufficient funds to meet the promises made in the context of the scheme. It is when a scheme is underfunded that difficulties arise. The key issue with the existing priority order is that it gives 100% protection to pensions currently in payment and then distributes the rest of the funds to current and former members of the scheme. It can arise at present that pensioners receive all or almost all of the pension fund and the members who have contributed but have not retired receive considerably less than they had expected. This issue has been of concern for some time and a considerable number of calls have come from employee and employer representatives, the pensions industry, actuaries and others to address the current inequities. Detailed examination of the issues has taken place. Technical advice was undertaken on the provisions and consultation with all stakeholder groups also took place. All stakeholder groups were invited to take part in a consultation process and participated. Following consideration of all the factors, I am replacing the existing priority order with two priority orders in this Bill. I am making provision for a situation in which the pension scheme winds up and the employer is solvent. I am also providing for a situation in which both the employer and the pension scheme are insolvent, which is called a double insolvency. This is to ensure the State meets its obligations under the insolvency directive following the ruling by the European Court of Justice in April this year.
In a single insolvency, where the scheme does not have enough funds to meet the claims on it, the priority order will change in the following way. The first priority will be given to defined contribution assets in a defined benefit scheme, which should not be part of the distribution of defined benefit assets. The next priority is given to pensioners. They will still be given a significant level of priority but there will now be provision for redistribution into the scheme from higher pensions at the initial distribution of the scheme assets. I am retaining 100% protection up to an annual amount of €12,000 for pensions. I am then providing a priority of 90% of pensions between €12,000 and €60,000 and 80% of pensions over €60,000. This reprioritising of the element of pension benefit over €12,000 will contribute to the benefits of current and former employees, which will be prioritised at 50%. Pensioner benefit will then be reprioritised before further resources are allocated to current and former scheme members. The impact of the changes will depend on the degree of underfunding. If there are sufficient funds in the scheme, any initial reductions to pensioners will be regained once the current and former members have been provided for and as the distribution of funds moves through the order outlined.
By maintaining significant protection for the pensioner, we are recognising that pensioners have retired from the workforce and therefore are a lot less likely to be able to build up more contributions. However, it aims to bring more equity to the current system by giving an improved outcome to current and former workers who have contributed to the scheme. Current workers paying into the scheme are often referred to as active members, while former workers who have not yet reached pension age are referred to as deferred members. The latter will not claim the pension fund until they reach retirement age.
The change recognises that all beneficiaries of the scheme - active contributing members, deferred members and pensioners - need to share the risks when a scheme is underfunded. The limit of €12,000 takes into consideration that the median private sector defined benefit pension is €11,000, the average pension is €18,000 and 55% of private sector pensions are below €12,000. Separately to any private pension, the vast majority of pensioners receive the State pension, which is not affected in any way by these changes.
I have fully protected the State pension since becoming Minister in light of its critical importance to older people. A pensioner who has a State pension of €12,000 and an occupational pension of €12,000 will retain an income of €24,000, which is approximately two thirds of the average industrial wage and compares well internationally.
The second provision we are allowing for is double insolvency, which applies when an employer goes out of business and the pension scheme is also underfunded. It is a particular situation that is covered by the EU insolvency directive. Article 8 of the directive requires the State to have measures in place to ensure that at least 49% of the expected benefits of the contributors to the scheme can be met. In April this year the European Court of Justice found that the State was not meeting its obligations under Article 8, and this provision is addressing the obligation. Again, the options have been considered in detail, and this also included an examination of the mechanisms in other countries. I am aware that other countries with defined benefit schemes have established large and complex structures to deal with occupational pension underfunding, but we need to bear in mind that this economy is recovering slowly from the severe downturn. Although I am thankful that unemployment is decreasing and we will exit the bailout on 15 December, resources remain limited.
We also looked at the risk of future double insolvencies and the role that regulation can play in keeping pension schemes aware of the need to manage their own funding position. Therefore, this provision changes the order of priority in a double insolvency situation as follows. As before, first priority is given to defined contribution assets, as they should not be part of the distribution of defined benefit assets. The second and third priorities are given to 50% of pensioner and members' benefits, and then priority is given to protecting pensioner benefits up to €12,000. The remaining steps of the order continue to provide for the benefits of pensioners and then for benefits of current and former scheme members.
