guide The friendly to pensions

SECOND EDITION

PAUL KENNY

UNDERSTANDING PENSIONS
THE FRIENDLY GUIDE TO PENSIONS

Paul Kenny

Sponsored by The Department of Social and Family Affairs

Retirement Planning Council of Ireland and Irish Association of Pension Funds Dublin, 2004

First edition, 1994 Second edition, completely revised and updated, 2004 Printed by: Turner Print Group Design: Typeform Repro Copyright Retirement Planning Council of Ireland, Irish Association of Pension Funds, 2004 The authors copyright in this work has been given to the Retirement Planning Council of Ireland and the Irish Association of Pension Funds in recognition of their not-for-profit status and of the role they play in pre-retirement education and pensions in Ireland. All rights reserved. No part of this work may be reproduced, stored in a retrieval system or transmitted in any form or by any means, without the prior permission of the joint publishers. Any views expressed are those of the author and do not necessarily reflect those of the joint publishers. Professional advice should always be taken before taking action on any topic covered by this book and neither the author nor the joint publishers accept any responsibility for loss or damage occasioned by any person acting or refraining from acting as a result of material contained in this book.

ACKNOWLEDGEMENTS
Firstly, I am very grateful to the Minister for Social and Family Affairs, Mary Coughlan, T.D., for the encouragement and sponsorship she has given to this second edition of Understanding Pensions, and for agreeing to write the Foreword to the book. My thanks also for the feedback and helpful suggestions for improvements and additions to the book from both colleagues in the pensions industry and other readers over the years. I have been working on a revised version of the book on and off, almost since the original edition sold out, but every passing year seemed to bring more and more change pensions in Ireland just wouldnt stand still and a new edition always seemed just out of reach. However, with the passing of the Pensions (Amendment) Act, perhaps there may be a little more stability for a while, anyway. I hope the new edition will prove useful and durable. Incidentally, this book has been brought up to date as far as the Finance Act, 2004 and the Social Welfare Act, 2004. My particular thanks go to the members of the original project group from the I.A.P.F. and the Retirement Planning Council of Ireland who worked so hard to make this book happen, and to the peer review teams from both organizations who reviewed the new edition: Ciaran Long, Phelim OReilly, John OConnell, Paul Victory, Paul OBrien, James Kavanagh, Fiona Thornton. I am especially grateful to Patrick Burke and Nora Finn of the IAPF and Eamon Donnelly of the RPCI for their enthusiasm for the project. Finally, I must record the unique contribution of Noel OSullivan not just as an active and concerned member of the original project group and for his advice on Social Welfare pensions, but because the original idea of this book was his. PAUL KENNY Dublin, June, 2004

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FOREWORD
by the Minister for Social and Family Affairs

Retirement today only marks a change in lifestyle, not an end to a productive life as was too often the case in the past. Higher living standards and greatly improved healthcare have extended our life expectancy.At the same time our expectations for our old age have increased.We look forward to years of retirement which are active and rewarding. Retirement today is no longer a gentle stroll into the sunset years, but an opportunity to be grasped and vigorously enjoyed. Planning for your future is important, and pension planning is central to ensuring you can and will live the life you want to lead when you retire. However, the world of private and occupational pensions can be very complex.The number of different products available, their eligibility rules and tax treatment is many and varied. It is therefore very important to ensure that information is made available which is clear, concise and easily understood and this publication meets that need. The last ten years has seen significant development in the private and occupational pension area. In recent years there have been major improvements introduced by the Pensions (Amendment) Act 2002, including the launch of Personal Retirement Savings Accounts (PRSAs) and the establishment of a Pensions Ombudsman. I congratulate Paul Kenny the author who is now our first Pensions Ombudsman, for producing a clear and concise book which will be useful to a wide range of people, including scheme members, prospective members, PRSA contributors and pension professionals. I also want to commend the Retirement Planning Council of Ireland and the Irish Association of Pension Funds for their support for this project. Mary Coughlan TD Minister for Social and Family Affairs

Understanding Pensions

INTRODUCTION
With people now enjoying a longer life expectancy than in the past, we need to plan for a retirement period of perhaps twenty years or more that could be more than half as long as our total working careers. It is essential, therefore, that everyone should be encouraged to make adequate provision during their time at work to ensure financial protection through what may be a lengthy period in retirement. Through the State social insurance (Social Welfare) system most employees and selfemployed people will build up entitlement to a basic pension. However, in very many cases there will be need for additional pension cover to maintain into retirement the standard of living they enjoyed while at work. This additional cover is provided for employees through occupational pension schemes and, in more recent times, through Personal Retirement Savings Accounts (PRSAs).These schemes enable employees and their employers to set aside, in a taxefficient manner, a proportion of earnings in each working year to provide benefits in the form of retirement pensions. In addition, they provide financial protection for spouses and other dependants on a scheme members death. Occupational pension schemes outside the Public Sector are almost always set up as trusts.This is a requirement for exempt approval by the tax authorities. Exempt approval means that contributions can be deducted from an employees pay before it is taxed and that no tax is charged on investment income earned by the scheme.The use of a trust also ensures a measure of security for benefits due to members scheme assets are legally separated from those of the employer. It is the responsibility of the trustees to invest the joint contributions of employees and the employer in a prudent and balanced manner and to hold and manage the accumulating assets for the benefit of scheme members and their dependants. Most people dont appreciate that the pension rights being built up year by year by members of occupational pension schemes are probably their most valuable assets, often more valuable than the house they live in. If you have occupational pension cover, therefore, it is most important that you should understand how your scheme works and what your entitlements are and that you keep a careful eye on how your rights are being protected. The 1990 Pensions Act was introduced to improve and protect the rights of occupational pension scheme members and to ensure that schemes are properly controlled and administered. It was extensively amended and strengthened in 1996 and 2002.An important feature of the Act is that it gives members the right to obtain comprehensive information about their scheme and how it is run.Trustees must account to scheme members through giving them basic information about the scheme, their personal entitlements and how the scheme is being administered. It is essential that you should know what your pension entitlements will be in retirement and what will be paid to your dependants after your death.This knowledge may help you, while time is still on your side, to decide if you have adequate cover and to take action, if necessary, to supplement what you have.

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A lot of basic information is already available in scheme explanatory booklets and members should be familiar with and understand the contents of these useful publications.This material is now supplemented by a further range of data which must be made available, either automatically or on request. However, there could be a difficulty for some readers in fully understanding the content of the various papers and reports because most pensions documents contain technical terms which may not be familiar to the lay person. The purpose of this book is to try to make sense of pensions to plot a way for scheme members through what has been termed the pensions maze a maze that has got somewhat more complicated since the first edition of this book was published, in 1994.This is done by addressing the questions most often asked by members about their benefits and by supplementing the answers with glossaries of pension terms, together with separate sections relating to additional voluntary contributions (AVCs), limits imposed on benefits and contributions by the Revenue Commissioners, and public sector arrangements, the possible effects on pensions of separation and divorce, as well as the new introductions of recent years, the PRSA and the ARF/AMRF. It should be understood that answers, for obvious reasons, are of a general nature and cannot possibly cover every scheme as the rules of all schemes differ in one respect or another. They should, however, enable scheme members to ask their trustees or pension scheme administrator the questions needed to enable them to get precise information about their benefits. Even when members have the information they need, however, it would be wise in most cases to seek professional advice before acting on that information. Reaction to the first edition of this book was very positive and encouraging. However, I was conscious that there were areas which that edition did not explore, as well as a constantly changing pensions scene, largely as a result of developments in the law surrounding pension schemes.This new edition, therefore, has been expanded to include new sections on the self-employed; separation and divorce; Small SelfAdministered Schemes,ARFs and PRSAs; and, because the topic seems to be inseparable from pension schemes, I have included a brief chapter on Income Continuance (Prolonged Disability) Plans. Some information on investment has also been included. In spite of the effort that is made in the book to deal with pensions as far as possible in simple language, I find it useful to explain a lot of the technical terms used in the pensions industry.With this in mind, the book contains two glossaries, which have been considerably expanded since the first edition.The first covers general terms applicable to occupational schemes.The second contains those particularly used in connection with schemes in the Public Sector, which are not often employed elsewhere.As far as possible, I have defined terms using wording that sticks closely to that used in the PRAG / PMI glossary, PENSIONS TERMINOLOGY*, recognizing the desire of both bodies involved in its preparation to standardize pensions terminology as far as possible. I thank the Pensions Management Institute for permission to use copyright material from that book.Where terms are defined in Ireland by the Pensions Act 1990, the Family Law Acts or appropriate Regulations, these definitions are used

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instead, as this book is intended for use mainly in Ireland.Where there is no acceptable published definition of a term as it is used in Ireland, I have used my own. While this book is designed to provide the answers to most of the questions that arise from time to time on pensions, it is recommended that it should be read in conjunction with other publications, notably those produced by the Pensions Board. Appendix II, entitled Where to Go for Help, includes a list of organisations that can provide specialised assistance in the pensions area.Appendix VI contains a list of the publications of the Pensions Board. *Pensions Terminology A Glossary for Pension Schemes; Sixth Edition. London, 2002, The Pensions Management Institute

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TABLE OF CONTENTS Introduction ..........................................................................................................vii The Basics

Section 1 How Pension Schemes Work............................................................1 A. Defined Benefit Schemes.......................................................1 B. Defined Contribution Schemes..............................................3 C. How Pension Scheme Moneys are Invested .........................6 Bar

Questions About Your Benefits

Section 2 Section 3 Section 4 Defined Benefit Schemes .................................................................9 Defined Contribution Schemes......................................................19 Additional Voluntary Contributions .............................................25

Other Issues
Section 5 Section 6 Section 7 Section 8 Section 9 Section 10 Section 11 Maximum Benefits Approvable by the Revenue Commissioners.................................................................30 Public Sector Pension Schemes ......................................................37 Public Service Transfer Networks ..................................................41 Small Self-Administered Schemes..................................................43 The Self-Employed and Non-Pensionable Employment ..............47 Income Continuance Plans.............................................................50 The Family Law Acts and Pensions................................................54 Divorce and Judicial Separation.................................................54 Questions on Family Law and Pensions.....................................56 Section 12 Section 13 Section 14 Personal Retirement Savings Accounts (PRSAs)............................64 ARFs and AMRFs .............................................................................67 The Pensions Ombudsman.............................................................72 Enforcements and Appeals.........................................................76

Glossaries
Section A Section B Terminology of Occupational Pension Schemes...........................77 Terminology particular to Public Sector Pension Schemes ........106

Bar: Colour Bar is on the edge of every page to help identify separate sections

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Appendices
Appendix I Appendix II Appendix III Appendix IV Appendix V Appendix VI Abbreviations commonly found in connection with pension schemes...........................................................................111 Where to Go for Help ..................................................................114 About the Retirement Planning Council of Ireland...................118 About the Irish Association of Pension Funds............................119 Outline of the Provisions of the Pensions Act, 1990, as amended...................................................................................120 Pensions Board Publications ........................................................122

Appendix VII Pensions Ombudsman Publications.............................................124 Appendix VIII Publications of the IAPF...............................................................125

Bar: Colour Bar is on the edge of every page to help identify separate sections

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SECTION 1

HOW DO PENSION SCHEMES WORK?

A pension scheme is quite simply an arrangement that provides for payments to be made to a worker on retirement from paid work, or to his/her dependants in the event of death.The most most common kind of pension scheme in Ireland is that provided for by the Social Welfare Acts, which cover the provision of retirement and old age pensions to the employed and the self-employed and spouses pensions to their surviving marriage partners. Occupational pension schemes is the name given to employer-sponsored schemes for employees which are approved by the Revenue Commissioners under various Finance and Income Tax Acts.The term also includes scheme for employees in the various arms of the Public Sector, which in many cases may not require Revenue approval and which are set up under statutory provisions. Under the Family Law Acts, the definition is widened to include pensions for the selfemployed, annuities and buyout policies and any sort of pension promise, whether or not it is funded. This book is concerned with occupational pension schemes and those which apply to the self-employed. The Pensions Act, 1990 recognises two distinct types of scheme: A Defined Benefit Scheme, in which the pensions and other benefits are clearly stated in the rules of the scheme and promised to members and their dependants; A Defined Contribution Scheme (also known as a Money Purchase Scheme), where the benefits payable are determined solely by reference to the contributions paid into the scheme and the investment return earned on those contributions there is no specific promise or guarantee of particular benefit levels, except perhaps on death. Many of the questions contained in Sections 2 and 3 of this book have answers that are common to both types of scheme. Because of the differences between the two types of scheme and how they work, the questions dealing with the two types have been dealt with separately. Before approaching Sections 2 and 3, therefore, it is important for readers to be clear what kind of scheme they participate in. It is worth noting that, even where the main pension scheme is a defined benefit scheme, a scheme or section of a scheme designed to accept additional voluntary contributions (AVCs) will often be set up on a defined contribution basis.The pensions of the selfemployed and those in non-pensionable employment are always defined contribution arrangements, although the Pensions Act does not apply to them. PRSAs are also defined contribution arrangements.

