JOINT COMMITTEE ON SOCIAL AND FAMILY AFFAIRS debate -
Tuesday, 25 Jul 2006

Pension Provisions: Presentation.

Chairman

On behalf of the joint committee, I welcome the Pensions Ombudsman, Mr. Paul Kenny, and his colleagues, Mr. Kevin Lonergan, head of investigations, and Ms Joan Bray and Ms Caitriona Collins, investigators, who will make a presentation on pension issues. Members will remember that Mr. Kenny was in the Visitors' Gallery at a meeting of the joint committee two weeks ago, at which Councillor Philip Cantwell of Meath County Council made a presentation on the operation of the income continuance scheme for certain employees at Tara Mines. Mr. Cantwell is in the Visitors' Gallery today and we welcome him again. Therefore, their roles are reversed. I thank Mr. Kenny who has been most flexible in facilitating the committee by attending with his officials.

Members are reminded of the parliamentary practice that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable. Members who wish to make a declaration on any matter being discussed may do so now or at the beginning of their contribution. Members are also reminded that if there is a possibility of there being a conflict of interest, they should make a declaration either now or at the start of their contribution. In this case there is bound to be a conflict of interests as we are all would-be pensioners. I draw the attention of witnesses to the fact that while members of the committee have absolute privilege, this same privilege does not apply to witnesses appearing before the committee. While it is generally accepted that witnesses would have qualified privileges, the committee is not in a position to guarantee any level of privilege to witnesses appearing before it. This will not pose difficulties for Mr. Kenny and we look forward to his presentation.

Mr. Paul Kenny

I will refer to income continuance plans, largely in the light of what Councillor Cantwell said here two weeks ago because there is a number of issues which I may be able to clarify. I will then make observations on a number of pension related matters. I circulated a preliminary paper to the members of the committee to which I have since added a number of topics. I propose to stop after each topic and take questions from members rather than merge everything into one.

Chairman

That would be very productive.

Mr. Kenny

There are two types of income continuance plan, the first of which, which need not concern us unduly, is approved by the Revenue Commissioners under section 8 of the Finance Act 1979. It is an individual contract between the provider and insured person, although it may be provided under a group policy umbrella. The person covered has a direct relationship with the insurer. Typically, these contracts underlie the voluntary income continuance plans which are common throughout the public service and usually union sponsored. The first such plan was initiated for secondary school teachers many years ago. Such plans come within the purview of the Financial Services Ombudsman and there is redress available through him for any losses sustained through maladministration. An application may be made to the ombudsman because there is a direct contract between the individual member and the insurance provider.

The second type of plan is employer sponsored and not approved by Revenue because there is no mechanism for approval under the taxes Acts. This is the type of plan that concerned Councillor Cantwell in relation to Tara Mines. Typically, such plans are paid for in full by the employer because members cannot receive tax relief on contributions, unlike pension plans for which there is a specific mechanism for granting tax relief. Occasionally members do pay, not by paying directly for income continuance benefits, but by increasing the contributions they make to the parallel pension scheme. They obtain tax relief as though it was related to a pension contribution, but in reality they are paying the cost of the income continuance benefit. That is what happened in the case of the Tara Mines plan. They obtained tax relief but only because the income continuance cost was disguised as an extra pension contribution.

The contract of insurance lies between the employer and the insurance carrier, the employer being the beneficial owner of the policy. If a member becomes ill or disabled, the proceeds under the policy are paid to the employer who makes a discretionary payment to the member but that arrangement is purely artificial. It is a total legal fiction, as the Chairman would say, designed solely for the purpose of avoiding benefit in kind because if the employer paid the premium and the employee was beneficially entitled to the policy proceeds, a benefit in kind charge to tax would arise. To avoid this they keep the insurance policy in the employer's name. The employer pays for the policy nominally and the employee is not taxed on it. However, the employee is taxed when the benefit is paid because it is paid by the employer as if it were pay.

Most employer sponsored arrangements also include an extra benefit which we call a pension premium allocation, the object of which is to ensure the person who is disabled can remain in the employer's pension scheme without cost to him or her or to the employer and continue to accrue benefits during the period of disablement which could be temporary. It could last a year or two, from which the person concerned will recover in whole or in part. However, it could also last a lifetime and very often does. If there is a pension premium allocation, the person concerned can stay in the employer's pension scheme and continue to accrue benefits.

On the issues raised by Councillor Cantwell, during the years the design of plans and their interaction with pension schemes gave rise to a number of anomalies. The very first income continuance plans were put in place largely with the Norwich Union Fire Insurance Society. Under the contract issued, an income continuance benefit could continue to be paid to a disabled person even if his or her contract of employment was severed by the employer. Norwich Union would continue to pay the employer who would continue to pay the member, even though the employer had terminated the contract of employment. With newer contracts with other providers, there is not this facility. There must be a contract of employment, at least nominally, for the income continuance benefit to be paid. So it is that in Tara Mines there are some disabled workers who nominally have employment contracts while others do not. Both receive ongoing disability benefit payments under the income continuance plan. They are paid by Mercer as paying agent for the employer. However, those with contracts fall within the definition of an active member for the purposes of the Pensions Act. Those without contracts do not. As explained by Councillor Cantwell, this has implications in the election of member trustees and the making of additional voluntary contributions. It is also at the centre of a case before the courts and on which I will not comment further.

