Ireland - Alternatives to Defined Benefit Arrangements

The last five years have seen a rapid decline -  from 67% to 37% coverage - of defined benefit occupational pension schemes in Ireland.

Defined contribution schemes have in the same period risen in prevalence from 8% to 24%. While membership of defined benefit schemes continues to increase slowly; it forms a declining percentage of total coverage. These statistics reflect the recent poor performance of the equity market, an aging population and resultant unpredictable funding expense for sponsoring employers which has meant that many are now looking to alternative arrangements to strike a balance between company and member needs.

The issues

To give an overview of what is at issue: In defined contribution schemes, the level of final retirement benefit for the member will depend on what pension or "annuity" the member can afford to purchase at retirement age. This in turn depends on the size of the fund accumulated from employer/employee contributions and the return that has been amassed on that investment over the course of the employees working life.

Contrast that with the more typically employee favoured option of being members of a defined benefit scheme where the member will be appraised at the outset of the precise level of benefit that will be received on retirement; normally calculable as a percentage of pensionable salary multiplied by years of service. In the former, the employee bears the risk on poor investment returns resulting in a small fund to purchase a pension as against the latter where members will know the level of pension they will be receiving and can plan more easily for retirement.

Corporate Acquisitions

What is happening more frequently in corporate acquisitions is that purchaser companies are seeking to agree the closure of the targets defined benefit scheme as a term in the share or asset purchase agreement. In such cases in practice, the defined benefit scheme will continue for a transition period of approximately six months after which time relevant employees will be transferred into a newly established defined contribution scheme: the scheme administrators having first meticulously ascertained the member entitlements in order to affect the transfers.

Hybrid Schemes

Another emerging pension scheme trend in Ireland is the rise of the creation of what’s termed ‘hybrid schemes’. There are innumerate types of hybrid schemes, limited only by the employer’s imagination and Revenue Limits but the basic premise is that such schemes contain a mixture of both defined benefit and defined contribution characteristics and aim to facilitate the distribution of pension risk more equally between employers and employees. An example would be the combination hybrid, where the member accumulates two types of benefit simultaneously: Defined benefit to a salary cap of €60,000 for example and thereafter defined contribution on any earnings over that amount. It is anticipated that hybrid schemes will form a large part of the future of pension scheme design in Ireland as such arrangements are viewed as providing employers with transparency and certainty in their accounts while providing employees with a level of security due to the defined benefit element of their schemes.

Deborah McHugh is a senior associate in the employment and pensions department of Mason Hayes+Curran.