A. HOW DOES A DEFINED BENEFIT SCHEME WORK?

An employer setting up a defined benefits scheme intends to promise the scheme members a specific amount of benefit to be paid on their retirement. In the old days, this benefit might have been a fixed amount of annual or weekly pension, or perhaps a set amount of pension for every year spent in the service of the employer. Later, the promised pension began to be defined as something based on pay and service combined, so the common pattern of defined benefits that we see today emerged.

Understanding Pensions

Modern defined benefit promises are usually expressed as a fraction or percentage of pay taken at or near retirement age, and multiplied by the completed service of the member. A common formula nowadays would promise 1/60th of final pensionable pay for each year of pensionable service.This is usually intended to fix the maximum pension promised at 40/60, or two-thirds, of salary. Because the benefit to be paid is fixed in this way, and because it is not possible to predict what the amount of final salary is going to be, it follows that we cannot know in advance what the promised benefit is going to cost. Pay As You Go For some employers this is not a problem.They simply pay their pensioners out of their current income and make no attempt to make any provision for them in advance of employees retirement.Typically, this approach (called pay as you go) is taken by Government, by local authorities and by some other public sector employers. Since the thinking behind this is that the Government cannot go bankrupt, it is possible for them to take this approach. Advance Funding For most employers and their staff, however, this approach is not attractive. Employees are not happy with the idea that their security in retirement is going to depend on the employer being (a) still in existence and (b) making enough profit to pay their pensions.These employers put away money during their employees working lives, to provide a fund from which the promised benefits can be paid in the future. Some of the money may be contributed by the members themselves. In that case, the rate at which they will contribute is usually also defined.The employer then pays the balance of the cost.The recommended rate of payment is decided by an actuary, who makes various assumptions as to what will happen in the future to the members (how long they will live, how long, on average, their dependants will survive them, and so on), their future rates of pay and the investment returns that the fund will be able to earn. These assumptions are reviewed from time to time in the light of actual experience and a new rate of contribution recommended, if appropriate. Tax Treatment Funding in advance for pensions is encouraged by the government, which gives favourable tax treatment to pension funds.This applies, not just to defined benefit schemes, but to defined contribution schemes as well. Both employers and scheme members receive tax relief on their contributions as they pay them. In addition, what the employer pays is not treated as employee earnings for tax purposes. Most important of all, the pension fund pays no tax on the investment income that it makes in the shape of dividend income and capital gains. In return, except for some limited benefits paid in cash on retirement or death, most of what is paid out as benefits from pension schemes is taxed under the PAYE system. To qualify for this tax treatment, a scheme must be approved by the Revenue Commissioners, who police the maximum benefits that can be provided. It must be set

Understanding Pensions

up under a trust, which has the effect of legally separating the assets of the pension scheme from those of the employer. Employee contributions are allowed, at the same rates as those mentioned below in the context of defined contribution schemes. It is usual for employees compulsory contributions to be fixed as a percentage of their pensionable pay.The employer then pays the balance of cost the difference between the employees total contributions and the contribution required to maintain the benefit promise. The employer must make a meaningful contribution to the scheme. See Defined Contribution schemes, below.The test is applied to employer contributions on a lifetime basis in defined benefit schemes, whereas it must be met year by year in defined contribution schemes. Other Features Apart from retirement pensions, defined benefit schemes usually include the option for the retiring employee to exchange some of his/her pension for a lump sum. Lump sum benefits for dependants on death are common features. Many schemes also provide pensions payable to spouses and/or other dependants.

B. HOW DOES A DEFINED CONTRIBUTION SCHEME WORK?

Unlike the defined benefit scheme, the defined contribution scheme promises only that a certain level of contribution will be paid and the pensions to come from the scheme are not defined or promised. How Is The Contribution Fixed? Generally, the employers contribution is decided in advance by the employer. Employee contributions will be in addition to the employers fixed rate of contribution. There are many variations on the way an employers contribution may be established and the following are all examples taken from schemes actually in operation: a fixed pension contribution, with the cost of death benefits and possibly also disability benefits paid in addition; a fixed overall contribution rate, with death and disability costs charged as a first charge against that contribution, the balance going to pension provision. different rates of contribution at different starting ages the older the employee when the scheme starts, the higher the contribution made by the employer. There are variations on this also contributions that increase in line with the members age, or with service completed. Contributions can be at any suitable level but there are some conditions attaching to them: 1. The employer must make a meaningful contribution to the cost of benefits in any particular year.This was originally set by the Revenue Commissioners at one third of the total cost for each member. Later, they reduced this to one sixth, largely in response to demands by members of schemes where the level of Understanding Pensions 3

employer contributions was low the limit made it difficult for these people to pay the maximum allowable personal contribution.After the increase in allowable employee contributions to an age-related scale (see 3., below), the rules were further relaxed.The Revenue requirement for an employer to make a meaningful contribution can be satisfied if the employer pays the establishment and ongoing running costs of the scheme and the cost of death benefits, OR not less than 10% of the total ordinary contributions to the scheme. 2. The benefits likely to be generated by both employer and employee contributions combined will not exceed the maximum limits which the Revenue impose on an employee by reference to salary and completed service at retirement. 3. Employee contributions themselves are limited to an overall maximum percentage of gross pay, including any contributions required by the rules of the scheme.The maximum allowable employee contribution, originally 15% for all, is now age related: 15% for those under age 30; 20% between 30 and 39; 25% for those aged 40-49; and 30% for those aged 50 or over. Employer contributions are made in addition, as long as the overall benefit limits are not breached.An earnings cap of 254,000 applies to contributions by employees, What happens when the contributions are paid in? Once contributions are received by the pension scheme trustees, they are invested through an insurance company or other investment manager.They are usually invested separately for each individual member, so that the members share of the fund can be easily tracked. Exactly how they are invested depends on a number of things, including how close the member may be to retirement age. For example, if the member was quite close to retirement, appropriate investment would be in assets whose value was not likely to reduce.A younger member might invest in more volatile assets, in the hope of making substantial capital gains before he/she needs to consolidate in the run-up to retirement.The assets of pension funds build up without any tax being paid on investment income or capital gains. Under normal circumstances, therefore, they should accumulate faster than an investment fund that has to pay tax. What Happens When I Retire? When you retire, the total fund accumulated in your name becomes available to the trustees to provide benefits.The maximum benefits that can be provided are dictated by the Revenue Commissioners rules (see Section 5). For those retiring at normal pension date, having completed at least 20 years service, the maximum lump sum is 12 times salary (or final remuneration calculated on the most favourable definition the scheme rules and Revenue regulations will permit).The balance of the fund available for the individual has to be applied to purchase pensions (for the scheme member and also perhaps for his/her dependants).The amount of pension available after the lump sum has been taken will be dictated by (a) the value of the accumulated fund and (b) the the cost of purchasing an annuity/pension at the time of retirement. Neither of these can be predicted in advance.The best that can be done in the case of someone who is years away from retirement age is to make a reasonable estimate of

Understanding Pensions

what might be available. Such an estimate would be based on assumptions regarding future fund performance and annuity rates. It is important to review these regularly, to measure actual performance against the assumptions.That way, changes can be made to the rate of contribution if needed. What Happens If I Die In Service? If you die in service, the fund that has accumulated for your pension will form part of the overall death benefit provided by the scheme how that is calculated will be determined by the rules of the scheme itself. Death benefits may be paid as tax-free lump sums within certain limits, with any balance going to purchase pensions. What Happens If I Die After Retirement? That will depend on the choices you made at the point of retirement to provide for your dependants. Some people set up a pension only on their own lives. Others ensure that part of the capital available at retirement age is used to buy an extra pension which will be paid to a spouse or other dependant on the death of the member after retirement.The available capital can be used to tailor the benefits to fit your individual circumstances. Advantages and Disadvantages From the foregoing, it will be obvious that a defined contribution scheme places a great many things firmly under the control of the member. Benefits do not have to be taken in any prescribed pattern, even though the maximum levels of benefit are laid down by the Revenue Commissioners.Thus, the scheme member can decide on the distribution of benefits, between personal pension, lump sum, dependants pensions and cost-of-living increases. As well as this flexibility, defined contribution schemes have the great benefit of allowing an individual to trace the buildup of his/her fund, so that he/she knows its exact capital value as it accumulates over the years. However, he/she will not be able to estimate with any accuracy how that fund will translate into a pension until he/she is quite close to retirement age. If a person leaves service early, particularly at a young age, defined contribution schemes can generate leaving service benefits that are quite generous by reference to the relatively short period of service that the person has completed. As against all this, there are risks involved.The member is taking the investment risk i.e., the possibility that the returns on money invested could be poor. Returns cannot be guaranteed in advance in most circumstances. If poor investment returns are experienced, it follows that the capital available at retirement age would be less than a person might expect or wish for. Secondly, there is the risk involved in annuity rates.The scheme member and the trustees are not stuck with the insurance company or investment manager with which the fund of money was built up the money can be taken to the open annuity market to get the best value available in annuity rates. However, if long-term interest rates are low at the time of retirement, they will feed into all life offices annuity rates

Understanding Pensions

and so the annual pension available for any given amount of capital is likely to be poor.That said, it does pay to shop around for the best quotations.

C. HOW ARE PENSION SCHEME MONEYS INVESTED?

1. Retirement Annuity Contracts (Self-Employed and Non-Pensionable Employment) Retirement Annuity Contracts or Personal Pension Plans are primarily for the selfemployed, but are also designed for people who are not members of pension schemes in their places of employment.They are described in more detail in Section 9.The investment position under these contracts is fairly straightforward. The person who is paying the pension premiums can choose the insurance company that is to manage or invest them. In the first place, the individual must decide what kind of investment he/she needs for example, a traditional with profits endowment /deferred annuity policy, or an alternative unit-linked fund. If he/she chooses the traditional with-profit policy, this narrows that range of providers available to a small number of insurance companies. If he/she selects the option of a unit-linked fund, this will certainly open up much wider variety of choices. Some insurance companies offer a very wide range of funds in which the money may be invested and the choice rests with the individual who pays the premiums. Other insurance companies offer, not only a range of funds within their own management, but also the services of other investment managers, including investment banks. Once the manager is selected, the individual can then choose whether to go for a mixed fund, in which the manager is investing in different kinds of assets, including ordinary shares, government and other fixed interest stocks and possibly property.There can be further choice available when it comes to ordinary shares (equity) investment, as the manager may offer a range of funds that invest in different markets, such as the UK, the United States, Japan, and so on. There is often considerable freedom to switch between these funds as time goes on, so that control of the investment remains with the premium payer. Funds can now be moved freely from one investment manager to another, though there may be some costs incurred when this is done. 2. Occupational Pension Schemes In occupational pension schemes, the trustee is always responsible for the investment of the pension scheme moneys.Although it was always accepted that this was the case, the Pensions Act 1990 specifically mentions this as a responsibility of the trustees. How this actually works in practice depends on the nature and size of the scheme concerned. Who Does the Investing? Although the trustee is responsible for the investment of pension scheme moneys, they rarely perform this duty themselves. In practice, most trust deeds give the trustees

Understanding Pensions

some discretion to delegate the conduct of the investment to an investment manager and the choice of manager will, again, depend on the nature and size of the scheme concerned. Why is Investment so Important? There are two basic types of pension scheme defined benefit and defined contribution. In a defined benefit scheme, the employer has promised a given level of benefit. If the investments do not perform well, the money to meet these benefits has to be made up somewhere, and this usually takes the form in an increased contribution from the employer.Therefore, the employer is particularly interested in the success of the pension schemes investment policy. The second kind of scheme is a defined contribution scheme.The benefits to be provided under a scheme of this type depend solely on the amount of money available when a person comes to retire, leaves service, or dies. If the investment policy followed by the trustees is not successful, this will mean that the member gets less by way of benefits than he/she might have hoped or expected. In this kind of scheme, therefore, the member is vitally interested in the performance of the investments. What Kind of Investment Vehicles Are Used? This depends on the type of scheme and its size in terms of numbers of members and total contributions. Most smaller schemes nowadays are defined contribution schemes. So are most of the arrangements designed to accept additional voluntary contributions (AVCs).The pattern of investment is very similar to that adopted for Retirement Annuity Contracts (see above), except that trustees are legally responsible for the investments.Therefore, the individual scheme member may have little or no say in how his/her money is invested. Sometimes the trustees will allow members a choice between a limited number of investment options at times including a choice of different investment managers.The contributions made for and by individual members must be tracked so that each receives a fair return on his/her investment. Defined benefit schemes include most of the biggest schemes in terms of membership. Trustees will decide how they wish to invest the money in conjunction with their appointed investment manager. Insurance contracts are not as widely used now as they once were. Most schemes use shared or pooled investment vehicles, and the largest are directly invested often called segregated. Pooled Funds Shared investment vehicles include the wide variety of managed funds offered by insurance companies and unit trusts offered by the investment banks and specialist fund managers.They are similar to the funds used for individual investment.The main advantage of pooled investment vehicles is that they offer even smaller pension schemes an opportunity to spread their investments over a wide range of assets.A scheme that could never consider buying a property, for example, can still benefit from property investment by buying units in a managed property fund.

