Budget 2013

On 5 December 2012, the Minister for Finance published the budget for 2013. A number of significant changes have been made to the tax treatment of pensions in that budget. In particular on the positive side:

  • Although heavily tipped, there has been no change to the existing marginal rate relief available to employee pension contributions in this budget.
  • The Government has confirmed that the pensions levy will not be extended beyond 2014. (The pension levy has contributed €900 million to the austerity measures so far with another €900 million to come in 2013 and 2014.)
  • Members with additional voluntary contributions (AVCs) will be allowed to withdraw up to 30% of the value of their AVCs (subject to marginal rate tax) for a three year period with effect from the passing of the Finance Bill, 2013.

The key adverse change is the confirmation that the maximum amount of pension that an individual can accrue in a tax efficient manner over their lifetime will be €60,000 per year from 2014. The details of the mechanism to achieve this are to be developed over the next year. In practice this will mean negotiation over the extent to which the current multiple of 20 (used for DB pensions to compare the pension with the maximum fund allowed by Revenue - known as the Standard Fund Threshold or SFT) is to be increased. At a multiple of 20 a €60,000 maximum pension equates to a maximum fund of €1.2 million but it is well known that a DC pot of €1.2 million is not sufficient to purchase a €60,000 annuity. A complicating factor will be how this restriction is to operate in respect of unfunded public sector pensions.

Individuals will still be able to provide for a pension in excess of this amount but those savings would not attract tax relief. It is estimated that a significant majority of occupational pension scheme members would not be affected by this cap.

Pensions litigation

Element Six – litigation in progress

A group of members of the Element Six (formerly De Beers) defined benefit pension scheme have commenced an action against the trustees of that scheme. The members of the scheme are claiming that they are owed a substantial pension contribution (estimated in the region of €40-50 million) from the principal employer as a result of the principal employer agreeing to a funding proposal in respect of the scheme.

The employer served a notice of cessation of contributions on the trustees in 2011 and the defined benefit pension plan was wound up in December 2011 with a statutory minimum funding standard deficit in the order of €129million, increasing to €184million on the higher annuity buy out basis.

It is understood that the High Court was told that, by a 4/3 vote carried by the casting vote of the chairman the trustees accepted an offer from the company to pay €30million towards the deficit which offer included the company's €11million annual contribution for 2011. The chairman was a company nominated trustee. The trustees did not demand any further amount from the company.

The group of members are now claiming that the trustees should have sought this contribution from the principal employer and that if there was any doubt around their obligations in this regard, that they should have sought instructions from the High Court.

The full case will be heard in the Commercial Court in early in 2013. It is likely that the outcome will depend on the specific rules contained in the pension scheme in question (e.g. whether the principal employer had a unilateral power to terminate contributions, whether there was a notice period given to the trustees) and will also involve an assessment of the trustees' actions in the wind up process particularly with regard to their fiduciary duties to members. Trustees and their advisers are watching the outcome closely.

Pensions case law

EBS Building Society v Thomas Hefferon & Michael Kearns

The High Court recently provided some clarity in relation to the position of pension scheme funds on the insolvency of a member. The case concerned the appointment by EBS Building Society ("EBS") of a receiver by way of equitable execution over the individual pension funds of Mr Hefferon and Mr Kearns (the "Members"). The Members sought to set aside the appointment on two grounds. The first concerned alleged material non-disclosure of EBS in its original application to obtain the ex parte appointment of the receiver. The second ground was that a receiver could not be appointed over either the capital funds in the pension schemes or any future payments from the schemes.

On the second point, the court found that as the Members did not have legal or beneficial ownership of the scheme assets and as a pension on retirement was not readily available to the Members without the consent of the trustees, the pension scheme assets could not be attached by way of appointment of a receiver. The court also found that the pension funds were established under irrevocable trusts for the sole purpose of providing retirement benefits and had been approved by the Revenue Commissioners for this purpose. The court also noted that the terms of the pension deed expressly prohibited the assignment of benefits from the pension funds themselves.

Comment: this judgment provides clarification that the fund of an occupational pension scheme trust with customary prohibition on assignment provisions may not be amenable to attachment by creditors of active members. However, it is important to note that the same conclusions do not necessarily apply to those with vested benefits in particular those entitled to benefits in payment from annuities and retirement arrangements other than occupational pension schemes (e.g. RACs, PRSAs, ARFs).

Survey on fees

The Minister for Social Protection, Joan Burton, announced the publication of the Report on Pension Charges 2012 on 23 October 2012. The aim of the report was to gather information on the charges levied on pension arrangements to assess whether they are reasonable and transparent. The report acknowledges that saving for a pension cannot ever be cost free due to administration and management requirements, however such costs have a real impact on the retirement income of individuals.

The report noted that as trustees had difficulty obtaining the data sought in the surveys commissioned by the Department and that there was some variance in the quality of responses received, trustees may not always be fully engaged in the management of their scheme and or in determining the most reasonable of charges.

The key findings of the report include:

  • While charges for occupational pension schemes can be reasonable, many schemes are paying more than this amount.
  • Strong economies of scale exist and as a result smaller occupational schemes pay more.
  • There is considerable evidence of re-brokering (scheme review and amendment) in recent years which needs further examination.

In summary the report has found that consumers, including trustees, do not fully understand that even a modest charge can have a large impact on final pension. As a result, the report sets out nine key recommendations to improve this situation. These include:

  • continuing to monitor the Central Bank's 2012 Consumer Protection Code;
  • developing approaches to improving consumer, employer and trustee awareness and knowledge of pension charges;
  • developing a communication action plan on pension charges;
  • reviewing occupational pension scheme disclosure obligations to:
    • provide that annual benefit statements are issued to deferred members;
    • improve the information provided in the Statement of Reasonable Projection; and
  • monitor developments and continue to develop a single standard measure that would assess all costs and charges and making it easier to make comparisons.

The Pensions Board Annual Report 2011 also noted that the level of charges imposed on members was an issue for some defined contribution schemes. The Pensions Board noted that there is an on-going responsibility on trustees to manage their scheme in the best interest of beneficiaries and this includes a duty to ensure that costs are reasonable. In practice, the report is likely to be of more interest to members of defined contribution pension schemes than members of defined benefit ones. In general, the costs of a defined benefit schemes are met by the employer and therefore do not have a direct effect on members' pensions. It is more common for members to meet costs of defined contribution schemes and this will have a direct impact on members' retirement savings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.