Recession
The Pensions Insolvency Payment Scheme
By James McConville & Mark Woodcock, Partners, McDowell Purcell
Jul 6, 2010 - 11:15:11 AM

The Pensions Insolvency Payment Scheme

Following several high profile cases, including those of SR Technics and Waterford Crystal, the Government took steps in 2009 to try and alleviate some of the financial difficulties facing defined benefit (“DB”) schemes where, at the time the scheme is wound up, both the scheme and the employer are insolvent. Section 22 of the Social Welfare and Pensions Act 2009 empowered the Minister for Social and Family Affairs to establish the Pensions Insolvency Pension Scheme (“PIPS”). The purpose of PIPS is to provide benefits to persons in receipt of (or eligible to receive) benefits at the date of winding-up of an insolvent DB scheme. PIPS came into force on 1 February 2010.

Background

The current recession has seen most DB schemes fall below the solvency levels required by the funding standard contained in Part IV of the Pensions Act (“the Act”). In its recent annual review, the Pensions Board estimated that, had all DB schemes been valued in 2009, around 80% of them would have failed to meet the funding standard on a “discontinuance basis”.  Section 48 of the Act prescribes a statutory order of priorities to meet scheme liabilities, with benefits from additional voluntary contributions and those payable to pensioners and members who have reached retirement age generally taking precedence over the benefits of active and deferred members.

It follows that where a scheme is insolvent, it is unlikely that active and deferred members may only receive a proportion of their full benefit entitlement, particularly given the increasing cost of purchasing annuities for pensioners over the past number of years.  The purpose of PIPS is to provide a lower cost alternative to the traditional method of purchasing annuities from life.  This will be done by permitting annuities to be purchased from National Treasury Management Agency (“NTMA”) backed investments linked to secured government bonds.  The lower cost of purchase (estimated at 8-18% less than those purchased on the open market) means that a greater proportion of a DB scheme’s assets will be available to fund benefits of lower priority such as those of active members.

How PIPS Works

To be eligible for PIPS, the trustees of a DB scheme must apply for a certificate of eligibility from the Pensions Board.  Only schemes which are insolvent at the date of winding-up and whose employer is insolvent can apply for certification. The application to the Pensions Board requires a number of factual statements to be made by the employer and the trustees.  The Pensions Board decision as to whether a scheme is eligible for PIPS is final.  There is no right of appeal.

Once a scheme has been certified as being eligible, the trustees can then apply to the Minister for Finance (“the Minister”) for inclusion in PIPS.  The application must include actuarial valuation of scheme benefits, a statutory declaration of completeness and assurances by the trustees that they will comply with the requirements of PIPS.  Provided he is satisfied that the scheme is indeed eligible and has not infringed any of the anti-abuse provisions, the Minister can ask the NTMA to quote a cost for providing annuities to pensioners.  The trustees have 14 days to accept or reject the quote.  If accepted, the trustees make a cash payment from the relevant scheme assets to the Minister, who then enters into a contract with the nominated payment administrator.  The annuities are then paid from the
Central Fund.

Issues for Insolvency Practitioners

A number of issues may arise for insolvency practitioners, particularly where an employer is in receivership or liquidation:

• Where the scheme is not already wound up, the receiver or liquidator may have to determine whether the scheme should be wound up or continue – in the knowledge that winding-up may trigger an application to PIPS.
• The receiver or liquidator must, on behalf of the employer, supply the trustees with a statement of affairs for submission to the Pensions Board.  In addition, the receiver or liquidator must also supply evidence of their appointment and a statutory declaration that the employer is insolvent, as defined in The Protection of Employees (Employers’ Insolvency) Act 1984.
• The receiver or liquidator may be reluctant to provide information to the trustees until it is satisfied that all assets and liabilities of the employer have been accounted for.  This may in turn hold up the process and lead to friction with the trustees and the scheme beneficiaries.
• In addition, where it is not the trustee of the scheme, the liquidator or receiver may be sensitive about certain information in the statement of affairs being disclosed to the trustees, which could include employees and union representatives.
• Where the employer is also the trustee of the scheme, the receiver or liquidator – to the extent that they assume the role of trustee – must balance their duty to the scheme’s creditors with the trustee’s fiduciary duty to act in the best interests of members.  They may wish to consider the appointment of an independent trustee.
• As trustee, the receiver or liquidator must take responsibility for supplying information to both the Pensions Board and the Minister for Finance.  This may include liaising with the employer, employees, the scheme’s actuaries and consultants and the nominated payment administrator.
• The trustees must also swear a statutory declaration that the information is complete and accurate.  As a result, an insolvency practitioner may find himself swearing two separate statutory declarations – one as trustee and one as employer.  This doubles the potential exposure of the practitioner – particularly were the application to the Pensions Board to fail owing to its actions, either as employer or trustee. PIPS will be reviewed in 2013.  Its future may very much depend on the state of the public finances at that point, particularly if the scheme does not turn out to be cost neutral for the Exchequer as intended.

James McConville
Partner

e: jmcconville@mcdowellpurcell.ie
t: 01 8280 646

Mark Woodcock
Partner

e: mwoodcock@mcdowellpurcell.ie
t: 01 8280 658