I thank the joint committee for the opportunity to address it on an important issue for some long-established and strategically important businesses in the IBEC membership. The last time on which we provided an input to the committee on defined benefit, DB, pension schemes was on the heads of the Government’s Bill in June 2017. Our concerns with that draft Bill and the Pensions (Amendment) (No. 2) Bill 2017 under consideration today are broadly similar. These concerns principally relate to the unintended consequences, potential risks and practical considerations arising from section 3 of the Bill. This proposes that it would be illegal for a solvent company to wind up a DB pension scheme without the consent of the Pensions Authority, the so-called employer debt.
Before looking at the practical implications of this, and Mr. Murray, the chairman of the Pensions Council has highlighted some of these, it is worth remembering that most DB pension schemes are established under a trust deed. The employer voluntarily undertakes to be bound by the rules of the scheme and to meet certain duties and liabilities. There has never been a statutory obligation on employers under Irish law to contribute to a DB pension scheme nor to accept liability for any deficits. This Bill will turn a voluntary contribution into a mandatory obligation and potentially jeopardise the viability of businesses which are unable to absorb this extra cost.
I was struck by some witness inputs on employer debt during the previous session of the joint committee meeting on 11 April. To paraphrase, they suggested that schemes have had many opportunities to close or wind up, that this type of legislation has been under consideration for two years with no evidence of that happening, and that schemes that now remain have decided they are in it for the long term. I tend to agree with that as a generality. However, while this point was being used to support the argument we would make that the risk to employment and business viability is exaggerated, I would then ask what problem the Bill is trying to solve.
The Bill proposes an unfair burden on long-established and highly reputable employers who voluntarily set up defined benefit pension schemes and invested significant sums to maintain them through very difficult times. There would be no corresponding obligation on employers who have set up defined contribution schemes or the vast majority of smaller businesses, particularly, which have no pension scheme at all. I will give members some insight into the size of the cost and competitiveness implications. I refer to recent research by Roma Burke of LCP and Tony Gilhawley which suggests that employer funding for defined contribution, DC, members averages 7% of salary compared with 22% for DB scheme members. That raises issues of equity within companies between different categories of employees in the same company.
IBEC shares the ambitions of committee members to protect scheme members, to encourage employers to ensure that schemes are well funded, and to prevent employers who will not pay or who will not propose an equitable alternative arrangement, as opposed to those who cannot pay, from walking away from the schemes they sponsor. Advocates of employer debt ignore the reality of business risk. They are asking companies to assume responsibility for factors that have undermined the DB pension model and are outside their control, such as volatility in stock markets, demographic pressures of increasing life expectancy, falling bond yields and regulatory requirements. As a small open economy, Ireland is especially vulnerable to uncertainty, global economic slowdown and turbulent international trading conditions. We can ill-afford to add unnecessary risks to our companies’ balance sheets.
Committee members will have seen in the Oireachtas Library and Research Service's briefing paper the figures on the long-term decline in the number of DB schemes in Ireland. We are, in effect, moving towards a long run-off phase for increasingly maturing DB schemes and we should be trying to nurse them through this process. This will only be achieved by addressing the rules surrounding the funding standard and not by additional regulation. In that regard, we welcome the proposal in section 4 of the Bill that the Pensions Authority should prepare a report on the feasibility of changing the way in which the funding standard is calculated. I would question, however, whether we require legislation to mandate this.
The experience of recent years has demonstrated that DB schemes are best managed through discussion and negotiation between trustees, employers and members, and where efforts are made to reach agreement on the steps required to secure scheme viability.
As we have argued previously, these steps may include a mix of measures such as increased employer-member contributions, longer working and amended benefits.
The painstaking process of supporting schemes to move gradually to a more appropriate funding level may not attract the same media attention as a small number of high-profile scheme closures. However, it is more likely to secure sustainable member benefits than additional regulation. The fact that almost 80% of DB schemes now meet the regulator's funding standards is testament to the progress that has been made. It is estimated that just 20% met this standard ten years ago.
While most of my comments have been from an employer's perspective, we should not forget that this type of proposal could result in a far worse outcome for some scheme members, particularly younger ones. In some cases, preventing an insolvent scheme from winding up can result in its ongoing deterioration before inevitable closure, with older members using up the assets before younger members retire. This point was acknowledged in the research service's briefing paper.
We believe that the Bill would be unfair on employers who, unlike many of their competitors, had voluntarily set up DB pension schemes and invested significant sums in maintaining them. The proposed legislation would destabilise the future efforts of many employers and trustees to support and deliver on the pension promises made to scheme members. The pensions liabilities and investment risk assumed could be too big for companies to support in what can be a very uncertain business environment, and could jeopardise the viability of the business and jobs of those employed. If implemented, the Bill would result in a far worse outcome for some scheme members, particularly younger ones, whose assets could be used up before they retire by older members.
I thank the committee members for their attention and look forward to answering their questions.