Councillor Cantwell referred to problems relating to pension entitlements under the pension scheme and the fact that this entitlement did not automatically increase, even though the pension premium allocation in the case of Tara Mines was increasing at 5% per annum. The main difficulty is that most, if not all, pension scheme rules fail to deal properly with disabled members benefiting from income continuance payments. They leave them to be dealt with instead by temporary absence rules which were designed to cater only for a temporary absence from work, not long-term disability. In my digest of cases for 2005 which has not yet been published I make the following plea: "I would also strongly urge employers and trustees to cater specifically under pension scheme rules for those on income continuance benefit and not to rely on the ad hoc use of temporary absence provisions, which are sometimes vague and often discretionary, to deal with situations they were not designed for".

Income continuance plans are not within my remit, as they are not occupational pension schemes. However, because they interact with such schemes inevitably they come to my notice but I can only deal with the pension scheme, not the related income continuance plan. As I previously pointed out, they are not within the remit of the Financial Services Ombudsman either because there is no direct relationship between the disabled person and the insurance carrier — the employer is intervening. Therefore, for technical reasons to do with the Act under which the Financial Services Ombudsman Bureau was set up, he cannot provide redress in cases of maladministration. Therefore, there is no possible avenue of redress for any person who suffers a loss due to the maladministration of a company-sponsored income continuance plan. Neither is there any regulation of those plans. They do not fall under the supervision of the Pensions Board and the Pensions Act does not apply to them. There is no automatic right to information on such plans, as would apply to information on a pensions scheme to which the Pensions Act and the regulations under the Act apply. This is a sector of activity covering employee benefits which effectively is totally unregulated.

A report was prepared for the Pensions Board at the request of the Minister for Social and Family Affairs some time ago by Watson Wyatt and Matheson Ormsby Prentice. It is not in the public domain and it is not clear what plans there may be to regulate income continuance plans, but it is my firm conviction that they must be covered by some form of regulation because the current position is unsatisfactory.

Senator Terry

I thank Mr. Kenny for going through that with us, although I still find it confusing. Does he recommend that legislation should cover income continuance plans?

Mr. Kenny

Yes, I do. I am not clearly wedded to that being supervised by any particular regulator but I am firmly of the view that they should be regulated.

Senator Terry

With respect to an occupational pensions scheme, was the pension scheme of those workers in Tara Mines, whose work was terminated as a result of their being involved in an accident and becoming disabled, frozen at that time?

Mr. Kenny

Originally, it was. The booklet that was given to the workers at the time the pensions scheme was introduced stated that the employee's pension would be based on his or her salary at the date of disablement. Although the employees continued to accrue future years of service, they did not accrue any salary increases. That position was changed following a great deal of agitation for such change by Councillor Cantwell and the disabled workers. There is now a link between the salary for the job and the pension employees will accrue. However, there is no linkage between the rate at which the pension premium allocation increases, which is a fixed5%, and the rate at which the pension increases. There is nothing in the documentation that has been given to people that would provide for the regulation of that position. The documents on the pension scheme do not allude to the position of disabled workers. They are dealt with under a discretionary leave of absence rule. Therefore, what happens in respect of them is basically in the hands of the employer and the trustees. They can decide to do things or to do things differently because there is nothing in the pension scheme rules that copperfastens the position of a person who becomes long-term disabled.

Senator Terry

Is such a person's pension fund regulated in terms of him or her being required to provide a funding certificate to the Pensions Board every year? Councillor Cantwell informed us last week that the scheme is almost insolvent. What regulations apply to such a scheme?

Mr. Kenny

The Pensions Act applies in full to such a person's scheme. The scheme is fully regulated by the Pensions Act. Such a person is required to provide a funding certificate. The scheme may or may not be solvent but if it is slightly insolvent, it would not be alone in that plight. There is a great number of non-solvent pension schemes. The fact that the pension scheme is regulated does not solve the problem. The unsatisfactory aspect is that the rules of the pension scheme are not subject to regulation. Certain minimum safeguards are provided in the legislation but we do not tell employers what to include in the rules governing their pension schemes. The rules of most pension schemes do not address the situation of people who become long-term disabled. Then everybody asks what should happen as regards these disabled people and the reply is that the scheme has a temporary absence rule and they treat them under that. The temporary absence rule is probably discretionary in one way or another, and therefore there is no certainty for people who are long-term disabled. They are treated under this temporary absence rule and there is not a rule which states precisely what happens under the pension scheme rules where one becomes disabled and is unable to work from then until normal pension date. That is what is missing and that is what I would like to see people providing for in the rules of their pension schemes.

Senator Terry

The Pensions Board is the regulator that is obliged to work in the interests of the pensioner or someone who is receiving income continuance. If this area is not addressed, the board is neglectful in its duties.

I would welcome any representations Mr. Kenny can make to the Pensions Board and whatever work can be done here to ensure that the pensioner is put at the centre of this matter. The legislation should reflect that those at the centre are the pensioners, not the companies and the industry which seem to dictate the pace. I would welcome anything Mr. Kenny can do in that regard and what we can do here.

Mr. Kenny

I have also spoken to the Financial Services Ombudsman who is supportive of the notion that this is an area that needs to be brought under control. He certainly is prepared to lend his voice to that as well.

Deputy T. Dempsey

Under the current legislation is it possible for the employer to treat two former employers, who are now disabled and who had similar terms of service up to the time of disablement, in entirely different ways which might discriminate against one as compared with the other?

Mr. Kenny

As long as there are discretionary rules of the kind that I described, it is in principle possible to do that.

Deputy T. Dempsey

I take it there is no protection because the employer is the owner of the scheme.

Mr. Kenny

That is correct.

Chairman

This does not come under Mr. Kenny's remit. Would legislative intervention be required to allow him to conduct a review?

Mr. Kenny

It would. My brief is firmly confined to occupational pension schemes and PRSAs.