Understanding Pensions

Direct Investment When the value of a schemes assets reaches a certain size, trustees often feel that they can add value by moving away from shared investment arrangements and asking their investment manager to invest in stocks, shares and other assets that are owned directly by the trustees. Even these schemes, however, may not hold direct property investments, but purchase property fund units instead. Because a scheme is investing directly, it may follow an investment strategy that is closely designed for its particular needs.Without going into too much detail, it should be clear that a scheme that has a lot of pensioners, for example, and therefore needs cash to pay benefits, may invest differently from one whose members are far from retirement age and there are many variations in between those extremes. Information on Scheme Investments The annual report of the trustees of each pension scheme will contain information on how the assets are invested, the name of the investment manager and how he/she is paid. It will also include information on the investment policies followed by the trustees during the scheme year and on any changes made to those policies.The report should give details of any significant financial developments (such as large movements of money in or out of the scheme) and comment on the performance of the investments during the year. Other information that must be given, if it applies, is whether there is what is called a concentration of investment that is, whether more than 5% of the assets are invested in a particular asset or asset type. If there is significant self investment (this means investment in employer-related assets or property) it must also be reported.

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SECTIONS 2 AND 3 QUESTIONS ABOUT YOUR BENEFITS

The main purpose of this part of the book is to address the questions most often asked by members about their pension benefits. Obviously, answers will be of a general nature and cannot possibly cover every scheme as the rules of all schemes are different. It is essential that you get specific information before you decide on any course of action or on any option which you may be entitled to exercise. In particular, you should not take any action, defer any action, agree to exercise any option, or fail to exercise it, solely on the basis of information contained in this book.You should always ask your scheme trustees or administrators for any information or explanation you need in order to come to a decision. In general trust law and under the Regulations governing disclosure of information to scheme members under the Pensions Act, you are entitled to that information. Even when you have the information to which you are entitled, it may be advisable for you to seek individual financial advice before coming to certain decisions such as making or increasing voluntary contributions or exercising the various options that may be available to you at the time of retirement or leaving service.

SECTION 2:
Question 2.1:

DEFINED BENEFIT SCHEMES

At what age is normal retirement pension payable?

Normal retirement age under the rules of each scheme is the age at which the benefits specified by the rules will be paid in full. If retirement takes place before that age (which may be subject to consent), a smaller benefit would usually be payable. Conversely, if late retirement is allowed, most schemes would provide a larger benefit. Normal Retirement Age in most Irish pension schemes is 65, because this is the age at which the social welfare system pays pensions to qualified employees and it is common for occupational pension scheme benefits to be designed in a way that takes account of social welfare expectations. Question 2.2: How is my pension calculated?

In defined benefit schemes, pension is calculated usually by reference to a members final pensionable pay and pensionable service. In most schemes, these two factors would be multiplied by a pension fraction to arrive at the members entitlement.An example of this would be as follows: Pensionable Pay: Pensionable Service: Pension Fraction: Pension Entitlement: 21,000 per year 40 years 1/60th 21,000 x 40/60 = 14,000

The following should be noted:

Understanding Pensions

Pensionable service This will be defined in the rules of the scheme. It may be service as an employee, or service as a member of the scheme. It may be expressed in complete years, years and months or even years and days. It may be continuous, or could include periods of broken service. Service with other companies in a group may also be included. Pensionable Salary This is the part of your salary which is taken into account for pension purposes. It could be your gross annual pay but is usually something lower than that.The usual starting point for calculating this is basic salary. If the scheme is integrated with social welfare benefits (see below), it may be subject to a deduction.Anything included in pensionable pay must be taxable under Schedule E of the tax code and the Revenue Commissioners require that anything which is not a fixed part of pay (such as bonuses, commissions, etc.) must be averaged over 3 or more years, or any shorter period for which it has actually been paid.What is included in pensionable salary in your case will depend upon the rules of your own scheme. Final Pensionable Salary This will be based on your pensionable salary (see above). It may be that salary taken at the date of your retirement or at some date close to that, or it could be an average over several years. How the Social Welfare Pension can influence your Occupational Pension It is common in Irish pension schemes that the benefits provided under the occupational pension scheme are integrated with the benefits paid under the Social Welfare system. In the public sector, this is known as co-ordination.This can be done in a number of different ways. Sometimes it is done simply by subtracting all or part of the amount of the individuals Social Welfare retirement pension from the pension calculated on the scale or the formula contained in the rules of the scheme. Most commonly, however, it is done by means of a salary offset.This works by reducing the salary for pension purposes by an amount which is related to the Social Welfare pension currently payable. Members benefits and contributions would then be based on this lower pensionable salary.The thinking behind this is that the Social Welfare pension is regarded as catering for a persons pension needs in relation to that part of salary, and only the balance of the intended overall pension needs to be provided under the occupational pension scheme. Question 2.3: Can I receive a cash payment instead of part of my pension?

In most pension schemes, the answer is yes.The term commutation is used to indicate the right, which members usually have under pension scheme rules, to exchange part of their pension for a lump sum.This lump sum is payable tax free (unlike the part of your pension that you exchange for it).The lump sum paid by any pension scheme will usually be based on the final pensionable salary and pensionable service of a member and the maximum allowed by the Revenue Commissioners is 12 times final pay. Exactly what is payable as a tax free lump sum depends upon the rules of your own scheme. One way or the other, the maximum benefit cannot be paid to

10

Understanding Pensions

anyone who has less than 20 years service at normal retirement age.The Revenue Commissioners require smaller amounts to apply to shorter service, and to early retirement.The rate at which the lump sum is then converted into equivalent pension will also vary from scheme to scheme.The most common formula in Ireland is probably 900 cash = 100 annual pension, but it will vary from scheme to scheme. In many cases, the exchange rate for women may be higher than that for men, reflecting their longer life expectancy. In public sector schemes, lump sums are not given by commutation, but are provided as a separate addition to each members pension entitlement. In a very few pension schemes, the option to receive a lump sum is not given under the scheme rules. Question 2.4: How are pension scheme benefits taxed?

In Ireland, schemes that have exempt approval from the Revenue Commissioners dont pay tax on their investment income. Most schemes are treated in this way.When benefits come to be paid, however, they may be taxable. Retirement Benefits Benefits payable in lump sum form on retirement (up to certain limits see Question 2.3) are not subject to income tax. Benefits payable in pension form are taxed under the PAYE system, just like salary. However, they dont attract full PRSI contributions, but only the Health Contribution.This is PRSI Class K1, currently 2% of the pension. Death Benefits Similarly, benefits which are allowed to be paid in lump sum form on the death of a member are not subject to income tax, but those paid in pension form are taxable under PAYE. [See Question 2.12]. Death benefits are subject to Inheritance Tax. For the purpose of this tax, they are treated as if they were an inheritance from the member who has died, so the question of tax is governed by the relationship to the member of any beneficiary.Thus, a payment to a husband or wife will be free from this tax. Payments to children and others will fall under the various classes set out in the Capital Acquisitions Tax Act. See also Question 2.12 Foreign Benefits If you have pension benefits payable from a foreign country, the tax treatment of these benefits when you receive them will vary. In some cases, they will already have been subject to foreign tax and you may be able to get credit for this against your own tax liability here. Benefits payable from the United Kingdom can be exempted from UK tax but you must make proper application for this to be done. Ireland has double taxation agreements with many countries, designed to ensure that you are not taxed twice on the same benefits. In all cases where foreign pensions are payable, you should check with your local tax office. Question 2.5: Do pensions increase after retirement?

Where payment of increases in pensions after they start to be paid is provided for in the scheme rules, this is often called escalation. Some schemes do not provide any Understanding Pensions 11

such increases.Where increases are provided, the amount of the increase is often a defined percentage figure, or may be related to a suitable index, such as the Consumer Price Index. In some schemes, increases are provided purely at the trustees discretion. This usually happens where no specific funding is being provided in advance for pension increases. Sometimes, increases in pensions are paid, not from the pension fund, but purely from the income of the employer. In this case, these increases would be likely to cease if the employer closed down.The Pensions Act Disclosure Regulations require that retiring members are informed if their increases are not guaranteed. In many Public Sector schemes, it is customary for pensions to be increased in line with any changes which take place in the salary appropriate to the post formerly held by a retired member, although many non-standard increases, such as productivityrelated pay increases, may be excluded.This method of treating pensions post retirement is called pay parity. Question 2.6: How soon may I retire?

Retirement before normal retirement age is usually subject to the consent of the employer and/or the trustees.The Revenue Commissioners will permit a pension to be paid at any age if it is due to ill-health. Otherwise, the minimum age at which a person can receive a pension is normally age 50.A member who retires in advance of normal pension age could expect a reduction in pension benefits and these reductions can be quite large if the period from the date of retirement to normal pension age is long. The reduction takes place because Fewer contributions have been paid and those which have been paid have been invested for a shorter time; The payment of the pension starts earlier, the average expectation of life is longer, leading to a longer period of payment of benefits.

If early retirement takes place due to ill-health, sometimes a scheme will give better benefits than would be paid on early retirement in normal health. Please note, however, that the rules of each scheme will specify the earliest date at which retirement will be allowed under that scheme. Question 2.7: What happens if I retire late?

If your retirement is to be postponed beyond normal retirement age, this usually requires the consent of your employer and/or the trustees of the scheme. What happens then depends very much on the rules of the individual scheme. Revenue rules, and the provisions of most pension schemes give the option to take all of your benefits at normal retirement age.Alternatively, you may have an option to take the cash element (see commutation above) and defer receiving your pension until you actually do retire.The third option is to defer your benefits altogether until you eventually retire. If that option is taken, death in service cover may continue to be provided until you actually retire, although it would be unusual for this provision to continue after age 70. 12 Understanding Pensions

If you defer your benefits beyond normal retirement age, it is usual for these benefits to increase, to reflect the fact that their value continues to be invested in the fund, and that average life expectancy will be shorter from a later age, so fewer instalments of pension will be payable overall. Question 2.8: I have contributed for 40 years but I have not yet reached normal retirement age. Can I stop my contributions, or even retire now on full benefits?

The answer to the first part of the question depends on the rules of your scheme. Some schemes will permit members to stop contributing after 40 years of contributions but most schemes require people to continue to contribute up to normal pension age, even if this means that they would have contributed for longer than the maximum period of service credited for pension purposes. If you want to take your benefits before the normal retirement age specified in the scheme rules, this is a case of early retirement and your benefits in those circumstances would be subject to whatever reduction the scheme would usually require for benefits paid before normal retirement age. Question 2.9: What happens if I die before retirement age?

