Pensions Law Blog 11th May 2011
THE PENSION LEVY FUND SCHEME – THE STRAW THAT BREAKS THE CAMEL’S BACK?
In the 1982 Budget, the then Minister for Finance (and later Taoiseach) John Bruton proposed to levy 18% VAT on shoes and clothing. When it was discovered that this would include children’s shoes, the ensuing row brought down the Fine Gael/Labour Coalition and the phrase “tax on children’s shoes” entered the Irish political lexicon.
Time will tell whether the current Minister for Finance, Michael Noonan and indeed the present Fine Gael/Labour Coalition, had their “tax on children’s shoes” moment yesterday when the announcement was made to introduce a €470 million Pension Levy Fund Scheme (the Levy) on private occupational pension schemes, personal pension plans and personal retirement savings accounts, in order to fund the Coalition’s new jobs initiative.
According to the (somewhat laconic) information provided thus far by the Department of Finance, the Levy will see operate by way of a stamp duty charge of 0.6% on the value of the assets under management of each eligible pension fund as at 1st January 2011 or the most recent accounting date in the preceding 12 months. It will not apply to the pension funds of non-residents and nor would it seem to apply to approved retirement funds (ARFs), which are already subject to an imputed distribution charge.
So how are they actually going to implement the Levy? There is, of course, already a levy in place to cover part of the cost of funding public sector pensions. This levy, introduced by the Financial Emergency Measures in the Public Interest Act 2009, was implemented by way of an additional pension contribution to be deducted from the gross annual salary of eligible public sector employees (practically everyone in the public sector).
By contrast, the Levy appears as though it will operate in a similar manner to the imputed distribution. Each year, the qualifying fund manager (QFM) of an ARF must deduct and pay to the Revenue an amount equal to the value of the income tax payable on a certain percentage of the value of the ARF (currently 5%), whether or not the ARF holder actually draws down such amount in that year.
Thus it is the trustees, administrator or insurer of the pension arrangement who will be the chargeable person for the Levy, meaning that they must bear the cost in the first instance. They then have the option to absorb the Levy or to pass it on to the individual members. Given that most defined benefit (DB) schemes are in deficit and many sponsoring companies are in trouble, I think it is safe to assume that this charge will be passed on in most cases.
In addition, the trustees or insurers will be given the statutory right to reduce the benefits payable by pension plans. Presumably this is to assist insolvent DB schemes where the promise to pay the benefit would survive the payment of the Levy.
The information to date, gives no details as to whether benefits could be reduced over and above the value of the Levy. Nor does it explain how the Levy might impact on spouses or former spouses (by way of pension adjustment orders). However, the Levy will have an impact on all those associated with affected pension arrangements.
For administrators there will be the added time and cost of implementing the Levy into their systems. It will be vital that they maintain close contact with the trustees and/or the member so as to ensure that records are kept up to date and benefit changes are properly communicated.
For trustees, particularly non-professional ones, this comes as yet another onerous burden at a time when they are already struggling with issues such as scheme solvency, reconstruction or closure. Increasingly, trustees are struggling to reconcile their fiduciary duty to act in the best interests of members with their duties to their employer. It is vital, therefore, that they maintain their independence and are clear as to their duties and obligations – particularly if benefits are to be adjusted. As volunteers, trustees are, of course, free to resign at any time but should be mindful of the impact of resignation en masse and should be conscious that they may still be liable for actions taken during the period of their trusteeship.
For employers, particularly of DB schemes, there will be an anxious wait to see what impact the Levy will have on the solvency of their scheme. Given that the overwhelming majority of Irish schemes remain in deficit and the Pensions Board will not postpone changes to the funding standard forever, I suspect that we may see a rash of reconstructions and closures of DB scheme in the second half of 2011. This will, in turn, have industrial relations implications, as well as increasing the potential for conflict with the trustees.
For members, particularly those currently benefiting from tax relief at 41%, this will come as a bitter blow, since they can also expect a double whammy in the form of a reduction in their tax relief to 33%, probably in the 2012 Budget. It will certainly make those considering entry to a pension scheme think twice as to whether, in the present climate, it may be better to hold off. I suspect that the proposed changes will do nothing to stem the current fall in private pension scheme membership (down 6% since 2005) and that within the next couple of years, the majority of people in the State will no longer be a member of a pension scheme.
There is also the question of fund liquidity. The increase in the imputed distribution has proved problematic for QFMs, as ARFs have traditionally been tied up in illiquid assets such as shares, units or property. Since QFMs are jointly and severally liable to account to the Revenue for an imputed distribution, they have been scrambling to try and ensure that there are indeed sufficient liquid assets in ARF’s to meet the annual charge – not an easy task.
Those Irish pension arrangements to be covered by the Levy may also struggle to maintain sufficient liquidity. For example, Mercer, as part of its European Asset Allocation Survey 2011, made the point this week that Irish pension schemes have an average equity allocation of around 50%, far higher than any other country surveyed other than the UK (47%). Therefore trustees, administrators and indeed members will have to consider carefully how to maintain sufficient liquidity in their arrangements to meet the cost of the Levy.
It would appear that the intention is for the Levy to be backdated to 1st January 2011, with an exception made for pension schemes with an insolvent employer, whose winding-up was triggered prior to 10th May 2011. Just how a scheme whose winding-up was completed prior to 10th May 2011 and who had a solvent employer will meet the Levy has not been made clear.
Already there are mutterings of Constitutional challenges over the decision to backdate the Levy to 1 January 2011. Perhaps the Coalition’s motive for backdating the Levy is to counter the possibility that many of the thousands who left Ireland over the last couple of years might attempt to circumvent it by transferring their pension benefits to their new country of residence prior to its introduction. Even if such challenges were to be successful – and I suspect that it may not be – the Government could simply continue the Levy for a further period to compensate.
Whilst the Levy is scheduled to last for four years, with two collections during that period – the first this year, previous experience with other such levies suggests that, once the income starts to come in, the Coalition will find it very difficult to give it up.
I think it’s fair to say that announcement of the Levy has been met a mixture of anger and incredulity amongst the pensions industry here. Since the National Pensions Framework (containing the previous Government’s proposals to counter Ireland’s long-term pensions time bomb) was published in February 2010, the emphasis has been firmly on the Framework’s revenue raising initiatives, such as the proposal to reduce the top rate of income tax relief to 33% or even 21%.
The pension industry was promised that proposals to provide access to cheaper annuities (by way of sovereign annuities) and a new model defined benefit (DB) scheme would be published in early 2011. To date, no such proposals have been put forward. Whilst this may still happen, it may be rendered largely irrelevant by yesterday’s announcement.
Full details of the Levy will be contained in the Finance (No.2) Bill, to be published on Thursday 19th May. However, even before its introduction, some financial experts in Ireland are already opining that pensions in Ireland will be holed below the waterline by the Levy, perhaps fatally.
Contact: James McConville, Partner
Pensions Law Blog 18th April 2011