I thank the Chairman and members of the committee. My name is Fritz Spengeman and I am happy to appear before the joint committee to speak about the matter to which the Chairman referred, namely, the Pensions Ombudsman's annual report 2005. I am a member of the MTQ pension scheme, from which more than €1 million was removed in 2002. This figure constituted approximately 35% of the scheme's assets. Members of the scheme applied to the Pensions Board for assistance on this matter. However, although the action taken by the pension scheme was expressly forbidden by its trust deed, the board refused to prevent it. We then approached the newly-formed office of the Pensions Ombudsman. The ombudsman described this action in his recent annual report as a "sinister" development but while recognising the dangers of the measure, he declined to remedy it on technical grounds.
I will give some brief background information on the company. Founded in 1962 , MTQ was a progressive employer which established two defined benefits schemes, one for executives and one for staff. After many years of downsizing, the executive scheme was wound up and its six members were moved into the staff scheme. They and I continue to receive payments from the staff scheme.
The executive scheme established in the 1970s was annuities-based but with annuity costs increasing, it was decided in the 1990s quietly to drop them. The failure to inform the executives of this decision caused bitterness, particularly among older members. The relevant provisions of section 48 of the Pensions Act 1990, which is the issue on which this matter turns, were introduced in April 1992 to give relief from the high cost of annuities for legitimate business amalgamations. For some reason, the trust deed for the executive scheme was not completed until September 1995, three years after the introduction of section 48.
As one would expect, these rules had extensive transfer powers for merging schemes fully consistent with section 48. Astonishingly, however, in 2002, seven years after its execution, we were informed that our deed conflicted with the law and must be overridden. Instead of transferring all the assets from the old executive scheme into the new staff scheme, more than €1 million was removed for the benefit of the employer.
Typically, a man who is 65 years old and who wants an income of €8,000 per year would be obliged to pay Irish Life, Canada Life or another other company something in the order of €150,000 in an annuity. This is an indicative figure. Such figures are available in the newspapers. Actuaries guiding pension schemes would only set aside approximately €110,000 — a smaller amount in a defined benefit scheme. These individuals use more liberal assumptions. In particular, they assume a much higher rate of investment return. This discrepancy in valuations by annuity providers and actuaries has serious consequences in winding up a scheme. Every business has a life cycle and, furthermore, defined benefit schemes are becoming less popular and defined contribution schemes are finding increased favour. Winding up the former will, therefore, be more frequent as the membership becomes older.
Section 48 was introduced in 1992 and its purpose is to prioritise benefits and to facilitate legitimate business combinations. Our trustees, under their deed rules, already had the ability to combine the executive scheme with a staff scheme. However, they wanted more and arrived at a perverse interpretation of section 48 to the effect that they should be allowed to strip out the assets they regarded as surplus. Their interpretation is facile and self-serving. It is significant that, in the 14 years the statute has been in operation, it is the first and only company to interpret it in that manner. It did not bother to obtain a ruling from the Pensions Board and did not take pensions advice.
Our trustees claimed the scheme was in surplus but there were still substantial pensions owed to beneficiaries of the executive scheme. The law has always regarded surpluses as temporary and notional until all liabilities have been discharged.
The amount of any surplus in a scheme is defined by the actuaries. These are extremely complex calculations involving rate of return, longevity and other complex factors. Actuaries have tremendous skills in mathematics and statistics but they do not have a crystal ball regarding the markets, interests rates or even human longevity. The word "guesstimate" would be a better term to use in this area. In any event, prudence is always required.
What is the law in respect of surpluses? What happens when a scheme is in surplus? It is difficult to obtain information in this regard and the Pensions Board was none too helpful. Fortunately, however, we live in the age of the Internet and I would recommend to the committee the report I discovered there, namely, the Report of the Pensions Board, written in December 1998, which contains proposals on surpluses in occupational schemes to the then Minister for Social, Community and Family Affairs. The report clearly states that surpluses should be kept within schemes. It also specifically refers to section 48 and states that the latter does not give trustees a licence to remit the surplus back to employers. Unfortunately, the Pensions Board appears to take a different slant on this matter now.