Almost all pension schemes provide some sort of death in service benefit designed to provide for the dependants of members who die before reaching pension age.These death-in-service benefits take the following forms: (i) Lump Sum Benefits Lump sums are payable income tax free and are often expressed as a multiple of salary.The maximum lump sum benefit which the Revenue Commissioners will allow is four times your final pay. However, your own contributions can be refunded in lump sum form in addition, with or without interest, if the rules allow that.This refund of contributions would also be tax free. If the benefit provided in the form of a capital sum exceeds the Revenue limits on cash payments, anything over the limits must be used to provide a pension for a dependant or other beneficiary. Check the rules of your own scheme. (ii) Pensions for Dependants Many schemes provide pensions for dependants in addition to lump sum benefits.These pensions can take the form of spouses benefits, spouses and childrens benefits, or benefits payable to dependants generally.The total amount of these pensions is regulated by the Revenue Commissioners and the total cannot exceed the maximum pension which you could have had, based on your final pay and the service you would have completed if you had lived to normal retirement age. (iii) Preserved Benefits If you have left employment since the 1st January 1993 and are entitled to preserved benefits under the Pensions Act, the value of these benefits must be paid to your estate in the event of your death.Alternatively, the trustees of your

Understanding Pensions

13

Pension Scheme may have chosen the option to pay a dependants pension instead.The notification of your benefits on leaving service must specify what is payable in the event of your death, and in what manner. Beneficiaries may be liable to Inheritance Tax on these benefits. See Question 2.12. Question 2.10: Who gets my death-in-service benefits?

The rules of the majority of pension schemes specify that the lump sum death in service benefits are payable to a broad category of dependants.These will normally include a members wife or husband and children under 18. Often, in addition, the category of dependants will include those over 18 who are still receiving education or who are mentally or physically handicapped, and any person who was ordinarily dependent on the member for the necessaries of life. Remember, the definition of dependants can vary considerably from scheme to scheme and you should check your scheme booklet or other explanatory documents. Discretionary Powers of Trustees In most schemes, the trustees will have a fairly wide discretion to decide who gets these benefits. In some schemes, apart from dependants as outlined above, there might also be a broader category of eligible beneficiaries whom the trustees can choose to pay.You cannot direct the trustees in the way they exercise these discretionary powers (but see next paragraph). Nomination of Dependants The trustees may give you the option of completing a form of nomination of dependants, often known as a wishes letter or expression of wishes.The purpose of this is to specify your own wishes in the disposal of your death benefit. Such a letter or expression of wishes cannot bind the trustees but they will normally try to give effect to your wishes.They will not do so, however, where your wishes are in conflict with the obligations imposed by law on trustees. Spouses Pensions If the dependants pensions are expressed as spouses pensions in the scheme rules, they can be paid only to the lawful spouse of the member. Payment to the estate The majority of pension schemes do not provide for payment of your death benefit to your estate except, perhaps, where there are no dependants. However, the Pensions Act does require the value of any compulsory Preserved Benefits under that Act to be paid to your estate.Any moneys due under a Pensions Adjustment Order made at the time of divorce or separation would also be paid to your estate.Any amount paid to your estate will be disposed of in accordance with your will, or in accordance with the rules on intestacy if you dont make a will. Every pension scheme member is strongly advised to make a will.

14

Understanding Pensions

Leaving Death Benefits by will: You can leave your death benefits to someone else by means of your will only if the death benefit is paid into your estate. In most pension schemes, this does not happen immediately, because the death benefits are usually expressed as something payable to dependants. Generally, payment to your estate will take place only if you have no dependants (except in the case of certain benefits mentioned in the previous paragraph).Therefore, in most cases, your will can have absolutely no effect on who becomes entitled to the benefits payable under the rules of the pension scheme on your death.You should also note that benefits payable to dependants or other beneficiaries under the rules of the scheme can be paid fairly quickly after the death of the scheme member. Benefits that have to be paid to your estate could not be paid until your will has been submitted to probate (or until letters of administration have been granted, if there is no will). There are a few circumstances in which death benefits will be paid automatically to your estate: lump sum death benefits under public sector schemes are always payable to the members Legal Personal Representatives; the actuarial value of preserved benefits under the Pensions Act must also be paid in this way (unless the Trustees choose to pay dependants pensions instead); and the value of pension benefits that may be due to you as a result of a Pensions Adjustment Order will go to your estate as well. Question 2.11: What happens if I die after retirement?

Benefits payable after the death of a pensioner in retirement vary considerably from scheme to scheme. It is quite unusual for any benefit to be paid in lump sum form when death occurs more than 5 years after retirement. Death in retirement benefits can be any one or more of the following: Guarantee Many pension schemes provide a guaranteed minimum period for payment of your benefits, whether you live or die.This period can be up to 10 years. However, if it is 5 years or less, then the remaining instalments payable under this guarantee can be translated into a lump sum payable to your dependants or estate instead. Pensions payable to dependants may commence within the 5-year guarantee period. If the guarantee is more than 5 years, the outstanding instalments must be taken in pension form, and no benefit payable to dependants may commence until after the period of the guarantee has expired. Dependants benefits provided by surrender Many pension schemes give a retiring employee the option to give up some of his/her own personal pension to provide for a continuing pension to be paid to a dependant on death after retirement.This is an option that has to be exercised before you actually retire.The cost to you in terms of a reduction in your own benefits will depend on the age and sex of your dependant, relative to your own age and sex.The older the dependant, the less of your own pension you will have to give up to make this sort of provision.As women generally have a longer life expectancy than men, it would cost more to provide for a female dependant than for a male. Understanding Pensions 15

Dependants Pensions Sometimes the scheme rules will provide for specific dependants pensions to be paid on your death after retirement, without any need for you to give up any part of your own pension.These benefits may be payable immediately on the death of a pensioner, even though a 5 year guarantee might still be in force, or they may begin payment after the guarantee expires. Marriage after Retirement Generally speaking, pension schemes which provide spouses pensions on death after retirement cater only for the spouse to whom the pensioner was married at the time retirement took place.The same usually applies in the case of other nominated dependants payment will be confined to the dependant/s nominated at the point of retirement. However, you should check the rules of your own scheme for precise information in this area. Question 2.12: How are my death benefits treated for tax purposes?

As has already been stated (see question 2.4) benefits are taken into account for tax only when they come into payment.Any benefits which the Revenue Commissioners allow to be paid as lump sums in normal circumstances are not taxed. Benefits payable in pension form are subject to tax under the PAYE system, so the tax payable on them will be determined by the individual tax position of whoever is receiving the payment. There is another tax to which death benefits can be exposed. Benefits paid on death are regarded as part of your estate for the purposes of Inheritance Tax, even though you cannot normally control who gets these benefits by means of your will. For the purposes of inheritance tax, death benefits are treated like every other inheritance.The amount of tax payable (if any) depends on who is receiving the benefit and the relationship to you. For example, if the only beneficiary is your husband or wife, no inheritance tax would be payable. If a child or children receive the benefit, anything they get from the pension scheme will be added to whatever else they have inherited for the purpose of calculating whether they are liable to tax or not.The thresholds for relatives other than children are low and, for non-relatives, even lower still. In summary, therefore, if your death benefit is inherited by anyone except your lawful spouse, there is at least a possibility that inheritance tax will be payable. Non-relatives, such as a dependant who is not legally married to you, are the most likely people to pay substantial amounts of inheritance tax. The trustees will want to satisfy themselves that the liability for inheritance tax has been taken care of before they pay out the full death benefit, as they could be held liable for payment of the tax otherwise. Question 2.13: What are my options on leaving service?

Under the Pensions Act, your pension scheme trustees have an obligation to let you have a detailed note of the full options available to you on leaving service.The following may help you to understand what these options mean:

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Understanding Pensions

(a) What are vested rights? This is a term used to describe a right which a pension scheme member acquires to a benefit on leaving service, which is provided for in the rules of the scheme. Many scheme rules giving vested rights are now overridden by the provisions of the Pensions Act, which confers rights to preserved benefits.The Pensions Act does not permit schemes to give leaving-service rights which are less than those provided for under the Act. However, it is possible for schemes to exceed these statutory preserved benefits.A vested rights rule may apply automatically on leaving service, usually after a certain minimum period, regardless of the circumstances in which you leave. Sometimes, vested rights apply only if you leave through no fault of your own, such as through redundancy. In practice, most vested rights rules have been superseded, because preservation under the Act is compulsory after two years in the scheme. (b) What are preserved benefits? Preserved benefits are benefits earned during service as a member of a pension scheme.The Pensions Act 1990 originally provided only for preservation of benefits earned after the 1st January 1991, the date on which the Act came into operation.They were available to those who left service after the 1st January 1993, and who had been at least five years in the pension scheme, in any other scheme of the same employer or in any pension scheme from which rights have been transferred to your present scheme.The Pensions (Amendment) Act, 2002 extended preservation to all benefits, regardless of when they were earned, provided only that you have been a scheme member for two years or more. In defined benefit schemes, these benefits will be subject to revaluation (see Glossary) between 1996 (or later date of leaving service) and the time you collect your benefits. (c) What is a transfer value? This term is explained in the Glossary at the back of this book. (d) Can I take a refund of contributions made to the scheme by (i) myself and (ii) my employer? If you are entitled to a preserved benefit (see above) under the Pensions Act, you will have no right to take a refund of your own contributions.This also applies to voluntary contributions. If, however, you have not completed enough service (two years as a member of the scheme, or any scheme of the employer, or any scheme from which rights have been transferred) to acquire rights to a preserved pension, you can take a refund of all your own contributions, subject to whatever the rules of your scheme provide. Interest may or may not be payable, depending on the detailed rules of your own scheme.The tax currently payable on a refund of contributions is 20%. You can never take a refund of the contributions made by your employer to the scheme on leaving service.Also, certain industry-wide schemes that provide for transferability between participating employers do not allow contribution refunds at all. Understanding Pensions 17

Question 2.14:

Will a transfer value buy an equivalent period of service in a new scheme?

In general terms, the answer to this is no. It is usually up to the trustees of the receiving scheme to decide what credit you are given in the new scheme in return for any transfer value paid in.This decision will generally be made on the advice of the scheme actuary. No two schemes are the same in every detail but, even if they were, the benefits which you take from the first scheme are likely to be calculated on your pay at the time you leave service, not on the pay you will be receiving when you retire from the service of the second employer. If you are considering asking for a transfer payment, you should obtain detailed information on what it is likely to buy for you in the new scheme before you ask for the money to be transferred. If the transfer value will not replace all of your service, you may be able to make up some or all of the difference by making Additional Voluntary Contributions (AVCs). See Section 4 Question 2.15: (a) How are my personal contributions calculated? The rules of your scheme will contain a formula, normally expressing your contributions as a percentage of pensionable salary. If your scheme is integrated with social welfare, you may have a pensionable salary that is lower than your actual salary. (See the explanations of these terms in the glossary). If your pensionable salary is calculated by subtracting from your basic salary in order to calculate your pay for pension purposes, the contribution you pay would be based on the adjusted figure. Sometimes earnings other than basic pay may be counted for pension purposes. Only the detailed rules of your own scheme will provide an accurate answer to this question. (b) Is there tax relief on contributions? Yes. Contributions which you make, including additional voluntary contributions, up to maximum limits that vary with age, from 15% to 30% of your gross earnings, will receive income tax relief.An earnings cap of 254,000 applies to contributions by employees.The relief will be given at your marginal rate of tax. Since contributions are normally deducted from your pay before tax is calculated, you will also receive relief from PRSI on these contributions. However, the maximum allowable contribution by you is subject to the condition that the employer must have paid a substantial contribution to the total cost of your benefits. In other words, tax relief would not be available on a defined benefits scheme which was funded solely by contributions from members. Since the Finance Act of 2003, contributions to all forms of pension provision occupational pensions, PRSAs and Retirement Annuities or personal pensions are added together in computing the contribution limits and the earnings cap. Question 2.16: Have I got scope for Additional Voluntary Contributions?

