Pensions Update: Closing Defined Benefit Pension Schemes – A Bitter Pill?
08 May 2018
Defined benefit pension provision in Ireland
In a Defined Benefit, or DB, scheme, the employer bears the financial risk of the plan. If the amount contributed to the scheme is insufficient to discharge the liability, the employer must pay the balance. As people are now living for much longer, employers face significant increases in funding these plans. This, in turn, has led to companies such as Pfizer making strategic decisions to move away from DB pension provision. The move towards Defined Contribution, or DC, pension provision will reduce risk and uncertainty for employers but it also results in employees taking on the risk that they will have an adequate pension in retirement.
In 2017 there were 628 DB schemes in Ireland, which represented 6% decline on the previous year’s count. The liabilities of DB schemes across the country were measured at €58.1 billion. The Irish Government have recently acknowledged the difficulties that arise for DB schemes in their recent ‘Roadmap’ for pensions in Ireland. It reported that the latest actuarial figures indicate that 1 in 4 DB schemes do not have the funds to provide for the benefits promised if wound up today. This would indicate that these schemes are no longer economically feasible for companies.
The Pfizer pensions case
Pfizer is currently seeking to close its DB scheme and transition members to a DC scheme at its Cork plant. The company cites the excessive financial cost of keeping a scheme of its kind in place, which affects its cost competitiveness, as the main reason for this change. The attempts to close the scheme are being strongly contested by SIPTU and TEEU. Negotiations between the parties thus far have been unsuccessful. The unions claim that the pension scheme is an integral part of the Company Union Agreement and of the terms and conditions of its members. It is opposed to any change to the current position of the scheme. The dispute has reached the Labour Relations Court (LRC) where a recent recommendation has been made on the issue.
The LRC recommendation
The LRC recommended that:
- The funding of the DB scheme be continued by the company so as to provide benefits on retirement for all service accrued to the date of closure.
- The DB scheme will be frozen in relation to future service accrual only
- The link to final pensionable salary in the DB scheme will remain. It will be based on the final salary of the employee as at the date of termination of service as opposed to the date that the scheme is frozen
- An initial lump sum of €10,000 is payable immediately after 30 June 2018 to the DC scheme of affected members
- An additional lump sum must be paid by the company to each individual based on years of service from the date of employment until the 30 June 2018. Each individual is entitled to €1700 per year of service to a maximum of €25,000
The recommendation of the LRC comes with a sting in the tail for Pfizer. They will face high costs in closing the DB plan owing to the initial lump sum payment and the additional payment for years of service accrued to each employee. The Court has also recommended that the DB scheme be frozen in relation to pensionable service only. The DB pension will still be calculated on the basis of final salary at the end of service, not on the date of closure.
From Pfizer’s point of view it would be preferable if both pensionable service and pensionable salary were frozen at the date of the transition. The pensions payable will be significantly higher if computed at the end of an employee’s service as opposed to the date of the freeze. Based on the recommendations of the LRC, it has been suggested that the closure could cost Pfizer up to €31.5 million. While in the long term the closure may be cost-efficient for a company such as Pfizer, the costs of such a change may be too onerous for other companies considering closing their DB schemes.
The Court has recommended that Pfizer continue the deferral of the freezing of the DB scheme until the unions have had time to consider the recommendations and put it to a ballot. The recommendations are not binding unless both parties undertake to accept such recommendations. If the recommendations are rejected the parties will have to return to the negotiating table to try and resolve the issue.
Employers now face a precarious position if they wish to close their DB scheme. If they choose to close the scheme they may incur massive costs in providing financial compensation to employees. The ruling of the LRC raises the possibility that closure may only result in the freezing of pensionable service and the link to pensionable salary will be maintained, making the closure of a scheme less cost-effective. If an employer seeks to force through the closure it may result in the employees taking industrial action, as 800 employees of Irish Life recently did when it was announced their DB scheme was to be closed. The Pfizer ruling has added to uncertainty in this area and may prove to be harsh medicine for many employers who plan to close their DB schemes.
For more information on the benefits and risks of closing your organisation’s DB scheme in favour of a DC arrangement, contact a member of our Pensions team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.