Chairman

If the committee recommends that this is an area that should come within the purview of Mr. Kenny's remit, what would be his response?

Mr. Kenny

I would ask the committee for support in seeking more staff from the Department of Finance.

Chairman

I appreciate that.

Mr. Kenny

That aside, I would have no objection in principle.

Chairman

What amendment would have to be made to the Pensions Act to allow this to happen?

Mr. Kenny

Detailed consideration would probably have to be given to the amendments needed to the Pensions Act. The Pensions Act is a complex piece of legislation. It covers matters such as the disclosure of information. It would be necessary to consider in detail precisely which areas of the Pensions Act should be applied to income continuance benefits. Income continuance schemes do not fit neatly into the Pensions Act because they are not pension schemes and it would be necessary to give detailed consideration to how exactly the Pensions Act needs to be amended. It may well be that this is an area which has been covered to an extent in the report which has been given to the Pensions Board.

Chairman

Is that the Matheson Ormsby Prentice Solicitors, MOPS, and Watson Wyatt report?

Mr. Kenny

MOPS and Watson Wyatt prepared this report for the Pensions Board at the request of the Minister.

Chairman

There may well be something cooking as we speak.

Mr. Kenny

Yes. There may well have been firm recommendations in that report.

Chairman

Mr. Kenny stated he was not fussed as to whether it is done by him or by the Financial Services Ombudsman. It appears the committee would prefer the matter to come within Mr. Kenny's remit because he deals with pensions. I know income continuance plans are an adjunct to pensions and not a pension per se. However, were they not sold as add-ons to a pension?

Mr. Kenny

Yes. The nature of the complaints we get is such that it would be easier to keep them together than to separate them. As matters stand, if they were part of the Financial Services Ombudsman's remit, one part of a complaint might be dealt with by me and it would then have to be passed on, which would not make much sense.

Chairman

It would not make sense.

Senator White

I agree with Senator Terry that the issue is complicated for the lay person. I thank Mr. Kenny for his explanation as I understand more having listened to him. I am not a member of the committee but I feel that we should do whatever we can to improve the situation. People who suffered a disability had to go underground to earn a living; I do not know how they did that.

What is the extent of the problem nationwide with regard to income continuance plans? Are there many others, besides the Tara Mines workers, who experienced this problem?

Mr. Kenny

There are thousands of members of income continuance plans, but only a percentage of those will become disabled. However, nobody knows who these will be. As there is no regulation, there is no guarantee of uniformity of treatment. One person might be lucky enough to work for a person who operates an income continuance plan with open access to information and who treats members fairly, but another might work for a company that believes its income continuance plan is governed by the Official Secrets Act.

Deputy T. Dempsey

It appears that it is possible for an employer to discriminate in the treatment of one employee over another. If an employee is discriminated against, does he or she have recourse to the services of the Pensions Ombudsman? Are there disabled workers on income continuance plans in other areas who are in the frozen pension situation? How does Mr. Kenny recommend we assess or access the numbers involved?

Mr. Kenny

It is only if we bring these plans under regulation that a statutory organisation such as the Pensions Board, if it was the regulator, could require, as it does for pension schemes, returns in terms of membership etc. This is what happens in the case of pension schemes. People can go to the Pensions Board register and find out exactly how many people are in a particular pension scheme.

Deputy T. Dempsey

If they are regulated.

Mr. Kenny

If a scheme is regulated, the information is available on a statutory basis. Income continuance plans, because they are called "occupational benefit schemes", are the subject of Part 7 of the Pensions Act, which deals with discrimination — originally only sex discrimination. This arose from European Council Directive 86/378 implemented here in 1990 by Part 7 of the Pensions Act, which was confined to sex discrimination originally, but extended to any occupational benefit scheme. By default, income continuance plans are regulated as far as discrimination is concerned and are now subject to the nine grounds of discrimination in the new Part 7 of the Pensions Act introduced in 2004 by the Social Welfare (Miscellaneous Provisions) Act 2004. Therefore, one cannot discriminate on grounds of marital status, membership of the Traveller community, sexual orientation and the other grounds in terms of an income continuance plan. If, however, I was asked whether it was conceivable an employer might decide to discriminate on the grounds he does not like the employee——

Deputy T. Dempsey

Or trade union membership perhaps.

Mr. Kenny

——or whatever, that is possible. If a person is discriminated against on one of the grounds in the Act, the appropriate avenue for redress is the ODEI, the Office of the Director of Equality Investigations.

Deputy Cowley

I thank Mr. Kenny for his presentation. I apologise for my non-attendance at last week's meeting as I was in Medjugorge as medical officer with the first pilgrimage for special needs children. I am sorry I missed Councillor Cantwell's presentation because I understand it has been very important in exposing what was a gross inequity. Are there other gross inequities of which the Pensions Ombudsman is aware which need to be addressed?

Mr. Kenny

I am about to address a few of them in the next part of my presentation to this committee. Every year in my digest of cases which is contained in my annual report I draw attention to matters I believe are not working properly. One of the advantages of the Pensions Act is that it is capable of being fixed and it is regularly fixed. As we go along we find out the bits that are broken and there is a will to fix them which I am very pleased about.

Deputy Cowley

Has the Disability Act any role to play in this situation?

Mr. Kenny

I do not think so because this is a matter that can be done by regulation.

Chairman

I thank Mr. Kenny. It has been very productive to segment this part of the presentation because there is a high degree of focus on this subject. He has indicated other areas which have come to his attention and I invite him to refer to those areas now.