Whether or not you have scope for additional voluntary contributions will depend on the extent to which there is a gap between the maximum benefits permitted by the

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Understanding Pensions

Revenue Commissioners and the benefits actually being provided in the scheme.The scope for additional voluntary contributions generally arises where: (i) not all pay is pensioned: For example, if your scheme is integrated with social welfare or if you have non-pensioned pay, such as overtime, bonuses or benefits in kind. (ii) the scheme does not provide for the absolute maximum benefit that the Revenue would approve.Very few schemes can afford to give maximum approvable benefits. (iii) your service with your present employer is short, so that your service-related pension falls short of what you would receive for a full career with the same employer. The scope to make voluntary contributions may be limited by the amount of your employers contributions to the scheme (see 2.15 (b)) and by having to take retained benefits (see Glossary) into account. You should be aware that you cannot make voluntary contributions at all unless the rules of the pension scheme permit this, or there is a separate scheme in existence designed to cater for them. The Pensions Act requires that, if the scheme does not offer an AVC facility (or if a separate AVC scheme is not available), the employer must grant access to a Standard PRSA that can be used for this purpose. Incidentally, the Revenue Commissioners are no longer allowed to approve a single-member AVC scheme. The Revenue Commissioners treat a separate AVC scheme as if it were part of the main pension scheme, because an AVC arrangement cannot exist on its own.Therefore, the benefits of an AVC scheme must be dealt with in the same way as the benefits emerging from the main scheme for example, if one is transferred to a new employers scheme, they will require both to be transferred.The only time AVCs can be treated differently is at retirement, when they can be used to invest in Approved Retirement Funds (see the section on ARFs, page 67)

SECTION 3:
Question 3.1:

DEFINED CONTRIBUTION SCHEMES

At what age is normal retirement pension payable?

Normal retirement age is exactly the same under defined contribution schemes as it is under defined benefit schemes (see question 2.1). Question 3.2: How does a defined contribution scheme work?

Unlike a defined benefit scheme, where the rules promise you a specific benefit on retirement at normal retirement age, a defined contribution scheme does not make such a promise. Instead, what you are promised is a fund which is made up of the proceeds of the investment of contributions paid on your behalf by your employer, together with whatever contributions you make yourself.All of the contributions, plus whatever they earn, make up the assets of this fund. Such a fund does not pay any tax

Understanding Pensions

19

on its income and, when you come to retirement age, it provides a capital sum which the trustees will use to provide your benefits.The guaranteed contribution which the employer will pay on your behalf (the defined contribution) may, or may not, include the cost of death benefit. Sometimes this is paid for in addition to a defined pension contribution; in other cases, your death benefit is a first charge against the total contribution being made. Sometimes, the overall payment being made by the employer will also include premiums payable under a Permanent Health Insurance scheme (also called an Income Continuance Plan) designed to give benefits in the event of prolonged disability.This is not a part of the pension scheme and is not the responsibility of its trustees. At retirement, under a defined contribution scheme, you have a great deal of flexibility in planning your retirement benefits. Subject to Revenue limits (which govern the maximum amount that you can receive in cash, for example), the choice as to what you take in cash, what you take as personal pension benefits and what is provided by way of dependants benefits on death after retirement, is up to you to decide. Question 3.3: How are defined contributions schemes financed?

Generally speaking, the first step in the financing of a defined contribution scheme is to fix the amount of the employers contribution.As already stated, this might be fixed to include the cost of death benefits.Then the question of any agreed level of contribution from employees must be considered. Employers and employees agreed contributions will be the core payments to the defined contribution scheme. Members may make Additional Voluntary Contributions (AVCs) on top of this. The contributions are invested, usually in insurance contracts or unit trusts. Occasionally, they may be invested in a directly invested fund.Whichever investment medium is chosen, the contributions appropriate to each member are individually tracked, which means that the capital sum appropriate to each person can be easily identified at any time during their membership of the scheme, and at retirement age. Question 3.4: Can I cash in part of my pension?

Yes, if the rules of your scheme permit it.The rules applying to benefits payable in lump sum form are exactly the same under defined contribution schemes as under defined benefit schemes (see question 2.3). In a defined contribution scheme, you are dealing with a capital sum and, once the amount of your permitted cash benefit is ascertained, the balance of the capital sum must then be used to provide an annuity or annuities for yourself and possibly for your dependants unless you are a Proprietary Director. For an explanation of annuity, see Question 3.5 below and the Glossary. Proprietary directors will be dealt with under the heading of ARFs (page 67). Question 3.5: What are my choices when it comes to buying an annuity?

In a defined contribution scheme the choice can be very wide indeed.Where benefits are payable in pension form, there is really no choice but to purchase an annuity. Usually, regardless of where the capital fund has been built up, there will be an open market option, which means that the fund can be taken to any insurance company so that you can obtain the benefit of the best rates available on the market at the time

20

Understanding Pensions

you retire.Annuity rates can vary from one company to another and from day to day. They are influenced by current long-term interest rates, by the insurance companys view on life expectancy, and by commercial considerations within the company itself. It can pay to shop around, and pension scheme trustees have an obligation to do this on behalf of their members. There are various types of annuity: Single Life this is an annuity on your own life only. It will cease to be payable when you die, unless, in setting up the annuity, you purchased a minimum guaranteed period of payment (see guarantee in the Glossary). Joint Life Annuity this means an annuity which is payable during the lifetimes of both you and another person (for example, your spouse). It can be designed to be paid in full for as long as one of you is alive, or it could be bought on the basis that it reduces in the event of the death of one of you. Post Retirement Increases annuities can also be bought with a built-in escalation factor, so that you would receive automatic increases during the time the annuity is payable. In recent years with profit annuities were available.These are annuities with a guaranteed element of income, but also giving a variable element that will alter upwards or downwards depending on the profits declared by the insurance company. Unit-linked annuities are also sold, which give the possibility of extra payments depending on the performance of a unitised investment fund. Most annuities are sold without any medical evidence being asked for.The insurance companies operate on the basis that those for whom annuities are bought will enjoy the average life expectation of people of their age and sex. However, for those who suffer from certain serious illnesses, it is possible to buy an impaired life annuity.This means that special favourable terms are given to people whose life expectation is probably shorter than average, as a result of serious illness. What all of this means is that you have a great deal of flexibility about the precise way in which your benefits are set up at the time you retire.They can literally be tailored to suit your own circumstances, but always subject to the overall limits imposed by the Revenue Commissioners. Dont forget also that there are numerous providers of annuities in the market and you and the trustees of your pension scheme should take expert advice before coming to any final decisions on where the annuities are bought. Question 3.6: I would like to aim for a particular level of pension. How can I do this in a defined contribution scheme?

It is impossible to guarantee in advance any particular level of pension from a defined contribution scheme.This is because the final capital fund available to you will depend, not only on the contributions made, but on the investment income and capital growth achieved on those contributions while they are in the pension fund.Added to that is the fact that annuity rates do fluctuate.As it would be impossible to predict these with any certainty, years in advance of your retirement, it is not possible to target very accurately for any particular level of pension. Understanding Pensions 21

Having said that, it is possible on the basis of professional advice to arrive at an appropriate level of contribution for any particular target benefit, using assumptions in relation to investment returns and future pay increases.There will be no guarantee of reaching the target but it may be possible, over your lifetime in a pension fund, to make some corrections to the rate at which the pension is funded, in order to stay close to the target and compensate for fluctuations in investment returns.The most important thing here is that advice is needed, and you will need to make sure that the target is kept under regular review. Question 3.7: How are benefits taxed?

See the answer to question 2.4. Question 3.8: Can I retire early from a defined contribution scheme?

Yes.The Revenue Commissioners rules on early retirement apply equally to defined benefit and defined contribution schemes. However, in a defined contribution scheme, instead of having a specific benefit reduced because of early payment, you would simply have available to you whatever is the capital value of your particular share of the fund at the point of early retirement.After taking whatever cash is appropriate, the balance would be applied to the purchase of an annuity. Dont forget, the younger you are when an annuity is bought, the smaller the annual payment is likely to be.Subject to your scheme rules, you may take your early retirement benefits at any time due to ill-health, or after the age of 50 in other circumstances. See question 2.6. Question 3.9 What happens if I retire late?

If you remain employed after Normal Pension Date, be careful.Your benefits dont automatically increase.You may wish to look at the way your fund is invested, and take steps to protect it from fluctuations in market values.The value of your fund and the state of annuity rates when you actually retire will decide what pension you receive. You can also explore the option of taking your benefits before you actually retire. Question 3.10: What happens if I die before retirement age?

This topic has been dealt with in detail in question 1.9 under the heading of defined benefits. However, there are some features which are peculiar to defined contribution schemes, as follows: The lump sum death benefit may be available to the trustees as a separately insured amount, in addition to the fund of money that secures your retirement benefits. Sometimes, a lump sum death benefit may be expressed as a multiple of salary, e.g., 3 or 4 times annual pay, which may include the total fund of money which represents your retirement benefits. It is less usual for dependants benefits to be provided in pension form from defined contribution schemes than it is from defined benefit schemes.Where dependants benefits are provided in pension form, they will normally be expressed as a percentage of the salary on which contributions are based, rather

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Understanding Pensions

than being related to your own pension entitlement. From the previous questions in this section, you will realise that your own pension entitlement is not defined and it would not therefore be possible to define a dependants pension in terms of your own entitlement. The rules of your own pension scheme will specify how exactly your death benefit is determined, and what limitations exist on the manner in which it can be paid. Question 3.11: What happens if I die after retirement?

In defined contribution schemes there is no specific provision for payment to be made to dependants on your death after retirement.Any guaranteed period of payment of your own pension, or any dependants pension to be paid after your death, must be arranged by you at the time you retire, out of the total fund of money available for retirement provision. Question 3.12: See question 2.11. Question 3.13: See question 2.12. Question 3.14: What are my options on leaving service? How are my death benefits treated for tax purposes? Who gets my death benefits?

The options that you have on leaving service are the same as those described in questions 2.13 and 2.14. In defined contribution schemes, the preserved benefits applicable under the Pensions Act are defined as being the value at the date of leaving service of the contributions paid by you and on your behalf during your membership of the scheme. Preserved benefits from defined contribution schemes are not subject to revaluation between the time of leaving service and the date of eventual retirement. If you leave them in the scheme, they will simply continue to be invested, and you will benefit from any growth in the investments. In a defined contribution scheme, if you request a transfer value, the trustees have power to fix the date on which the transfer value is calculated, since the value of the investments representing your benefits can change from day to day it does not become fixed just because you leave service. Question 3.15: What scope is there for me to pay additional contributions?

Within the general limits placed by the Revenue Commissioners on benefits and contributions (described in Section 5) there is a good deal of scope for a member of a defined contribution scheme to pay extra contributions. Sometimes, defined contribution schemes are set up on the basis of a fairly basic contribution rate from the employer.The limits set by the Revenue Commissioners on benefits will usually allow a person in such a scheme to make the maximum personal contributions allowed by law. See Section 4 AVCs, also questions 2.15 (b) and 2.16.

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In general scheme members, particularly those at younger ages, who wish to make large additional contributions, should always check that the benefits which result from making these contributions, when added to the benefits under the main pension scheme, are likely to be within the overall benefit limits imposed by the Revenue Commissioners. See Section 5. You should also note that one of the conditions imposed by the Revenue Commissioners is that the employer must make a substantial contribution to the total cost of benefits under the scheme if the scheme is to be approved for tax purposes. This test must be met on a year-by-year basis in a defined contribution scheme. Question 3.16: Have I any say in how my fund is invested?

This depends upon how your scheme is run by its trustees.You should bear in mind that the trustees have the ultimate legal responsibility for the investment of every pension fund but it is fair to say that it is the scheme member who carries the investment risk in a defined contribution scheme.Trustees may therefore be willing to allow each member to have some say in the investment of that part of the fund which represents his/her benefits.You do not have an automatic right to such consultation, because the legal responsibility belongs to the trustees. The Pensions (Amendment) Act, 2002, allowed trustees to transfer this legal responsibility to the member, under very strict conditions.At the time of writing, the Section which permits this has not been commenced. Very often, trustees will give scheme members a range of options for example, a deposit or a cash fund and some sort of mixed fund with a variety of different investments in it.The degree of risk attaching to each of these funds will be different.A cash fund is likely to give a steady (but possibly low) rate of return.A mixed managed fund may give returns that fluctuate widely from year to year and show no regular pattern of returns. On the other hand, over the longer term, the returns from such funds can be attractive. Often, investments that involve low risks also involve low returns, and vice versa. With this in mind, it is clearly not appropriate for an older person, fairly close to retirement, to invest in a fund that is likely to show very volatile returns.This approach might be appropriate for a younger person.As the member gets older, gains made from these forms of investment can be realised and consolidated into a deposit or cash fund, where at least the value of the investments is unlikely to go down, something which is always possible with investments based on stocks and shares. This is an area where it is really impossible to generalise and you need to seek detailed expert advice.The important thing here is to make sure that your scheme trustees or administrators give you the information you will need in order to get meaningful advice on investment matters.And do not try to instruct the investment manager yourself instructions to change investments should be given by the trustees of the scheme, or by the administrator as their agent.

