The warped priorities of Irish banks' pension schemes
Issued : 23 September 2012
Sunday Business Post
There is a gross injustice over who gets what from banks' defined benefit schemes.
As most of the Irish banking sector is now in state hands, one of the many challenges ahead for the government is to decide how - and to what extent - the enormous deficits in the banks' defined benefit pension schemes can be filled, or shrunk. Taking all the state-supported banks together, these holes are several billion euro deep. At present, the taxpayer is helping to fill them.
Shortfalls in the Irish banks' defined benefit pension funds have to be taken into account when calculating the banks' regulatory capital requirements. As only one Irish bank has been able to access the capital markets in recent years, top-ups to meet capital requirements have had to be met by the taxpayers. That's why taxpayers' interests are at stake when it comes to the banks' defined benefit pension schemes.
Some steps have been taken by each of the banks already to shrink the size of their pension holes. Existing employees have been asked to increase their contributions to the funds. Current salaries have been frozen. At higher levels, they have been cut. New staff have been switched to defined contribution schemes. Future-accrued benefits in some of the defined benefit schemes are being linked to career average salary, rather than final year salary.
So there has been progress, but it has been made on a basis that is grossly unfair to existing bank employees - and over-generous to the banks' existing pensioners.
There is a gross injustice at the heart of the current legal order of pension payment priorities in Ireland's defined benefit pension schemes. Existing employees come at the end of the queue - after already-retired pensioners - if a pension fund becomes insolvent. While the banks' current employees and the state have been ponying up, deferred and existing pensioners, even those on €500,000 per annum pensions, have gone virtually untouched.
In practice, this means that a modestly paid Irish Bank Resolution Corporation (formerly Anglo Irish Bank and Irish Nationwide Building Society) employee on €35,000 per annum and his employer (the state) can be paying each year a percentage of his modest salary into a defined benefit pension fund that is simultaneously distributing €400,000 per annum or more in pension payments to several of the bank's disgraced former bosses.
There is no ringfencing of the lowly-paid employee's contribution, and no guarantee that he will get any of his contributions back if, between now and his retirement, the pension fund has to be wound up. Meanwhile, retired INBS chief executive Michael Fingleton is collecting his pension in full.
Similarly, AIB employees are paying more to top up a pension fund that is used to pay six-figure pensions of €250,000-€500,000 per annum each to five former AIB group chief executives - Gerry Scanlan, Tom Mulcahy, Michael Buckley, Eugene Sheehy and Colm Doherty - many, if not all, of whom made little or a negligible financial contribution to the fund because in their time the schemes were either substantially or wholly non-contributory schemes.
The capitalised value of these outstanding pensions for each of these men - which the state is now effectively funding - is a multiple of between 20 and 35 times the annual six-figure payments to each. What this means is that those five men alone have a priority over existing employees - even when the fund is insolven t- of somewhere between €75 million and €125 million of the fund's assets. (One cannot be more precise because of their varying years of service entitlements and varying outstanding life expectancy).
Adding in the retired generations of former deputy chief executives, group finance directors, divisional chief executives and general managers- all with six-figure pensions - it is clear that a tiny group representing much less than 1 per cent of the bank's total of former employees and pensioners have a priority claim of more than €250 million on the scheme's assets.
These assets are being topped up by contributions from current employees and indirectly via the big recapitalisations by the taxpayer.
Fortunately, the Minister for Social Protection, Joan Burton - following a tendering exercise - has appointed Mercer to advise on the current priority order given to assets in the event of a defined benefit pension scheme wind-up. What politician would even try to justify existing bank clerks on as little as €35,000 per annum having to make increased annual contributions to a scheme that gives priority to paying Rolls Royce pensions to their former bosses, some of whom helped bring down the Irish banking industry?
Employees' own contractual rights against pension funds are limited due to the wording of typical employees contracts. These give rights to membership of the scheme, but not to guaranteed benefits. Ranking of entitlements is embedded by the state rather than contract law and, hence, is adjustable by legislation. Subject to the Mercer findings, basic justice surely demands that the current statutory priorities be changed.
Calls on Irish-governed defined benefit pension scheme assets by existing employees, deferred pensioners and existing pensioners should have equal security ranking - up to a ceiling of, for example, the average pension entitlement per employee per annum. Higher pension levels should be paid only after growth through investment performance of the fund's assets creates an actuarially calculated buffer sufficient to underpin the pension security of all staff fund members' pensions up to the average threshold.
For the state to be cutting disability payments while protecting the huge pensions of many retired executives - including the disgraced former banking elite - is patently indefensible.
Michael Murray is a former banker, journalist, political adviser and NAMA portfolio manager. His views are his own.