Irish Pensions Magazine Autumn 2013
6
B
enefit design and the change in the State
pension age
In order to help address the increasing life expectancy
of the Irish population and to reduce pressure on the
public finances, the Social Welfare and Pensions Act
2011 provided for increases to the age at which the
Old Age (Contributory) Pension (the “State Pension”)
is payable. The State Pension age (currently 65) is to
increase to 66 years from 1 January 2014, to 67 years
from 2021 and from 67 to 68 years from 2028. This
change may have significant implications for private
defined benefit occupational pension schemes,
especially schemes with an integrated benefit design
and schemes that provide bridging pensions.
Integrated and bridging pensions
A common benefit design employed in Ireland is the
integration of scheme benefits payable on retirement
with the State Pension (ie, the total pension package
promised to members at retirement is calculated
taking into account the State Pension which will also
be received). Schemes with such a benefit design
require particular consideration in the context of the
increase in the State Pension age.
Where a scheme has a normal retirement age of 65,
an increase in the State Pension age will result in a
gap arising between the age at which pensions are
payable from the scheme and the age at which the
State Pension becomes payable. Depending on the
provisions of the trust documentation, it is possible
that such a scheme could be deemed liable to pay
the amount that would otherwise have been payable
by the State. This could potentially create serious
funding difficulties for a scheme.
A similar issue arises in the context of “bridging”
pensions where, on early retirement, an integrated
scheme pays a higher pension to members until they
reach State Pension age, at which time the temporary
“bridging” pension ceases and is replaced by the State
Pension. Increases to the age at which the State
Pension is paid may result in such schemes having
to pay the bridging amount for longer than anticipated
(or funded for).
Amendments
Given the funding difficulties in many defined benefit
schemes, it is unlikely that employers will be willing
or able to bridge any funding gap that arises due to
the changes in the State Pension age. The question
that then arises for trustees and employers is whether
their scheme documentation requires amendment to
address these potential problems. Often a relatively
straightforward way of dealing with the issue is to
amend the scheme to allow integration with the State
Pension without specifying the date at which the State
Pension becomes payable.
It is relatively common for a scheme amendment
power to contain a restriction that prevents
amendments that would have the effect of reducing
or negatively impacting benefits accrued to the date
of the amendment. Trustees must also keep in mind
their fiduciary duties to scheme members. Employers
and, in particular, trustees must therefore consider
(and take advice where required) whether they are
permitted to make an amendment of the type outlined
above.
It is arguable that trustees of an integrated scheme,
in making such amendments, are complying with their
fiduciary duties by securing both the benefit design
and the funding model of the scheme. A scheme
whose benefit design is premised on the State
Pension being offset against the members’ salaries on
retirement would not have been funded on the basis
that the scheme would be liable to pay pensions on an
unintegrated basis. In agreeing to the amendment,
trustees may be able to demonstrate that they are
simply reflecting the original intentions of the parties
and pre-empting possible future funding difficulties.
In considering whether to amend a scheme, it may
also be reasonable to assume that it was not the
Government’s intention to undermine the benefit
design of private integrated schemes by altering the
State Pension age. The explanatory memorandum
for the Social Welfare and Pensions Act 2011 states
Implications of the increase in State pension age
by Deirdre Cummins
Analysis