Mr. Kenny

This may sound odd but there are some employees of the State who are forcibly kept out of pension schemes. There is a policy in place under which people who opted out of pension schemes in the past are never allowed to opt in again. These were people who in the past were working part-time or working for small money. They decided not to join the pension scheme and signed a document to opt out. Ten or 15 years later they have regretted the error of their ways as they see retirement looming. They ask to rejoin the pension scheme but they are refused because they opted out and must now stay out. This was a particularly thorny issue in respect of people who had opted out of participating in spouses' and children's schemes over the years because in the time since 1969 when widows' and orphans' pension schemes were first introduced, there were regular opt-in and opt-out options under various schemes. This fact was considered by the Commission on Public Service Pensions in its deliberations. It decided to recommend a fairly limited appeals system in respect of people who had opted out of spouses' and children's schemes. However, the commission was not asked to consider the position of people who had opted out of the main pension scheme. I can understand the difficulties that might be posed by reopening membership of spouses' and children's schemes as by definition, many of the people who opted out are now deceased and equity is difficult in that situation. For those still alive and still employed, the difficulties need not be that great.

Some people have been given the opportunity to join the scheme that is mostly in my frame at the moment. It appears that where the relevant Department cannot locate the evidence that the person opted out in the past, the employee is given the benefit of the doubt and the Department is allowing him or her to opt in. If the Department has clear evidence that a person opted out, then that person is out forever.

I am further concerned about that problem because although I have only anecdotal evidence in terms of the complaints that have been made to me, I have a suspicion that most of the people involved in this particular area are women. Consequently it may well be that the State is indirectly discriminating against women by keeping them out of the schemes.

Another disturbing feature of the policy is the fact that it seems to run counter to the present policy being announced by the Minister for Social and Family Affairs every chance he gets. He wants to get as many people as possible into pension schemes yet another Department is operating a policy that is forcibly keeping them out. I have already referred to this problem in my annual report which has been presented to the Minister, Deputy Brennan, but not yet published. The complaints to which I have referred arise in respect of certain school secretaries who are on the payroll of the Department of Education and Science. However, there are other school employees, secretaries and caretakers, who never get a chance to join or opt out of a pension scheme because they are not on the Department's payroll and are technically employed by the school board of management. However, they are paid from public funds. Their salaries are financed from the Central Fund by the capitation grant paid to the school. However, there is no specific pension allowance and schools are not obliged to do anything other than offer them personal retirement savings plans, PRSAs, to which they are not even obliged to contribute. Most schools could probably not afford to do so, even if they had the desire.

Schools are not the only ones affected. I recommend that members read the health supplement with today's edition of The Irish Times. It refers to a parallel case of nurses in a hospital in Cobh that caused some concern to the Labour Court and makes interesting reading. I suspect there may be other pockets of people in the State service who in one way or another may be excluded from participation in occupational pension schemes.

Chairman

Has Mr. Kenny an idea of the numbers involved?

Mr. Kenny

I have no idea of the numbers involved because some school secretaries opted in and there is only a limited number on the Department's payroll. However, given the number of schools, each of which has a secretary and a caretaker, there must be thousands in this boat. There are also nurses in hospitals such as the one in Cobh which, although a private hospital, is heavily financed by the Exchequer. Talks in that case are ongoing with the INO. It may well be that the hospital will be brought in under the umbrella of the HSE and then the problem will be solved. As of now it is not and the Labour Court was very disturbed by it. These matters gradually come to light only because people start to complain about them.

Chairman

It seems incongruous, given the position adopted in advocating that people should join pension schemes.

Mr. Kenny

I have a suspicion that if we could sort out the public service and construction workers, the Minister for Social and Family Affairs, Deputy Brennan, would be right on top of his target in terms of coverage.

Chairman

He would almost hit it automatically.

Senator Mooney

I am sorry I was somewhat late. Having spoken to one of the clerks, I assume the issue of Tara Mines was addressed. I wish to be associated with it and will probably see the minutes.

What is the position of those with employment contracts with semi-State bodies with a similar source of revenue in that the State ultimately has the majority shareholding and responsibility? In other words, in many cases the money is coming from public funds, although not exclusively. Increasingly employees are being put on contract. In some cases the contract is very cleverly geared to ensure the company does not need to discharge certain pension responsibilities.

Mr. Kenny

Some very murky things are happening in that regard. I do not know whether any of my colleagues would like to make any observations arising from complaints. The problem with contract workers, in particular, is that they now have a certain level of protection if the contract is renewed. They have to be treated as if they are permanent employees once they have fulfilled the conditions for the renewal of a contract. However, the people I am discussing are mainly those employed by the State at one remove, perhaps by a non-governmental agency, for instance, a charity, which is heavily funded by the Government or perhaps a local authority. A number of services are provided by arm's length operations which, in effect, are subsidiaries of local authorities, in which the people concerned do not have the same pension rights as local authority employees.

I recently came across the case of a person who was being transferred from the employment of a local authority to one such agency. As a local authority employee, he had a right to a defined benefit pension. If he transfers to the agency in question and has no permanency in the local authority, his service will be pensionable but not permanent. He will be in a defined contribution pension scheme. He really does not have any option. He has just under two years served in the local authority. This means he has no preservation rights. I told him to hang on until he had served two years to at least preserve them.

Senator Mooney

I raised the matter because I was a victim of that system. Prior to the introduction of legislation, I spent almost 20 years in RTE as a contract worker. It was my primary source of income. Unfortunately, my contract was terminated before the Protection of Employees (Part-Time Work) Act 2001 was passed and its application was not made retrospective. It was the same for many of my colleagues. As a result, I am very familiar with the problems of contract workers. While industry increasingly opts for contracts owing to the looming pensions crisis, are semi-State bodies which employ people on rolling six or nine month contracts subject to any obligations? In this context, I am not thinking of RTE, the revenue stream of which includes advertising sales.