These changes to the order do the following. First, they meet the requirements of the directive by ensuring that scheme funds are distributed in a way that ensures that all members, including pensioners, receive 50% of their benefits. The next priority is that significant protection is in place to ensure that pensioners receive a pension of €12,000. Again, much depends on the funding of the scheme. If the scheme is sufficiently funded, the distribution of funds can move through the various steps of the priority order and provide for the 50% requirement under the directive and then for pensioners' benefits up to €12,000, with the remainder going to pensioners' and other members' benefits.
In addition, the Bill provides that in a double insolvency where a scheme has insufficient resources to provide the 50% of benefits and protect €12,000 of pensioner benefits, the Minister for Finance shall provide for the shortfall in scheme assets. The scheme would wind up in the normal way and provide current and former workers with transfer values, which can be moved to another pension arrangement, and purchase annuities for the pensioners. The Minister has agreed that some of the funds obtained from the pension levy can be used to fund any costs which arise in double insolvency only. In such cases - which I should emphasise are very rare - it is proposed that there be a transfer of funds from the State to the scheme trustees by way of a once-off settlement. The provisions outline the principles of this process on which guidelines will be introduced. In short, the State does not intend to establish a complex and costly structure funded by taxpayers. What is provided for is a mechanism that can also provide for any historic situations that have arisen.
The aim of this Bill and the entire package of measures is to ensure as far as possible that we have the minimum number of double insolvencies. The Pensions Board will be introducing secondary legislation and tightening up the regulation around underfunded defined benefit pension schemes with a view to ensuring that such schemes take action to manage and improve their funding position. I cannot stress enough the importance of this, as pension schemes are based on promises made in good faith by employers. As a result of the events surrounding the Irish bank guarantee and turmoil in the international markets, pension schemes have gone through a very difficult time, although we are slowly recovering and stabilising. It is important that we get as many schemes as possible back into a properly funded position. That is the best protection for pensioners and active and deferred members. These measures and actions are all aimed at minimising the risk of double insolvencies in future.
The Bill broadens the category of benefits that can be reduced where a defined benefit pension scheme is being restructured to improve its funding position and remain viable for all its members. Schemes have numerous options in this regard. For example, they can increase contributions or extend the retirement age, and they can also reduce benefits. Schemes are managed by trustees under trust law, and people will be familiar with negotiations taking place between trustees, the employer, and active and deferred members on how to effectively restructure schemes to produce the best and most sustainable outcome for the fund. This provision represents an additional option for the trustee.
The reduction is progressive and the limits are as I outlined for single insolvency. Pension benefits up to €12,000 are fully protected, annual pension amounts of between €12,000 and €60,000 can be reduced by up to 10%, and annual pension amounts over €60,000 can be reduced by up to 20%. This again brings increased fairness to the scheme, improves the position for current and former scheme members and may help a scheme to stay open. I also want to emphasise the fact that the provision provides for a reduction of up to 10% and up to 20%, and the trustee has discretion as to the percentage that needs to be applied. If a viable restructuring package can be put in place, it will assist in reducing the amount of restructuring. For example, a scheme with a high number of pensioners with high average pensions that applies a 1% reduction could receive an injection of funds of 2% to 3% back into the scheme for current and former workers. Everybody speaking on all sides of the House is conscious of cases in which a person reaching the pension age of 65 years will get 100% while somebody who is 62, 63 or 64 but has not yet reached pension age is left with little or nothing. That is part of the fairness issue we are trying to address.
In addition to the changes to defined benefit schemes that I have mentioned, this Bill also addresses issues that have been raised in a recent High Court judgment concerning the legal powers of deciding officers and appeals officers to revise decisions in certain cases.
