IRELAND - Law firm A&L Goodbody has warned pension schemes which are considering capping benefits or even the "unthinkable" of altering accrued pension need to be aware of the legal issues involved.

In the latest edition of its newsletter, the law firm acknowledged the first option focused on by employers when defined benefit (DB) schemes get too expensive is too wind up the scheme, but as this could involve trustees asking for a substantial final contribution, firms should consider alternative options such as placing limits on benefits payable to members.

These could include capping the level of future pensionable salary; excluding bonus payments from pension calculations; reducing the accrual rate from 1/60th to 1/80th and even switching a guaranteed increase in pension in payment to a discretionary basis.

That said, A&L Goodbody warned sponsoring employers should understand certain issues including the impact of human resources or industrial relations on the proposed changes and the position of the scheme's trustees, while the changes could also highlight employment law issues such as particular promises included in individual employees' contracts.

In addition, as most of the cost-cutting options require a scheme amendment to be made firms should be aware that pension funds can only be amended within the parameters of the amendment clause, which can usually include terms prohibiting any changes that would reduce benefits already accrued to members, a possible option highlighted by Attain Consulting last month. (See earlier IPE article: Irish funds may have to consider the 'unthinkable')

Even if the particular amendment clause does not specifically prohibit this, the law firm suggested there are "implied restrictions on amendments" which mean amendments cannot be made to reduce benefits, as the theory is this would "go against the very purpose of a pension scheme, which is to provide benefits rather than to take them away".

A&L Goodbody noted while there are good reasons for employers to look at cost-cutting rather than switching to defined contribution (DC), "the business of making scheme amendments is not altogether straightforward, and careful consideration will have to be given to each particular case".

The increasing number of DB cost-cutting solutions being considered follows on from this week's decision by Standard & Poors to downgrade Ireland's long-term sovereign credit rating from AAA to AA+.

David Beers, credit analyst at S&P, said it reflected the view that the deterioration of Ireland's public finances "will likely require a number of years of sustained effort to repair" on a larger scale than the government anticipates and warned the ratings could fall further "if the public finances weaken substantially further than what we currently assume."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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