Mr. Kenny

If it is not done on a rolling basis, there is no protection for workers. There was an interesting development recently in the higher education sector in which many are employed on a part-time basis. Some contracts are funded externally by way of research grants; other mainstream staff positions are internally funded. The Department of Finance took a strong stance with some institutions which wanted to treat workers externally funded differently from mainstream employees. All of the persons in question are to be covered by defined benefit schemes, although the arrangements have not yet been finalised.

Senator Terry

In which decade did the majority opt out? Before doing so, had they made contributions under the schemes? It appears there are extensive grounds for a legal challenge, given the many variances. For example, if the Department can find evidence that an employee never opted out, he or she will be allowed to opt in. It is unbelievably woolly. Can Mr. Kenny explain why most of those caught in these circumstances were women? What positions did they occupy? While he referred to secretaries and caretakers in schools, were there departmental jobs in which the women in question worked? I would like to get a picture of the people affected and to understand their age profile and fields of employment.

Mr. Kenny

While the age profile is uncertain, I suspect a number of the people in question are drifting towards pension age and beginning to get worried. In the case of school secretaries, the pension scheme was introduced in 1987, which means 19 years of service has been given in the meantime. It was a new scheme for those on the departmental payroll. School caretakers still do not have a pension scheme. As they generally work on a part-time basis, it was considered advisable to bring them into a pension scheme, although such a scheme has yet to be finalised. I understand it will be back-dated on its introduction to the commencement date of the Protection of Employees (Part-Time Work) Act 2001. School caretakers are generally male. The nurses in Cobh to whom I referred and elsewhere are generally female, but the evidence is difficult to find. There is no consistent pattern. Until a year ago I did not know this problem existed. Therefore, it is difficult for me to give the committee any hard data on its extent.

Senator Terry

If these people are still in employment they are making their PRSI contributions which would entitle them to only a contributory pension.

Mr. Kenny

That is right but they do not have an occupational pension.

Deputy Finneran

I welcome Mr. Kenny and his staff. Will Mr. Kenny explain the scheme for widows and orphans in respect of women? I understood that State employees, such as health board and local authority employees and those covered under the officers and servants legislation, had an opportunity to opt in or out of the scheme at a particular time and many opted in. Did that apply to nurses or was it interpreted in the strict meaning of widows rather than embracing widowers?

Mr. Kenny

No. There are two aspects to this, namely, that which refers purely to widows and orphans and that which refers to spouses and children. One cannot be in a pension scheme for spouses and children unless one is also in the mainstream pension scheme. The people who have this problem are those who are not even allowed into the main scheme. A person who has opted into the scheme might work side by side with a person who opted out. Those are choices they made.

Others will never be members of the scheme for spouses and children because they are not allowed to be members of the main pension scheme. They are more concerned about the personal pension. Most people nearing retirement age worry about what they, rather than their surviving dependants, will live on. The problem is to get them into the main scheme for future service.

Deputy Finneran

I know of State employees, such as health board employees and others, who died in retirement leaving their spouses without a pension. If they had opted into the scheme at a certain stage the spouse would have received half of the pension. There are many people in that situation. Did the commission to which Mr. Kenny referred deliberate on those cases or others?

Mr. Kenny

It deliberated on those who opted out of the pension scheme for spouses and children and recommended a limited basis of appeal in those cases. That commission produced a large report in 2002. In the wake of that an implementation body was established which divided the commission's recommendations into those that would be implemented without argument, those that needed further discussion, those that would be put on the long finger and those that would never again see the light of day.

Deputy Finneran

In respect of the officers and servants legislation, the officers did not have the opportunity to receive a contributory old age pension but the servants did. Were the servants discriminated against to the effect that they could not opt into the scheme for widows and orphans as well?

Mr. Kenny

An arrangement for widows and orphans was eventually set up for the servants. It still exists. There is no difficulty in that regard.

Deputy Finneran

What excluded the officers from the contributory old age pension?

Mr. Kenny

Government policy. There was a different contribution for the officers in the social welfare system under which they qualify only for limited benefits in respect of occupational injuries and spouses and children.

Deputy Finneran

I understand that part of it now. Finally, a group of people has been in contact with me and I expect other Members of the Oireachtas, including members of the committee. I have raised with the Minister the fact that the managers of social welfare offices, labour exchanges or whatever they are now called feel they have been badly treated and I wondered whether this had come to the attention of the Pensions Ombudsman.

Mr. Kenny

No, not at all.

Deputy Finneran

If I were to forward the documentation to Mr. Kenny, would he be prepared to take a look at their case?

Mr. Kenny

If it concerns occupational pension schemes, I can certainly have a look at it. If it is concerned with the social welfare system itself, that is outside my remit.

Deputy Finneran

I understand it has more to do with gratuity.

Mr. Kenny

Yes, as far as I am aware this relates to an occupational benefit. In fact there was a similar benefit for the part-time firemen, which is a gratuity as well. I spoke to representatives of the Department of the Environment, Heritage and Local Government which had to recognise that technically this was an occupational pensions scheme, even though it was never called that.

Deputy Cowley

I thank Mr. Kenny for his fount of information. The notion of Government employees being forcibly kept out of pension schemes indicates that the State might be guilty of indirect discrimination. Has the Pensions Ombudsman costed the situation as regards the cases that are known, in order to put matters right?

Mr. Kenny

I have no idea. I am conscious that a significant cost might be involved, but until I know the extent of the problem I have no idea of the cost.

Deputy Cowley

Is this a massive cost?

