The key provisions I am introducing today relate mainly to occupational pensions. They address difficult issues of equity and fairness and have been under careful consideration for some time. The issues date back over much of the past decade and have been raised in both the 2007 Green Paper on pensions and the 2010 national pensions framework, both of which were published with much fanfare by the previous Government. However, this is the first time these issues have been comprehensively addressed. The aim of the Bill is to ensure a fairer deal for workers and sufficient protection for pensioners while allowing employers to tackle their pension problems.
Defined benefit schemes are private pension schemes in which those contributing to the scheme - the employer and the members - pool their contributions, which are then invested in order to pay a pension on retirement. The primary role of the employer as the sponsor in these schemes is an underlying principle in forming this legislation. So too is the sufficient 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 that the pension promised to them will be delivered in the future. This Bill acknowledges their role in the scheme and realigns that role to an extent. The stakeholders share both the benefits of the fund and also, in principle, the risks to the fund. 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 ensure all people have an adequate income in retirement.
It is well known that defined benefit schemes have had considerable funding difficulties for several years. I have brought legislation on occupational pensions into this House every year for the past number of years to help defined benefit schemes help themselves. Changes were made to give the trustees of defined benefit schemes options and help them improve their funding position. Last year, for example, after a period of suspension to allow schemes to get on with assessing their funding positions, I reintroduced the regulatory structure and schemes had to return their funding positions to the Pensions Board by June this year. The previous Government suspended the funding standard, believing that it would be like the bank guarantee but the problems continued. I am relieved to report the position is not as difficult as we had feared. Over 40% of schemes are fully funded. Although 20% are poorly funded, many of these schemes have put in funding proposals to the Pensions Board to get them back on track. The board is now engaged on an individual basis with schemes. We are in a more managed place.
This Bill introduces changes to the existing priority order. The priority order comes into play when a defined benefit scheme winds up. It basically outlines, step by step, 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 for a scheme winding up when the scheme is funded, as all benefits can be met. 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 that are in payment and then distributes the rest of the funds to the current and former members of the scheme.
It can arise that pensioners receive all or almost all the pension fund and the members who have contributed but not retired receive considerably less than expected. This issue has been of concern for some time and considerable calls have come from employee and employer representatives, as well as the pensions industry, to address the current inequities. Detailed examination of these issues has taken place.
After considering all the factors, I am replacing the existing priority order to introduce two priority orders in this Bill. I am making provision for the situation where the pension scheme winds up and the employer is solvent. I am also providing for where both the employer and pension scheme are insolvent, happily a rare occurrence. 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, 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. This next priority is given to pensioners. They will still be given a significant level of priority but there will now be provision for a 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 and then providing priority of 90% for those between €12,000 and €60,000 and 80% for those over €60,000. This reprioritising of an element of pension benefit over €12,000 will contribute to the benefits of current and former employees which will be prioritised at 50%. This will apply only if the scheme is underfunded and its impact 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. Limits have been put in place in the legislation on how the reductions of 10% and 20% are applied to ensure these are proportionate.
This change is carefully balanced between the existing pensioners and the current and former contributors to the scheme who have not yet retired. This change also recognises that all of the beneficiaries of the scheme - all 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. Pensions of up to €12,000 are 100% protected for existing pensioners.
The following is important, although it is often not mentioned in discussions. The vast majority of pensioners, separately to what they may be entitled to from a defined benefit scheme, 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. So 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 two-thirds of the average industrial earnings. By international standards this is quite a good level of pension provision.
This Bill also changes the priority order in the very particular situation of a double insolvency. This is when an employer goes out of business and the pension scheme is also underfunded. It is a particular situation which is covered by the EU insolvency directive. Article 8 of the directive requires that the State 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 addressing the obligation by changing the order of priority in a double insolvency situation as follows. As before, first priority is given to defined contribution assets, which should not be part of the distribution of defined benefit assets as they are two separate structures. The second and third priorities are given to 50% of pensioner and member benefits. 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 ensures that significant protection is in place to ensure 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, this Bill provides that in a double insolvency, where a scheme has insufficient resources to provide 50% of benefits and protect €12,000 of pensioner benefits, the Minster for Finance shall provide for the shortfall in scheme assets. The Minister has agreed that some of the funds obtained from the pension levy can be used to fund any costs that arise.
In such situations, which I am happy to say are rare, it is proposed there would be a transfer of funds from the State to the scheme trustees by way of a once-off settlement. What is provided for here is a mechanism which can also provide for any historic situations which have arisen.