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SECTION 4

ADDITIONAL VOLUNTARY CONTRIBUTIONS

This section of the book is intended to cover private sector arrangements for Additional Voluntary Contributions. Similar arrangements can be established alongside public sector schemes. However, this section does not go into any great detail on the special added years provisions which are available in most public sector employments. For ease of reference, we shall use the term AVCs, as this is the term most frequently used to describe them.Where the main scheme is non-contributory, they cannot, strictly speaking, be called additional but the expression AVC is used for the sake of brevity. What are AVCs? Voluntary contributions are made by employees in addition to any compulsory contributions which they may make.AVCs are used to improve the benefits of members, over and above those provided by the scheme rules, but within Revenue limits. How are they documented? It is necessary for the rules of a pension scheme to make provision for AVCs if scheme members wish to make them. If your scheme rules do not allow them at present, you would have to get your employers consent to change the rules in order to permit voluntary contributions.Alternatively, a separate scheme can be set up to accommodate AVCs but this, again, would need the co-operation of your employer. Although the law does not require schemes to allow AVCs, the Pensions (Amendment) Act, 2002 requires any employer whose pension arrangements do not include an AVC facility to offer access to at least one Standard PRSA, to be used for AVC purposes. Comments about AVCs in this section of the book apply equally to AVC PRSAs. Why make voluntary contributions? AVCs can be used, within the limits imposed by the Revenue Commissioners, to: Increase basic pension or provide benefits based on non-pensionable pay. Increase tax free lump sum, if possible. Provide or increase dependants provisions on death in retirement. Provide or increase cost of living provision on all benefits. Increase death in service provision. Provide additional security for you and/or your dependants if you retire early. Since April 2000, the proceeds of AVCs may, if the member wishes, be transferred at retirement, to an Approved Retirement Fund (ARF), subject to conditions; or to an Approved Minimum Retirement Fund (AMRF) if those conditions have not been met. See Section 13.

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The presence of AVCs alongside the benefits available under the main scheme can make it attractive, or even just possible, to accept early retirement, although Revenue rules dont permit specific additional funding with a view to retiring early. In considering the possible application of AVCs, the following questions are relevant: Is all pay pensioned? Is the main pension scheme integrated with social welfare? If it is, the gap created can be used to enhance benefits, in terms of increase in basic pension dependants pensions and perhaps tax free cash. Is pensionable service short? Is all service pensionable? Has the employee got dependants and if so are dependants benefits already provided, or are they adequate? Is there provision for cost of living increases? If so, is it enough for your needs?

Revenue Requirements These are dealt with under various headings in other Sections of this book but they are here summarised: Total member contributions may not exceed 15 30% (depending on age) of gross pay in any tax year, inclusive of any contributions already required by the scheme rules. AVCs made annually should usually be deducted on a net pay basis i.e., deducted before tax and PRSI are calculated.This gives immediate tax relief (and PRSI relief) at the point of payment. Revenue approval is needed for special contributions, i.e. those not being made on a regular basis.Tax relief on these will be spread forward into later years if the total contribution being made in a particular year exceeds the maximum allowed for tax purposes. In any tax year, it is possible to claim unused relief for the previous year, if the contribution for that year is paid, and the claim for relief is made, before 31 October of the current year. Backdating of tax relief for up to ten years, which was formerly allowed, was abolished by the Finance Act, 2003. When the benefits secured by AVCs are added to the main scheme benefits, the maximum Revenue limits on benefits must not be exceeded.

Advantages of AVCs Full and immediate relief from income tax; and from PRSI on contributions deducted at source. The fund in which the contributions are invested does not attract tax. AVCs give the member a facility to have some control over benefit levels, by choosing the pace of additional saving for retirement.The mix of benefits at the time of retirement (personal pension, dependants provisions, cost-of-living increases, etc.) can be adjusted to suit individual circumstances. Present legislation allows for the AVC fund to be paid as an additional tax-free lump sum on death. Understanding Pensions

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Disadvantages of AVCs Contributions are locked in and may emerge only as benefits on death, retirement or leaving service and the scope for cash refunds of contributions is extremely limited. Unlike life assurance policies, a voluntary contribution fund may not be assigned, charged or borrowed against and it is therefore outside the employees effective control until it emerges as benefits. AVCs are not short term savings.While it is possible for a member to stop contributing, no refund of contributions is possible, except in the limited circumstance of leaving employment before completing two years as a member of the scheme. If a refund of contribution is taken on leaving service, this would usually exclude the possibility of any other benefit from the company pension scheme.

Form of AVC Scheme / Investment In the private sector,AVCs mostly take the form of defined contributions. It is quite unusual for benefits secured by AVCs to be set up on a defined benefit basis. For this reason, the investment considerations in AVC schemes are generally the same as those for defined contribution schemes. Your AVCs and the Main Pension Scheme Obviously, it is important for every member considering the question of Additional Voluntary Contributions to get proper advice.This advice should take into account the benefits being provided under the main pension scheme, as well as the members own personal circumstances and considerations such as tax relief and possible return on the fund. Remember that your employers co-operation, at very least, is needed if you want to set up a voluntary contribution arrangement for yourself. However, bear in mind that most voluntary contribution arrangements made directly by scheme members themselves could involve the employer in becoming trustee, if these arrangements are set up outside the main company pension scheme. Employers may not wish to become trustees in these circumstances and cannot be made trustees without their consent. In these circumstances, employers might be willing to deduct and remit contributions to a PRSA, as this would not involve them in any trustee obligations. It is also very important that the trustees of the main company pension scheme should be aware that people are making voluntary contributions. It is the responsibility of the trustees to police the Revenue limits imposed on members benefits and it is impossible for them to do so if they do not know that members are making voluntary contributions alongside the main scheme. If scheme members are using PRSAs to make AVCs, there is also a duty on the PRSA provider to make sure that Revenue limits are not exceeded. You may not take a refund of AVCs except to the extent that a refund of your main scheme contributions for the same period is permitted. Preservation requirements under the Pensions Act impose restrictions in this area. If a refund is taken tax is currently payable at 20% on the amount refunded. 27

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Excess Contributions Because the Revenue Commissioners limit the overall level of benefits with which you can be provided under a pension scheme, it follows that there is a possibility that AVCs could in some circumstances cause the total entitlements of a member to exceed these limits. If this happens, the trustees of the main pension scheme will have no option but to cut back on the benefits provided by that scheme in order to satisfy the Revenue Commissioners requirements. In exceptional circumstances, the Revenue Commissioners may permit (or even require) excess AVCs to be refunded. If this happens, they will be refunded through the employers payroll and subjected to full tax and PRSI. Life Assurance or AVCs? Sometimes, people ask Should I make voluntary contributions or take out a life assurance policy-linked savings scheme?The question was perhaps more relevant when some form of limited tax relief was available on life assurance contracts, but this is no longer given. Nevertheless, it might be useful to summarise the differences, since the answer to the question is that there is probably scope for both. Since January 1, 2001, both types of fund accumulate free of tax.The life assurance fund is, however, subject to an exit tax on the gains made. How an AVC fund is treated will depend on how its benefits are dealt with under the Finance Acts and the Revenue Commissioners rules (i.e., some of the proceeds might be payable tax free.) Life assurance is generally suitable for shorter term saving (but not very short term). The saver has total control over a life policy at all times. The saver can choose the term over which the investment is made. The policy can be made paid up or surrendered at any time. The policy can be assigned to a third party and in some cases even borrowed against. Under current legislation, the fund builds up tax free, but the proceeds are subject to an exit tax based on the gains made.

BUT There is no tax relief on premiums and no relief from PRSI.

With AVCs, the position is different: There is full tax relief on contributions and relief from PRSI if deducted directly from pay. No part of the amount being saved need go to provide cover in the event of death.

BUT No benefits may be paid until retirement, death or leaving service. Benefits may not be assigned to a third party or charged with any debts under any circumstances. Understanding Pensions

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If a refund of AVCs is taken on leaving service (and there is now a very restricted right to do this because of the preservation requirements of the Pensions Act), it is necessary for ordinary contributions to be treated similarly. Deferred benefit entitlements not preserved under the Pensions Act would be lost in these circumstances. The Revenue limits mean that the proceeds may not always be payable in tax free form.

ADDED YEARS: Members of Public Sector schemes may make additional contributions to purchase additional years of service credit.The Department of Finance Superannuation Section issues tables under which credits of added years and appropriate contribution requirements are calculated. Purchase of additional service by a single lump sum must be done within 2 years of appointment.Annual contributions may be started at any time.Actual plus purchased service may not exceed 40 years.Added years purchase is not available if your potential service at pension age will be 40 years, even if all your pay is not reckoned for pension purposes.

Public sector employments often offer ordinary AVC schemes as well as the added years facility. It is advisable to take advice about which of these options is best suited to your own circumstances. Indeed, it may be possible to avail of both to a limited extent.The purchase of added years facility means that what you buy includes all the elements of the pensions package personal pension, retirement gratuity, spouses pension and post-retirement increases.AVCs offer a little more flexibility, in that they could be used to enhance one element for example, tax-free lump sum within Revenue limits, without having to buy extra (taxable) pension as well.

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SECTION 5

MAXIMUM BENEFITS APPROVABLE BY THE REVENUE COMMISSIONERS

A brief note of the maximum benefits approvable by the Revenue Commissioners in normal circumstances is given below.These notes are for guidance only, as it is not possible to deal here with every case that might arise. In general, it should be noted that augmentation of benefits beyond a pension level of 1/60th of final remuneration for each year of service, or a commutation level of 3/80ths for each year of service, requires that non-trivial benefits from previous employments may need to be taken into account.20% Directors also require special treatment (these are people who, alone or with other specified people, control more than 20% of the voting rights in a company). These pages should not be used as a substitute for the Revenue Pensions Manual issued by the Large Cases Division Financial Service /Pensions unit of the Revenue Commissioners (formerly called Retirement Benefits District), which must be consulted in any case of doubt. What are the Revenue Limits and why are they there? The purpose of having regulation in the first place is to ensure that the generous tax reliefs given to pensions are not abused.The 1972 Finance Act is the legislation under which modern pension schemes receive Revenue approval, which ensure their favourable tax treatment.That Act set out the conditions under which approval of a scheme must be given.These conditions are very restricted, and are confined to benefits at a very basic level. Most employers need more flexibility than this, so the Act gave the Revenue Commissioners very wide powers to use their discretion to approve schemes that depart from these basic benefit levels.The Revenue Pensions Manual sets out the levels of benefit that the Revenue Commissioners are, in general, ready to approve under their discretionary powers. It does not contain the answer to every problem, however. Each case should be put to the Revenue on its merits. It is also worth noting that few, if any, Occupational Pension Schemes can afford to provide the maximum benefits which the Revenue Commissioners will approve. Individuals may receive maximum approvable benefits, particularly if they fund for them by means of additional voluntary contributions.The distribution of surplus assets on the winding up of a scheme is another reason why people might receive benefits up to the Revenue maximum limits. In practice, however, those most often affected by maximum limits are scheme members with short service. 1. Eligibility Who may be included? All employees of an employer participating in a pension fund, whether full time, part time, permanent or temporary, can be included. Until recent legislation, it was usual only for full time permanent employees to be included as members but other categories of employee participated in some schemes. Changes, arising mainly from developments in European law, have altered matters, however, for part-time workers and those on fixed term contracts. Discrimination in pensions matters is now illegal on a whole variety of different grounds which were formerly excluded.The important thing to remember is that only those who are 30 Understanding Pensions

taxed under Schedule E (the part of the tax code which covers workers who pay their tax under PAYE) can be included in occupational pension schemes.Agents, consultants, partners and self-employed people who are taxed under Schedule D of the tax code may not be included. Under the Pensions Act, any employee who is not eligible for inclusion in a pension scheme within 6 months of joining service must be offered membership of a Standard PRSA, although the employer is not obliged to contribute to this. 2. Scheme Documentation Both the Revenue Commissioners and the Pensions Act require that every employee who has a right to be a member of a scheme must be given details of all its essential features. 3. Normal Pension Age Any time between ages 60 and 70. If Normal Pension Age is to be changed, the Retirement Benefits District of the Revenue Commissioners must be advised. It is possible to get approval for a pension age earlier than 60 in special circumstances (such as particularly hazardous occupations), but each case must be put to Revenue separately. 4. Pensionable and Final Pensionable Salary These are regulated by the rules of each scheme, but the maximum benefits permitted by the Revenue Commissioners are expressed in terms of Final Remuneration. Final remuneration: All Schedule E income may be pensioned, but items that fluctuate from year to year (bonuses are a good example) must be averaged over 3 years or more. Final remuneration on which maximum approvable benefits can be based may be any one of the following: (a) Salary in any one of the last 5 years before retirement, plus fluctuating emoluments suitably averaged. (b) The members total pay averaged over 3 or more consecutive years ending not earlier than 10 years prior to retirement date. (c) The rate of pay at normal pension date or any point in the final year but this may be restricted in cases where special increases or promotions applied in the 3 years before retirement. If final remuneration is based on anything other than (c), the income may be dynamised, i.e.increased by reference to changes in the Consumer Price Index between the dates on which such remuneration applied and the point of retirement.This can be useful where a persons actual income has not kept pace with increases in cost of living.