Mr. Kenny

It probably would be fairly massive. However, the Department of Finance alone can find this out, because it can ask the other Departments to trawl their agencies and find out what exactly is going on.

Deputy Cowley

Would it run to several millions?

Mr. Kenny

It would.

Chairman

I can see that Deputy Cowley wants to pin the Pensions Ombudsman down, but in fairness, he is only into guesstimates at this stage.

Mr. Kenny

I have one or two other matters I want to deal with. I have been in contact with some of the financial institutions because people have complained about the SSIA pensions incentive, which the Minister introduced recently. It came to my notice that there might be institutions which were not going to offer that. A person had a pensions scheme with a particular company and wanted to put his or her SSIA money into this to avail of the incentive being offered by the Government and was told it would not take it. I queried this with the financial institution concerned which said it was not going into this because it had streamlined its systems and could not handle the administration required to claim the subsidy. I approached the Financial Regulator's office which informed me that if the company chose to stay out of the market, it could not force it to go in. I am concerned that if many of the small providers stay out of the market, these savings will be concentrated further into the hands of the two biggest players. The two biggest players are reported in today's Irish Independent as having had 51% of the sales last year in the pensions area. That is probably anti-competition. However, I am really concerned that if the difficulties are made too great for people they might just throw their hat at it and decide not to make the savings. Possibly, they might even abandon the ongoing savings they would continue to make, having formed the habit of setting aside €254 a month or whatever it was. The Pensions Board is trying to persuade people to put their SSIA money into pensions. I would not like institutions to be telling people they do not want their money and to go away and try somewhere else. I have drawn this matter to the attention of the Minister for Finance, Deputy Cowen. It is something of which he is aware and, I believe, about which he is concerned.

From time to time, I get complaints from gay and lesbian people who are aggrieved about their treatment with regard to pension schemes. Members will be aware of Part 7 of the Pensions Act, to which I referred earlier, introduced by the Social Welfare (Miscellaneous Provisions) Act 2004, which introduced the new grounds of discrimination that would be prohibited in occupational pension schemes. These grounds had been formerly limited to sex discrimination only but nine grounds are now prohibited, including age, marital status, sexual orientation, membership of the Travelling community and so on. However, some aspects of the Pensions Act allow for practical problems to be addressed, for example, the fact that men and women have different life expectancies. One can use actuarial tables that reflect that fact.

In the area of marital status and sexual orientation, it was specifically provided that it would not be illegal to give more favourable treatment to the widow or widower of a deceased member. Therefore, one can discriminate on the grounds of marital status by providing a widow's or widower's pension, which is eminently practical. That particular opt-out is the reason, particularly in public sector schemes, no benefits will be provided to anybody who is in a non-marital relationship, whether with a member of the same sex or the opposite sex. The situation in the private sector is not so black and white because trustees may have discretion to pay benefits even though people are not married, and very often they use that discretion. However, there are also schemes in the private sector that are in need of modernisation.

The recommendation of the Commission on Public Service Pensions was that existing spouses' and children's schemes in the public sector would be modified to allow for the payment of a survivor's pension to be made to a financially dependent partner where there was no legal spouse and where a valid nomination of that partner had been made by the member. The Department of Finance officials dissented from that recommendation. Even that modest proposal did not get past the joint working group on pensions which was set up afterwards. It was put on the B-list, namely, commission recommendations requiring further consideration, but it will not even get priority on that list.

Basically, if one is not married, one's partner gets nothing if one dies while part of a public service pension scheme. A person can leave his or her partner a gratuity in his or her will but the partner will not get a pension because that opt-out is used to confine the payment strictly to widows and widowers of deceased members. That is one side of the coin.

The last issue I want to address is not strictly a pensions matter but a tax matter, namely, the impact of inheritance tax on benefits coming on death from occupational pension schemes. Since 1965 benefits payable on death under occupational pension schemes have been the subject of a State duty and, from 1974 onwards, capital acquisitions tax or inheritance tax on death. Currently, a benefit that is received by a surviving spouse is tax free, so it is treated as if it was coming from the wife or husband who has died to the dependent spouse, and is tax free in the same way as any other property that is passing on the death of the spouse. However, this is not so in the case of other relationships and what is deemed tax free depends on the relationship of the person who inherits to the person who dies. If it is a child, there is a tax free threshold of €478,000-odd; if it is another relative, it is one tenth of that sum, approximately €47,800; and in the case of a stranger, such as non-marital partner, the threshold is only €23,908.

I have already referred to non-payment of spouses' pensions in these situations. I will now deal with the situation of a public servant who dies in a non-marital relationship. In such a case, no spouses' pension will be paid to the surviving partner. For a senior civil servant with a salary of €100,000, the minium gratuity that can be paid on death is the same amount. It could be more if his service were greater than 26 years or thereabouts. It is paid to his estate and he has willed it to his partner. If the partner has inherited nothing else and can avail of the full threshold, the tax he or she will pay will be around €15,200. If no threshold is available, it will be €20,000. Therefore, the partner will only get €80,000 out of the €100,000 because of inheritance tax.

I will now turn to the private sector and what would happen if the trustees are generous and decide to pay €100,000 in cash and a €25,000 pension to the surviving partner. The tax payable on the lump sum will be €20,000 and the partner will then be forced to pay inheritance tax on the capital value of the pension. The capital value of the pension would depend on the sex and age of the person who was going to receive it. However, a figure of €500,000 would not be off the wall. The tax on €500,000 is €100,000. The partner has just inherited €80,000 net after tax of a gratuity so he or she starts his or her career as a surviving partner owing €20,000 and will also pay income tax on the €25,000 pension as it is paid in instalments. This is a tax, rather than a pensions, matter but is discriminatory and should not be happening.