This is a complex area. Sections 301, 317 and 324 of the Social Welfare Consolidation Act currently allow officials of my Department, including appeals officers, to revise earlier decisions in a range of circumstances. This includes situations where new evidence is produced which indicates that the original decision was wrong and situations where there has been a change of circumstances since the original decision was given. These powers are wide-ranging and give considerable flexibility to deciding officers and appeals officers to deal with new evidence or changed circumstances which have been brought to their notice. Up until now, this flexibility has been seen as an asset in allowing deciding officers and appeals officers to deal with differing and, in some cases, changing circumstances. However, in the light of the recent High Court ruling, the provisions relating to a change of circumstances are now considered to be problematic. Up until now, in most cases, it has been the practice in the Department that once a claim is refused and all review and appeals processes are finalised, if the customer seeks a revised decision based on a change of circumstances, he or she is advised to make a fresh application. The new claim is then fully assessed in the light of all the circumstances of the case. In the light of the recent High Court decision, the Department can no longer require people to make a fresh claim but must reopen the claim, even if it was closed many years previously. The purpose of sections 3 to 5, inclusive, of the Bill is to address this issue, but in a limited range of circumstances. Specifically, section 3 amends the provisions of section 301 of the Social Welfare Consolidation Act which apply to the revision by a deciding officer of a previous decision of a deciding officer, an appeals officer or a designated person on entitlement to supplementary welfare allowance. I stress that where the original decision was wrong and if new facts and evidence emerge, the customer will still be able to seek a revised decision. The amendment does not change this. Where a claim is in payment, it will still be possible to revise the decision if circumstances change, but where a person was refused a social welfare payment in the past and his or her circumstances change, the correct channel is to make a fresh application in order that the application can be fully considered in the light of his or her current circumstances. The amendment aims to ensure that will be the practice in all cases. In the light of the High Court decision, I have asked officials of the Department to carry out a more wide-ranging review of the legislation on social welfare decisions and will bring forward any necessary legislation at a later date.
I will now outline the main provisions of the Bill. Section 1 provides for the Short Title, construction and collective citations. Section 2 defines the principal Act for the purposes of Part 2 of the Bill to mean the Social Welfare Consolidation Act 2005. Sections 3 to 5, inclusive, provide that where a person was refused a social welfare payment in the past and his or her circumstances have changed in the meantime, rather than seeking to have the earlier decision reviewed, the correct channel is to make a new application for payment in order that this application can be fully considered in the light of his or her current circumstances. Section 6 provides for the correction of an erroneous reference and the deletion of an obsolete reference contained in Table 2 of Schedule 3 to the Social Welfare Consolidation Act 2005 which lists certain items of income which are excluded from the assessment of means for social assistance payment purposes.
Part 3 and section 7 outline that the "Act of 1990" means the Pensions Act 1990. Section 8 amends section 41 of the Pensions Act to affirm that the changes to the wind-up priority order apply to all defined benefit pension schemes subject to the statutory minimum funding standard. Section 9 inserts five new subsections to provide for the amendments to the priority order to replace the existing order with two new priority orders to deal with scheme wind-up when the employer is solvent and the employer is insolvent - the double insolvency. Section 10 provides for the drawdown of benefits in the event of a shortfall arising in a double insolvency and provides the Minister with the power to make guidelines.
Section 11 broadens the category of benefits that can be reduced where a defined benefit scheme is being restructured because it does not meet the minimum funding standard. Section 50 of the Pensions Act permits the Pensions Board to direct the trustees of a pension scheme to reduce the benefits of current and former scheme members and-or post-retirement increases in benefits for pensioner members where a scheme does not meet the funding standard. The reductions apply to higher pensions up to the limits specified.
Sections 12 and 13 cross-reference section 50B and section 50C with subsection (1B). Section 14 amends section 59B to provide that the prohibition on reducing pensions in payment shall not apply to directions under section 50(1B).
The legislation seeks to achieve three things: it ensures the State meets its obligations to put measures in place under the European insolvency directive. It addresses the equity difficulties with the existing priority order. It goes further by providing a further option to enable schemes to stay viable and stay open, which is the purpose of the legislation, to get the maximum number of schemes across the line to becoming well funded, sustainable, viable schemes, with consequent benefits for pensioners, active current members and deferred members. People need to have a decent income when they retire and we want occupational pensions to be viable and effective. The legislation achieves a fine balance between the needs of the various parties and protects the State and the taxpayer. It does not in any way affect people receiving State retirement pensions, either contributory or non-contributory. A pensioner member of a defined benefit scheme who has an annuity will not generally be affected by the Bill. I commend the Bill to the House.