The tenth slide in my presentation contains a diagram which I provided to try to explain why the law insists that surplus funds be retained. The blue line represents a man's working life and the plan he would have for putting a pension together. In our 20s, 30s or even earlier, we all begin to make provision for old age. An actuary will say that if a person and his employer each invests 5% and growth of 7% or 8% occurs, there will be sufficient money at age 65 for old age. The pink line represents what happens in the real world, with oil shocks, dot.com bubbles and various other fluctuations. If things go to plan, it is normal for schemes to drift in and out of surplus and deficit during the course of a person's working life. The law insists that surpluses be retained because in the course of a person's life there are many fluctuations in market performance and other factors.
I received slide No. 11 from Mercer Market Insight and it indicates average funding levels for pension schemes in Ireland. The arrow represents 100% funding, signifying that assets match liabilities. The left-hand column shows that the average level of funding was over 130% in December 1999. Most schemes in Ireland were over-funded at the time. Things were going well. By 2001, however, that level of funding had drifted down to 100% and most schemes in Ireland are now in deficit. If one had permitted the removal of a surplus in 1999, as the trustees of MTQ have done, how much bigger would that trough have been? The current situation would be much worse. The prohibition on distributing surpluses is part of the overall wisdom, based on experience, to safeguard the solvency of schemes.
I tried to make the point that variations from plans, surpluses and deficits were natural. If a scheme goes into deficit, the trustees must submit a plan to the Pensions Board explaining how they will get back into credit. The committee should remember that three years is a long time and plenty of time for an employer to hold up his or her tent. If the plan does not work and the scheme fails to return to credit, the trustees must submit another plan. It is a "softly, softly" approach. While I understand the argument that putting too much pressure on employers to make up deficits may cause the withdrawal of schemes, one should examine the overall picture. What happens if, as happens from time to time, a scheme is in surplus? The employer can take an immediate contribution holiday. He or she can stop contributing to the scheme, even though there are substantial liabilities and young people involved in the scheme are planning for their retirement. The employer need not get permission from the Pensions Board or the members.
Senator Terry has done much work on the left-hand side. She is of the view that it is unfair that a person contributes to a pension scheme all his or her working life and is short-changed if there is a deficit in the scheme. The right-hand side is also permissive. The one limitation placed on employers heretofore was that they could not remove a surplus. This is the balance on which the law is based. If the Senator is successful in tightening the left side, perhaps people like me will be more relaxed about the removal of surpluses. These precedents should be changed only by the thoughtful consideration of the Houses of the Oireachtas. We allow private firms and individuals to tamper with them at our peril.
Who wins and loses by virtue of the fact that over €1 million has been withdrawn from the scheme? I used to be in a pension scheme that had sufficient funds to fund my pension and, if MTQ were to withdraw from Ireland, as it has hinted it might, to provide me with enough money to buy an annuity. The members of the staff scheme are vulnerable. Under the law, those already in payment take priority over those who are not. People aged 62, 63 or 64 years, approaching retirement, as many in MTQ are, rank behind individuals like me. Even if the committee could assure me that I have nothing to worry about and that my pension will be paid, I would still state that these rules were given to us well after section 48 was put in place. Seven years later we are told these rules are not effective. We have been misled and, as far as I am concerned, the rule of law has been undermined.
How is the employer doing? He has an exceptional item in his accounts for December 2002. A man will appear before Dáil Éireann in a few minutes to explain the origin of certain funds he received, a fraction of this amount. Perhaps he should have taken advice from the Pensions Board. Anyway, the employer is doing all right. Paradoxically, the stripping out of these assets reduces the net investment here and makes it easier for MTQ to withdraw from Ireland.
These are the matters of public interest I have tried to bring to the committee's attention. If they are let stand, Pandora's box is being opened over the withdrawal of surplus at will. If the committee did not see this as a serious problem for the integrity of the pension scheme, I hope the presentation has dispelled that notion. Confidence in our financial institutions will not be achieved by sending the Pensions Board to concerts or the Electric Picnic but by the scrupulous elimination of all forms of sharp practice by the so-called "expert" professions.