Chairman

Will Mr. Kenny furnish us with copy of these anomalies and issues that have arisen recently?

Mr. Kenny

Yes. I have added to the original submission I made so I will undertake to have the revised and fuller version transmitted to the committee.

Chairman

That would be very useful because the committee obviously must act on foot of a number of these cases. It will probably be September before we examine them but some of these cases are significant and appear to be very harsh. It is only through the work of Mr. Kenny and his colleagues and investigators that these matters are now being unearthed. Even though it is a tax matter, the committee should still be in a position to make a submission to try to deal with this situation before the forthcoming budget and make some progress on it.

Senator Terry

I wish to ask some other questions when Mr. Kenny is finished his presentation, if this is acceptable.

Chairman

We will allow Senator Terry to ask them now.

Mr. Kenny

I have finished my presentation.

Senator Terry

I thank the Chairman. Could Mr. Kenny tell me whether people, following their retirement, are claiming pensions they may have paid into when they started work in light of the fact that they may have changed employment a number of times? If we take the case of a current pensioner, these pension schemes would have been frozen. Is it the case that when someone reaches the age of 65, he or she does not even remember a pension plan he or she paid into? Is there any way of notifying people about pensions they have paid into and to which they are now entitled? Will I ask my remaining questions?

Mr. Kenny

I can address Senator Terry's first question fairly easily. A person is very much dependent on the records kept by whoever is administering the pension scheme and how up to date these records are. People fail to inform pension scheme administrators that they have changed address or that they are emigrating and the administrators frequently find themselves with benefits they cannot administer. They know from their records that somebody has reached the age of 65 but they are unable to locate him or her.

A very good service is provided by the Department of Social and Family Affairs in this respect. If the person is still in the country and his or her name and date of birth are available, it is generally possible to persuade the Department to trace the person through the personal public service number. If the Department knows the person's whereabouts, it will not provide the administrator with that person's details, but it will undertake to forward a letter. Often this is done when pension schemes are being wound up and administrators find that they cannot trace many people.

Quite a few people do not claim. In my experience of working in the industry and winding up pension schemes, we put notices in local newspapers and people would come out of the woodwork while others would come forward and volunteer the fact that someone had died a number of years previously. Gradually, one can build the jigsaw puzzle, but it takes time and is expensive.

Senator Terry

Can we put a figure on how many people we are discussing or how much money is unclaimed? In the meantime, where is that money lying?

Mr. Kenny

The amount of money in respect of very old pensions is small, but thousands of people are probably affected. The largest practitioner in the pensions area operates what it calls an inactive schemes unit, which only deals with discontinued schemes and tries to get benefits paid out to members and so on.

Our office and the Pensions Board get inquiries from people who are trying to find the scheme in which they used to be. Sometimes, it is the scheme that gets lost, not the person. For example, a company might have been taken over five times since the person left 20 years previously and the scheme in which he or she participated has been buried in a successor scheme to which assets have been transferred over time. Sometimes, the difficulty is in finding the scheme rather than the individual.

Senator Terry

I thank Mr. Kenny. That is an interesting point and we might keep it in mind.

The next issue may fall within the ombudsman's remit. What occurs in the event of a scheme with a surplus? It has been brought to my attention that where surpluses exist in a number of companies, the trustees return them to the employers. Does Mr. Kenny have an opinion on whether this is the correct action to take? A surplus has been created by the contributions made by the members of that scheme, whether they are active, deferred or pensioners, and therefore should belong to them rather than the employer. Is there an abuse in this regard?

One way in which a surplus could be created and employers could get their hands on some money would be by merging a number of their companies' schemes. Surpluses are fine because the pensioners are still getting their pensions, but the workers who are still active do not know whether there will be sufficient funds to pay for their pensions. Increasingly, we find pension schemes that are in deficit. Does this matter fall within the administration of schemes and, therefore, the ombudsman's remit? If there is a surplus, a company should not get it or be allowed to take a pension holiday. It should be prudent and look to the future when the situation may not be quite as good.

Mr. Kenny

The Senator has asked one of the most difficult questions that could possibly be asked about a pension scheme. A surplus in an occupational pension scheme is a complex issue because it does not arise just because of employee or employer contributions. Rather, it arises from a number of factors. We should distinguish between a live scheme and one which is being wound up. The Revenue Commissioners have a clear rule that anything not distributed from a scheme which is being wound up must return to the employer. The sole reason is the Revenue Commissioners want to tax it.

The next question is whether it is possible to distribute it before it reaches that stage, and the answer depends on the rules of the scheme. Most pension schemes have winding up rules and give instructions to trustees on how to deal with the assets of the scheme. Pensions legislation imposes a standard order of priority and the first priority is that pensions in payment and anybody over normal pension age must first be bought out. The next priority is to buy out people working and people who previously left service. If money is left over after those liabilities are satisfied, it is a surplus.

What happens to a surplus depends solely on the rules of the scheme. Some schemes state the surplus must be used for the members. In the UK, companies with extremely rich pension schemes have a "poison pill" included in those schemes which causes the workers to receive the money and discourages people from making bids for the company to raid its pension scheme. That is one extreme where the workers receive all of the money. The other extreme is where the workers receive nothing and anything left over goes to the employers. Most cases fall in between whereby discretionary powers are given to the trustees, possibly in consultation with the employer, whether benefits for the employees can be augmented from the surplus.