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5.

Pension at Normal Pension Date In most circumstances, a pension of 1/60th of final remuneration for each year of service may be provided, ignoring any benefits arising from previous employments.Where service is less than 5 years, no more than this formula can be provided.Where service exceeds 5 years, there is a sliding scale, from 8/60ths at 6 years of service, increasing by 8/60th for each year after that, to 40/60ths for 10 years or more. Proportionate benefits may be added for days of service not being a complete year.

6.

Commutation (Exchange of Pension for Cash) A basic cash amount of 3/80ths of final remuneration for each year of service can be provided.The maximum 120/80ths may be provided for any member with at least 20 years service at normal pension date.Where service is 8 years or less, a strict basis of 3/80ths of pay per year of service applies. For more than 8 years service, a sliding scale goes from 30/80ths for 9 years, increasing by 6/80th for each extra year to 13 years, and by 9/80ths from there on, to 108/80ths for 19 years and to 120/80ths for 20 years.Again, proportionate additions may be made for days of service not being a full year.A trivial pension (less than 330 per annum) may always be fully cashed, but its cash value will in some circumstances be subject to a small tax charge. See also paragraph 16, below.

7.

Spouses / Dependants Pensions (Death in Service or Death in Retirement) A maximum spouses or dependants pension equal to the members own maximum pension could be provided, inclusive of any retained benefits. Additional dependants pensions can be provided alongside the spouses benefit, but the total cannot exceed the members own maximum approvable pension. Childrens pensions must cease when the child is no longer dependent.The same limits apply on death in service and death in retirement. There are some restrictions as to when a pension may become payable to a spouse or other dependant in the event of a members death after retirement. These depend on any minimum guaranteed period of payment given with the members own pension. Pension schemes usually provide a minimum guaranteed period of payment of the pension, whether the pensioner lives or dies.The most common guaranteed period is 5 years but a guarantee up to 10 years can be given. If the guarantee is 5 years or less, its immediate cash value could be paid out as a lump sum, tax free, on the death of the pensioner. If the period of guarantee is more than 5 years, the remaining instalments must be paid as continuing pension and therefore subject to tax. If a spouses or other dependants pension is payable in addition, it may begin payment immediately in the case of a 5 year guarantee, but must not commence until the end of the guaranteed period if that is more than 5 years.This condition does not apply if the spouses or other dependants pension has been provided by the pensioner surrendering part of his/her pension to make this provision at the time of retirement. See also paragraph 16, below.

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8.

Lump Sum Benefits on Death in Service The maximum benefit is 4 times the members final remuneration at the date of death, plus members contributions to the scheme with interest on these. Lump sum benefits emerging from previous employments must be taken into account if the lump sum provided is more than twice the members final remuneration plus the members contributions with interest.Any lump sum provided in excess of these levels must be used to purchase pensions for dependants or other beneficiaries.

9.

Escalation In general, the maximum increase which may be given on a pension after retirement is the increase in the Consumer Price Index as applied to the maximum pension which the member could have received.An exception to this is that increases of up to 3% per annum compound may be promised and paid, regardless of the level of inflation. Employers may fund in advance for fixed rates of increase to pensions in payment in excess of 3% per annum, but the actual amounts payable will be restricted by the Consumer Price Index increases. In the public sector, it is common practice to give parity, which means that pensions increase in line with pay increases for those who are still at work.

10.

Early Retirement The minimum age at which early retirement benefits can be paid to a member in normal health is 50 years.Any departure from this has to be considered on its own merits by the Revenue Commissioners. In the event of retirement due to illhealth, there is no age limit and an employee retiring in ill-health may be given benefits up to the maximum approvable benefits which he/she or she could have had at normal pension age. In addition, an employee whose life expectancy is very short at the time of retirement may be permitted in exceptional circumstances to receive all benefits in cash form.Any proposal to use this facility must be referred to the Retirement Benefits District of the Revenue Commissioners. In most of the Public Sector, the minimum retirement age in normal health is 60, though this has been increased to 65 for the most recent new entrants. Earlier retirement ages apply in the Defence Forces,An Garda Siochna and some other areas.

11.

Limitations on Early Retirement Benefits in Normal Health The maximum pension is either: 1/60th of final remuneration for each year of service or N/NS x P; where N is actual service, NS is potential service to normal pension date and P is maximum pension at normal pension date based on current salary and total potential service.

However, this maximum is also restricted by the short service formula which applies at normal pension date.This restriction applies only to immediate early retirement benefits, and not to benefits whose payment is deferred to normal pension age on Understanding Pensions 33

leaving service. Similar formulae apply to commutation (exchange) of pension for cash, but short-service restrictions apply in this case if actual service is less than 20 years. Example:An employee retires early, having completed 7 years out of a potential 17.The formula is 7/17 x 2/3rds = 27.45% of salary. However, an employee retiring with only 7 years service at normal pension date could receive only 16/60ths, or 26.67% of salary, so this figure is the most the early retiree could be paid (see paragraph 5, above). 12. Late Retirement

If a member remains in service after normal pension date and total service at that date is, or exceeds, 40 years, additional benefits may be provided in respect of the service completed after normal pension date, subject to an overall maximum of 45/60ths.The lump sum element can be similarly increased.Alternatively, there can be an actuarial increase in the benefits, to take account of the deferment of payment.As a further alternative, benefits could be provided based on any actual salary increases of the member to the date of retirement, or age 70 if earlier. This is the only option open to a 20% director who retires later than his/her designated normal pension date. In such cases, the date of actual retirement is treated as if it were the normal pension date. Benefits can be paid at normal pension date, or on actual retirement.A member deferring retirement until after normal pension date may elect to take his/her lump sum benefit at normal pension date and defer the pension. If the member elects to take a pension at normal pension date, the cash payment must be made at the same time.There is no option to defer the lump sum and take the pension. 13. Employee Contributions

Employees may contribute up to a maximum of 15% of gross pay if under age 30; 20% between ages 30 and 39; 25% between 40 and 49, and 30% if aged 50 or over.An earnings cap of 254,000 applies to contributions by employees.These limits include voluntary, as well as compulsory, contributions. Since 2003, they must also take into account contributions to PRSAs and Retirement Annuities, even if these refer to other simultaneous employments.Voluntary contributions are permitted on condition that they do not result in benefits in excess of the maximum benefits the Revenue would approve based on the salary and service of the member. Special once-off contributions are allowed for tax purposes in the year of payment, if the relevant percentage limit is not exceeded.Where the limit is exceeded, relief on the balance will be spread forward to the members normal pension date or, if paid on or before 31 October, back into the previous tax year, provided relief is also claimed by that date. Employees ordinary contributions are collected through a net pay arrangement under the PAYE system, and receive relief from tax and PRSI at point of payment. Employers are obliged to remit employee contributions to the trustees within 21 days of the end of the month in which they are deducted. 14. Employers Contributions

Employers ordinary annual contributions for the cost of providing benefits are fully allowable in the year of payment.A special contribution by the employer would be allowed in the year of payment, to a maximum of (a) 6,350 or (b) the amount of the 34 Understanding Pensions

employers ordinary annual contributions for pension benefits under all schemes of the employer.Where these limits are exceeded, relief will be spread forward, usually by reference to the amount of the normal or annual contributions each year.The maximum spread period is five years, however, so one fifth of any special contribution would be allowed in any event in each relevant year. Special employer contributions must always be reported to the Revenue Commissioners. Employers may not receive tax relief in any financial year on contributions accrued in their accounts, but not paid over to the scheme at the companys financial year end. Employer contributions to defined contribution schemes and PRSAs are subject to the 21-day requirement that applies to employee contributions.An employer is required to make a meaningful contribution to the scheme. (See Section 1 How Do Pension Schemes Work?) 15. Leaving Service

Revenue rules do not specify any particular benefits to be granted to the employee, whose rights will be governed by the scheme rules exclusively, except as required by the Pensions Act. In contributory schemes, contributions which are not the subject of preservation under the Pensions Act may be refunded and these are subject to a tax deduction, currently 20%.The facility to receive a refund of contributions does not apply to 20% Directors whose pensionable salary has at any time exceeded 6,350 per annum.A mixture of deferred benefits and a refund of contributions may not apply except in very restricted circumstances. 16. (a) Changes to the Commutation Rules, 2004 Alternative to triviality treatment: Early in 2004 the Revenue Commissioners agreed some changes to the rules on cashing in small benefits.These can be invoked as an alternative to the existing rules regard trivial pensions. In cases where,AFTER the maximum tax-free cash has been paid out, there remains a residual fund of less than 15,000, there is the option to pay out this fund as a once-off pension, subject to marginal income tax and PRSI at 2%.The effective rate is therefore either 22% or 44%, depending on the individuals tax position. Benefits from all sources must be taken into account in calculating the fund value. This treatment can be offered to holders of buyout bonds as well as scheme members, and can be availed of by holders of PRSAs and Retirement Annuity Contracts if the fund available to them is not large enough to permit an AMRF to be set up.This rule can also be applied to pensions already in payment. The operation of this alternative is to be reviewed by the Revenue commissioners in September, 2004. (b) Cashing of AVCs valuing the pension equivalent: Where AVCs are being invested on a defined contribution basis, but where the main scheme benefits are on a defined benefit basis, there was always an issue of how the AVCs should have a pension value assigned to them to test whether combined benefits were within Revenue limits. If they were valued on the main

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scheme commutation formula, the AVCs would have a higher pension value than the member could hope to get by buying an annuity with his/her fund.This distorted the picture for such members, as against members of defined contribution schemes, where all benefits were tested by applying annuity rates. It also caused complications where a member was hoping to use his/her AVCs to finance his/her tax-free lump sum at retirement. Again on a trial basis, the Revenue Commissioners have agreed to allow the value of AVCs to be determined by reference to a single life annuity rate, unless the rules of the main scheme permit the member to convert AVCs into a pension payable by that scheme. In such cases, the main scheme factors must be applied.

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SECTION 6 PUBLIC SECTOR PENSION SCHEMES

INTRODUCTION
Public Sector Pension Schemes consist of two broad categories: Statutory Schemes, and Non-statutory Schemes. Statutory Schemes are those whose operation is governed by an Act of the Oireachtas. Examples of these are the Civil Service and Local Government Superannuation Schemes, those of the Defence Forces and the Garda Siochana, and of certain public bodies.Arrangements for non-established State employees differ in detail from those applying to established Civil Servants. Non-Statutory Schemes apply in most of the Semi-State Bodies, and in a number of organisations which are part funded by the Exchequer.These are usually made by means of Regulations made under a statute which permits or requires the setting up of a scheme without specifying its terms. Usually, these arrangements consist of two separate schemes: a Superannuation Scheme, which may be contributory or non-contributory; and a Spouses and Childrens Pension Scheme (normally contributory). Most pension schemes in the public sector are governed by Regulations, which are in most cases issued by the Minister in the sponsoring Department and require the consent of the Minister for Finance.The Superannuation Section of the Department of Finance issues a set of draft Regulations, which outline the standard provisions to be included in such schemes. Entitlement to benefits under most public sector schemes flows from the Regulations. These may permit the setting up of funded arrangements to secure the benefits, though the schemes covering the majority of public sector employees are unfunded, and operate on a pay-as-you-go basis. If the arrangements are to be funded, then an Exempt Approved Scheme must be set up, whose Rules will reflect the provisions of the Regulations. Such schemes are subject to the normal approval requirements of the 1972 Finance Act. Exceptions to this requirement may occur in certain schemes set up under statutes, which do not need Revenue approval under the 1972 Finance Act, even if they are funded. The following pages give a broad outline of the pattern of benefits which is usual in the Public Service.There are many exceptions to this pattern, e.g., pension ages differ in the Defence Forces, for Judges and members of the Labour Court, and there are augmentation provisions and special accrual rates for certain types of employee. Schemes set up under local Government arrangements differ in detail from apparently similar schemes in other areas of the public sector.The details given here therefore represent only a broad outline of what is usual in the wider public sector. One principle seems to be common to all schemes for the most part, discretionary augmentation of benefits is not allowed.A power of augmentation exists, but is used extremely sparingly to cater for very special cases, and must be exercised before the individual concerned takes up employment.

