The Finance Bill, 2013 (the "Bill") was published on 13 February 2013. The Bill will implement the changes announced by the Minister for Finance in Budget 2013. There are two significant changes from a pensions perspective. They are:

Early draw down of Additional Voluntary Contributions ("AVCs")

The Bill gives members a once off opportunity to draw down up to 30% of the value of their AVCs for a period of three years commencing on the date of the passing of the Finance Act, 2013. The option is available solely for AVCs made by the member to provide additional benefits in retirement and expressly excludes employer contributions, contributions made to a Personal Retirement Savings Account ("PRSA") that are not AVCs or AVCs made for the purposes of purchasing notional service. Where a member's AVCs are the subject of a Pensions Adjustment Order ("PAO") the member and the non-member spouse will be deemed to each hold a share of the AVC fund and permitted to exercise the option independently. Amendments introduced at Committee Stage now provide that the option to draw down AVCs overrides the rules of the relevant pension scheme and so, if the Bill is passed with these new provisions, where members wish to avail of the option, no scheme amendment will be required.

Tax at the higher rate will automatically be applied to an early drawdown unless the member provides the administrator with the relevant Revenue documentation. The payments are not liable to USC and it is proposed that they will be exempted from PRSI in the next Social Welfare and Pensions Bill. The Bill also sets out certain documentation retention and disclosure requirements that will apply to administrators where early draw down requests are received.

Temporary reversal of Approved Retirement Fund ("ARF") and Approved Minimum Retirement Fund ("AMRF") limits

The pre-2011 monetary limits for ARF options have been reinstated by the Bill. These limits are lower than those that currently apply. These are intended to apply for a period of three years from the passing of the Bill.

The reapplied lower limits are:

  • the minimum guaranteed pension income for life that a member must have is €12,700 per annum in order for an individual under 75 to establish an ARF (this had been increased to 1.5 times the State Pension (Contributory) which, at present, amounts to approximately €18,000 per annum); and
  • the maximum amount to be set aside in an AMRF if the minimum guaranteed pension income for life is not met must be €63,500 (this had been increased to 10 times the State Pension (Contributory) which, at present, amounts to approximately €119,800).

Interim provisions have also been included in the Bill to ensure that individuals who established ARFs while the higher limits were in force (i.e. between 6 February 2011 and the date of the revision, probably April 2013) will not be disadvantaged.

Pensions Board Investment Guidelines

At the end of January 2013, the Pensions Board published investment guidelines for the trustees of defined contribution ("DC") schemes. The guidelines are designed to assist trustees and their advisers in deciding on the investment choices to be made available to DC scheme members. The guidelines could equally be used by trustees of defined benefit schemes who offer an AVC facility. The guidelines describe the different types of risk involved in DC investment and the various types of asset classes and investment fund choice available to trustees.

The guidelines suggest that a choice of between five to seven funds would be the optimum number of choices for members. Too few funds might result in some investment risks not being "covered off" while too many funds might confuse members and make it difficult for members to make a choice. The guidelines also deal with default investment strategies and set out a number of trustee responsibilities in this regard including the obligation on trustees to assess the suitability of the default strategy for members, the costs associated with the strategy, on-going monitoring of the strategy and accurately communicating it to members.

The guidelines confirm that trustees should never advise on any matters on which they are not qualified and should avoid making specific recommendations to individual members. The guidelines are a welcome, clear outline of trustees' obligations and contain much practical advice. The key challenge remains how to inform members clearly about the available options in making accurate but general observations about the various risks in DC investment.

Brief updates on current topics

Change in State pension age ("SPA")

Since our last update, no further developments have occurred in relation to the impact on pension schemes as a result of the increase in the SPA but the pensions industry remains hopeful that overriding legislation will be prepared that provides clarity to members, trustees and employers.

We would recommend that trustees and employers review their pension scheme documentation to establish if any issues arise with bridging pensions or integrated pensions as a result of the increase in the SPA and that discussions are commenced between trustees and employers to look at possible solutions.

Proposed change in priority order on wind up of a pension scheme

The Minister for Social Protection announced at the end of 2012 that her Department was finalising a review of section 48 of the Pensions Act which deals with the priority of distribution from a pension scheme on wind up. The objective of the review was to determine to what extent, if any, the provisions of section 48 might be revised to provide for a different, more equitable approach to the distribution of assets in the wind up of an underfunded scheme. The Social Welfare and Pensions Bill, 2013 is expected later this Spring.

Disclosure update

The Disclosure Regulations have been updated to include two new disclosures: one where sovereign annuities are being purchased by the trustees and the other, which will affect all schemes, is a risk statement. The risk statement (set out in Schedule M to the Regulations) must be included in disclosures to members of defined benefit schemes including in the scheme annual report, the scheme booklet, annual benefit statements, leaving service statements, on the death or retirement of a member and on the making of a pensions adjustment order. The prescribed wording of the risk statement is set out in the Disclosure Regulations and is a reminder to members that there is no guarantee that the scheme will have sufficient funds to pay the benefits promised.

New Revenue pensions manual?

It has been suggested that the Revenue pensions manual, which was last updated in 2008, will be updated in the near future to reflect changes in Revenue practice. It is unclear at this stage when the new manual will be published. This coincides with the Revenue's announcement that they have changed the nature of their role with regard to pension schemes. Revenue have confirmed that they now view their role as one of policing compliance and have indicated that in future documentation submitted to them will be carefully scrutinised.

Introduction of single scheme for public service pensions

The Minister for Public Expenditure and Reform has signed the Public Service Pensions Single Scheme Commencement Order which commenced the Single Scheme for new entrants to the public service who join on or after 1 January 2013.

The provisions of the Single Scheme will not impact existing public servants. The new Single Scheme is a career average one, has a normal retirement date linked to State pension age and provides for pension increases that will be linked to the Consumer Price Index.

This is a significant change from current pension arrangements which are based on final salary. The Minister stated that "this will be fairer for all staff. Pension schemes based on final salary are more beneficial to those who are promoted later in their careers, who often accumulate rapidly accelerated benefits in the final years of service. The result can be that individuals receive much larger benefits in retirement relative to their contributions over their careers."

Sovereign annuities

The recent improvement in State finances is resulting in steadily lower Irish sovereign annuity bond yields. For many schemes thinking about sovereign annuities as a funding solution, the dramatic fall in yields means that sovereign annuities may not provide the anticipated savings that were hoped for in developing potential funding solutions.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.