If a company is insolvent, it can give rise to interesting conflicts of interest for a liquidator. He or she is the sole representative of the company and has the job of obtaining money to pay the company's debts. The liquidator also functions as the employer and the trustees are obliged to consult the employer on the distribution of the surplus. Perhaps agreement will not be reached between the trustees and the liquidator on how it is distributed.

Moral arguments are made that the surplus should belong to the members. However, as I stated, how a surplus arises is very complex. Surpluses may arise because during the years leading to the death of a company, many people prematurely left employment and instead of taking their full share of the fund, they may have taken refunds of contributions. That all contributes to the build-up of a surplus in a scheme. Many different factors can contribute, so it is never black and white.

Contribution holidays arise from the Revenue Commissioners' dislike of having a great deal of money washing around in pension funds. Pension funds are very tax privileged. All investment income builds up tax free within the pension fund and it is not taxed until it is paid out as benefit. The Revenue Commissioners are paranoid about this and are concerned they receive nothing on all the money which has been invested. They have a notion that if a scheme includes twice as much money as will be required to meet liabilities, it must be refunded to the employer so it can be taxed.

When many schemes were in surplus, the Revenue Commissioners introduced a rule whereby if a surplus was more than 10% of assets, it had to be reported. I know of one case where the Revenue Commissioners obliged the trustees to pay back several million pounds to the employer to be taxed. They considered the surplus was much more than would be required to pay benefits. To give credit to the employer in that case, it happened after the employer had taken in a non-pensionable bonus and made it pensionable for the members so some of the money could be used.

Senator Terry

The point is that the pensioner or member never wins. When the fund is in surplus, the employer wins and when it is in deficit, the pensioner loses out. It seems the pensioner or member is not at the centre and not the person about whom we are most concerned.

Mr. Kenny

If we were living in a perfect world, the pension system would function perfectly, as we would like it to do. In such a situation we would have employers who would stay in business and remain solvent and prosperous, as well as traditional defined benefit schemes, where the employer would agree to write a bottomless cheque. If things disimproved, the employer would simply increase his or her contributions, hand over fist, on the understanding that if things improved again, he or she would be able to reduce such contributions by eating into any surplus built up. That would be fine but, unfortunately, the system does not function perfectly and there are risks. If the employer and the scheme become insolvent, the pensioner will lose, even though the employer might have benefited from a surplus in the past. It is a very difficult question to resolve and any attempt to regulate the disposal of a surplus might invite constitutional actions on the basis of property rights and so forth.

Senator Terry

Nonetheless, we regulate deficits — always to the disadvantage of the pensioner. If it is seen that deficits or the underfunding of schemes present a problem, we change legislation to facilitate the employer. This issue comes within Mr. Kenny's remit because it relates to the administration of schemes which is skewed away from the pensioner. That is what I would like him to examine.

Mr. Kenny

If we receive a complaint about the disposal of a surplus, it is investigated. The conduct of the trustees and the employer, if relevant, is fully investigated. We have no difficulty with this. If there is an inkling that members have been treated unfairly or unjustly or a hint of maladministration in the manner in which the surplus has been considered, that will come out in an investigation and there will be redress.

Senator Terry

I accept that; I am not suggesting there has been maladminstration but if we can deal with deficits through legislation, we should also deal with surpluses and ensure the pensioner is at the centre of matters.

Chairman

In fairness to Mr. Kenny, that is a matter for the Legislature. He takes his lead from the Oireachtas.

Mr. Kenny

It is a policy issue.

Chairman

It is and we cannot ask Mr. Kenny to solve it for us.

A number of issues have arisen today. We will be making a recommendation to the Government that it should deal with the Pensions Acts and make appropriate amendments thereto. We will also ask the Minister for Social and Family Affairs what has happened to the Watson Wyatt and Matheson Ormsby Prentice report prepared for the Pensions Board. In particular, we want to ascertain its recommendations and find out what is happening with regard to their implementation. We will be following up on the issue of income continuance plans, particularly the one brought to our attention by Councillor Cantwell. We intend to recommend that the Government should investigate its operation in the light of the various matters brought to our attention.

I thank Mr. Kenny, Mr. Lonergan, Ms Bray and Ms Collins for attending. We are all a little wiser now. As the delegates have said, this is one of the most tedious and complex areas to understand. That is why Mr. Kenny, in his role as ombudsman, is in place to ensure people secure their rights and get a fair crack of the whip. The committee acknowledges the work that he and his colleagues are doing. We are grateful for their vigilance in investigating matters pertaining to all aspects of pension schemes. In our consideration of whether extra responsibilities should be assigned to the Pensions Ombudsman, we will bear in mind the need for additional staff to perform these important functions.

Deputy D. Wallace

Has the ombudsman requested additional staff?

Mr. Kenny

We are preparing a detailed submission on the basis of our existing responsibilities. We will have to amend our submission if the committee proposes that our workload be increased.

Chairman

Deputy Wallace is an old hand and knows that is a sine qua non in respect of any additional responsibilities we propose. Given the committee’s remit on pensions issues, it would be important for us to receive a copy of the ombudsman’s submission in order that we could add our tuppence ha’penny.

Senator Callanan

I fully endorse the recommendations proposed by the Chairman and believe we should act on them.

Chairman

If the ombudsman's workload increases, we will endeavour to ensure he is given additional resources. We hope to hold another meeting with representatives of the ombudsman's office at the end of the year or the beginning of 2007 to receive an update on the matters raised today. We will follow up the other issues raised by Mr. Kenny and his colleagues, some of which seem anomalous and particularly harsh on individuals, with a view to ameliorating their worst effects.

The joint committee went into private session at 4.30 p.m. and adjourned at 4.40 p.m. until Tuesday, 12 September 2006.