The aim of the Bill and the entire package of measures is to ensure as far as possible we have the minimum number of double insolvencies. The Pensions Board will introduce secondary legislation and will tighten up the regulation on underfunded defined benefit pension schemes with a view to ensuring such schemes take action to manage and improve their funding position. These measures and actions are all aimed at minimising the risk of double insolvencies arising in the future. Pensions are based on a promise by the employer and agreed levels of contributions by the employer and the employee. Protecting people's retirement income is critical. This is with regard to those who have retired, active members paying into the scheme, and deferred members, including those who went to work elsewhere or took redundancy, and have not yet reached pensionable age.
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 members. The reduction is progressive and the limits are as I outlined with regard to 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 the current and former scheme members and may, I hope, help a scheme stay open. I also want to emphasise the fact the provision provides for reductions of up to 10% and up to 20%. The trustees have discretion as to the percentage that needs to be applied. For example, a scheme with a high number of pensioners with high average pensions which applies a 1% reduction could mean an injection of funds of 2% to 3% back into the scheme for current and former workers.
I will also table a number of amendments to the Social Welfare Consolidation Act 2005 on Committee Stage, which are required to address issues raised recently in the High Court concerning the legal powers of deciding officers and appeals officers to revise decisions in certain cases. This is a complex issue. Legislation allows officials of the Department of Social Protection, including appeals officers, to revise decisions in a range of circumstances. These include situations where new evidence shows the original decision was wrong, and also situations where there has been a change of circumstances since the original decision. In the past, this flexibility has been seen as an asset, but when viewed in the context of a more modern interpretation of the law it also conveys an obligation. Last week the High Court confirmed if a deciding officer or appeals officer has the power to revise a decision, he or she also has an obligation to do so if requested.
Until now, in most cases it has been the practice of the Department that once a claim is refused and all review and appeals processes are finalised, if a customer seeks a revised decision based on changed 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 light of the High Court decision, the Department can no longer require people to make a fresh claim, but must reopen a claim, even if it was closed many years previously. The purpose of the amendment is to address this issue, but in a limited range of circumstances. 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 their circumstances change the correct channel is to make a fresh application so the application can be considered in light of his or her current circumstances.
The amendment aims to ensure that this will be the practice in all cases.
In light of the High Court decision, I have asked Department officials to carry out a more wide-ranging review of the legislation on social welfare decisions and I will bring forward any necessary legislation at a later date. In order to facilitate the inclusion of these amendments on Committee Stage, section 2 of the Bill provides for two minor changes to the Social Welfare Consolidation Act 2005. The inclusion of these amendments in this Bill necessitates a change in the Title of the Bill, as published, to the Social Welfare and Pensions (No. 2) Bill, and this in turn will facilitate the inclusion of the amendments to the Social Welfare Consolidation Act 2005 on Committee Stage.
In the area of pensions, I will be tabling a number of amendments to the Bill on Committee Stage to provide for the drawing down of benefits in the event of a shortfall arising in a double insolvency and to make consequential amendments to some of the provisions of Part 3 of the Bill as published. I will be making two technical amendments to provide for references to the Act of 1990 rather than the principal Act, and co-ordinating the text of section 48(1)(d) with the text of the Committee Stage amendment.
I will now outline the main provisions of the Bill. Section 1 provides for the Short Title, construction and collective citations. Section 2 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 that are excluded from the assessment of means for social assistance payment purposes. Part 3 and section 3 define the term "Principal Act" as used for the purposes of part 3 as meaning the Pensions Act. Section 4 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 5 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 the scheme wind-up when the employer is solvent and when the employer is insolvent.
Section 6 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. Sections 7 and 8 cross-reference section 50B and section 50C with subsection 1B. Section 9 amends section 59B to provide that the prohibition on reducing pensions in payment shall not apply to directions under section 50(1B).
In conclusion, this legislation achieves three things. It ensures that the State meets its obligations to put measures in place under the EU insolvency directive. It addresses the equity difficulties with the existing priority order. It also goes further by providing a further option to enable schemes to stay viable and open. People need to have a decent income when they retire and we want occupational pensions to be viable and effective. This legislation achieves a fine balance between the needs of the various parties and protects the State and the taxpayer.
I would like to reiterate that the Bill deals with defined benefit pension schemes and does not affect in any way the State's contributory and non-contributory retirement or old age pension. We should be clear about that, because sometimes when people hear the word "pension", they think of whatever pension they themselves may have. However, I wish to emphasise that this applies to people who are members of defined benefit pension schemes. I commend the Bill to the House.