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Almost all schemes in the State sector are exempt from the Preservation requirements of the Pensions Act, because their own preservation terms are better. However, an anomaly has been created by this exemption. It means that, if a member of a public sector scheme wishes to transfer his/her benefits to a scheme that is subject to the preservation requirements, that scheme is not bound to accept the transfer value, nor is the original scheme obliged to pay one, unless its rules specifically require it to offer this option.Also, until the Pensions (Amendment) Act, 2002, it was not possible to make a transfer payment into a scheme that is not funded, as is the case with many public sector schemes.This can now be done, with Trustee consent. Most funded schemes in the Public Sector have also been exempted from the Funding Standard under the Act, on the basis that the State will be liable if the scheme cannot, for some reason, meet its obligations.

BROAD OUTLINE OF CURRENT PROVISIONS (PUBLIC SECTOR)

1. 2. ELIGIBILITY: NORMAL PENSION DATE: Permanent employees over age 18, under age 60. 65th birthday, at which point retirement was usually compulsory. For new entrants on or after 1 April 2004, Minimum Retirement Age will be 65 for most State employees, the Garda, Defence Forces and certain Fire Brigade employees being exceptions. In addition, compulsory retirement at 65 has been abolished for existing employees who are able and willing to continue in their jobs.* (a) Normal Health: option to retire is from age 60 onwards for those in service before 1 April 2004; (b) Ill Health: after 5 years service. (see also 13.) Early retirement benefits are based on salary at date of leaving and on completed service (plus added years, if appropriate).There is no reduction for early payment. 4. NORMAL RETIREMENT: Pension: 1/80th X Final Pensionable Salary X years of service (pro rata for days, not being a complete year) Lump Sum (Gratuity): 3/80ths of Final Salary for each year of service (pro rata for days). May be subject to abatement (see Glossary of public sector terminology). Maximum Benefits: 40/80ths of final salary payable in pension form; 120/80ths of salary payable as a gratuity. Pension Increases: Reviewed in line with salary increases anually, subject to Ministerial approval.

3.

EARLY RETIREMENT:

* Public Service Superannuation (Miscellaneous Provisions) Act, 2004

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5.

BENEFITS ON DEATH AFTER RETIREMENT:

Minimum Guaranteed Period of Payment: Nil.The pension ceases on death. Spouses Pension: 50% of members pension. Childrens Pension: 1/3rd of Spouses pension per dependent child up to a maximum of 3 dependent children. Pension Increases: As for members pension.

6.

BENEFITS ON DEATH Lump Sum (Gratuity): 3/80ths of salary for each year of BEFORE RETIREMENT: completed service, minimum 1 X salary; maximum 1.5 X salary. May be subject to abatement (see Glossary). Spouses Pension: 50% of members pension based on projected service to Normal Pension Date. Childrens Pensions: As for death after retirement.

7.

INTEGRATION WITH SOCIAL WELFARE:

There is a requirement to integrate with Social Welfare for those employees who pay full Pay Related Social Insurance (PRSI.) and, therefore, qualify for a Social Welfare Pension.This is usually arranged by means of salary offset, i.e., Pensionable Salary would be Annual Salary less twice the Social Welfare retirement pension at the rate payable to a single person. For Gratuity purposes, the full salary is taken into account. All public servants who joined employment on or after April 6th 1995 are subject to Class A PRSI.

8.

LEAVING SERVICE:

1. 2. 3.

If joining another State body, full credit for service may be given by the new employer. If leaving the Public Service with less than 2 years service, refund of contributions. (But see 14 below). If leaving the Public Service with more than 2 years service, preserved benefits.These increase during deferment in line with pay for the job.

9.

EMPLOYEES CONTRIBUTIONS:

Many schemes are non-contributory except for the spouses and childrens benefits, for which a 12% contribution applies.The principle of contributory spouses and childrens benefits is almost, but not quite, universal.Where employee contributions are paid to the main pension scheme, however, the amounts involved are variable but 5% of pensionable pay is quite common. Where benefits are integrated with Social Welfare benefits, employee contributions are: 32% of pensionable pay (pay less twice the social welfare pension), plus 12%

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of annual pay. For spouses and childrens benefits, the contribution is 12% of pay less 1 X Social Welfare pension. 10. PENSIONABLE SERVICE: Includes all service reckonable under the Local Government (Superannuation) Act, 1956, the Superannuation and Pensions Act, 1963, and any amendment or re-enactment of these. Pensionable service does not have to be continuous. 11. ILL HEALTH: Pension and gratuity based on salary and completed service at date of early retirement. Service may be augmented by up to 6.67years, depending on service actually completed. See also 13. Members may make additional contributions to purchase additional years of service credit.The Department of Finance Superannuation Section issues tables under which credits of added years and appropriate contribution requirements are calculated. Purchase of additional service by a single lump sum must be done within 2 years of appointment.Annual contributions may be started at any time.Actual plus purchased service may not exceed 40 years. In addition, in certain employments, schemes exist for the recognition of special qualifications needed for the job, through the award of professional added years.These schemes differ in detail in different employments.Added years are also given on early retirement in ill health, and in certain cases have been used as an element of reorganisation programmes. If a person leaves through ill health, with less than 5 years service completed, a gratuity is payable of 1/12th of salary for each year of service. In addition, if completed service is more than 2 years, a further gratuity of 3/80ths of salary for each year is paid.Alternatively, if service is between 2 and 5 years, the member may opt instead for preserved benefits in the normal way. If a person leaves through redundancy and has no vested rights or transfer entitlement, a refund of contributions (if any) with interest is payable.Alternatively, a short service gratuity may be paid Contributions to Spouses and Childrens pension schemes are not refundable, even if the member reaches retirement age unmarried, except for those members who joined service when older schemes, since replaced, were in operation, and who did not opt to join the revised schemes.

12. ADDED YEARS:

13. SHORT SERVICE:

14. REDUNDANCY:

15. CONTRIBUTION REFUNDS:

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SECTION 7

PUBLIC SERVICE TRANSFER NETWORKS

Public Service transfer networks are vehicles by which employees who work in one part of the public sector, and who transfer to another area of the public sector, can receive full credit for pension purposes with the new employer in respect of service given to the earlier employer.The effect of this is that public sector employees who remain within the broader public service can receive credit for up to 40 years service for pension purposes, no matter how many times they change their job during their career. There are two transfer networks in operation. 1. Public Service Network (1979)

This provides for the reckoning by each participating organisation of earlier pensionable service with any other member of the transfer network. Under its provisions, there is a link between the Civil Service, the Garda Siochana, the Defence Forces, National and Secondary Teachers and about150 participating bodies, the vast majority of which are in the Public Sector. Approval of any organisation to participate in this Scheme is looked after by Department of Finance Superannuation Section.The Scheme is being finalised at present and will be put on a statutory footing in the near future.The Statutory Scheme will be established under Section 3 of the Superannuation and Pensions Act 1976, amending Section 4 of the Superannuation and Pensions Act 1963. Participating bodies have available to them a number of methods of dealing with transfers.These are set out in full in Paragraph 16 of the draft Scheme, but may be summarised as follows: A. Knock for Knock The final Employer pays the total benefits with previous Employers merely confirming the reckonable service with them. B. The final Employer pays the total benefit when the member retires. Previous Employers pay that employer a contribution to the gratuity payable at the time of retirement and to subsequent payments of pension.What they have to pay is calculated by reference to salary and reckonable service at the time of leaving each previous employer. 1. 2. 3. Pension: Gratuity: Spouses: 1/80th x reckonable service x salary at leaving. 3/80ths x reckonable service x salary at leaving. 50% of members benefit (for those participating in spouses and childrens pension schemes).

C. As B, but contribution uprated or increased in line with pension increases in the Public Service, i.e. contributions would maintain their value in real terms. D. A transfer value may be paid at the time of transfer.This is calculated by reference to tables drawn up by the Department of Finance Superannuation Section. Transfer value is based on full salary in all cases. Participating bodies have to agree which basis to apply if they each prefer a different option under Paragraph 16 of the draft scheme. Understanding Pensions 41

This network covers all transfers from an agreed commencement date, but earlier transfers could be dealt with on a pre-operative basis.The final Employer would have to agree to recognise past service not previously transferred, subject to the employee agreeing to pay back any refund or gratuity received, plus interest.The previous Employer could make a contribution but is not obliged to do so. Other features: All relevant service must be transferred. In some circumstances, it is possible to deal with previous non-pensionable service subject, where relevant, to the member paying appropriate arrears of contributions. It is important to remember that it is the service credit that is transferred, not a pension entitlement. So, if an individual transfers service from a particular scheme which had very favourable conditions, to a scheme whose conditions were less attractive, his/her benefits would all be calculated on the basis of the second scheme. Transfers can be made between Network bodies and the EU Commission. Transfer values are always paid in this instance. 2. Local Government Network

The 1979 draft Network (Public Service) was intended to cater for transfers under both Acts. However, the Department of the Environment took legal advice and, based on this advice, said that it would not participate in the draft Network. In 1984, that Department introduced a separate Network titled The Local Government (Transfer of Service) Scheme 1984 which brings their transfer provisions into line with the new Network. Bodies wishing to be designated for the purposes of transfer under both the 1956 and 1963 Acts must make separate applications to the appropriate Departments. The Scheme, as outlined, is similar to the Public Sector Network.A major difference however, is that the contribution system has been confined to knock for knock (see A above) or uprated refunds as outlined in C, above.Transfer values are paid in some circumstances, but this method of dealing with transfers is not attractive to the participating bodies.

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SECTION 8

SMALL SELF-ADMINISTERED SCHEMES

Approval by the Revenue Commissioners Under Chapter II, Part I, Finance Act 1972* The use of small self-administered schemes (SSASs) has become popular, particularly among smaller companies that are profitable enough to afford significant pension contributions.As originally conceived in the United Kingdom, such schemes lent themselves easily to tax avoidance. Consequently, the Revenue Commissioners have special requirements for the approval of SSASs which are additional to the usual requirements for approval.The reason for these extra rules is to ensure that schemes of this kind are in fact bona fide established for the purpose of providing relevant benefits and not for purposes of tax avoidance. (i) What is a small scheme? Generally, the Revenue Commissioners regard a scheme with fewer than 12 members as small. However, even if there are more than 12 members, a scheme may fall into the SSAS net if its main purpose is to provide for a few family directors of a company, with some relatively low paid employees, who may be entitled only to insignificant benefits, added to bring the membership over 12. In addition, if most or all of the members of the scheme are 20% directors (see glossary) the scheme would also be regarded as small. On the other hand, if the members were all arms length employees, the Revenue Commissioners might not regard the scheme as requiring extra supervision, even if the membership was very small. However, a scheme will be regarded as small at any time when 65% or more of its assets are there to provide the benefits of 20% Directors of the sponsoring employers and their spouses. Self-administered in this context means that the assets of the scheme are not solely held in insurance contracts.Technically, schemes invested in pooled investment contracts such as unit funds are not insured schemes, but Revenue do not apply as rigid a standard of supervision to these schemes as they do to schemes whose assets are held in direct investments for example, they do not insist on full audited annual accounts. The Pensioneer Trustee The trustees must include a pensioneer a professional trustee, person or body widely involved in occupational schemes and their approval.This person must give an undertaking to the Revenue Commissioners not to agree to the windingup of the scheme except in accordance with its approved winding-up rule.This rule in turn must provide that the pensioneer trustee cannot be overruled by the other trustees in matters affecting the winding-up of the scheme.The object of all this is to discourage the use of schemes for tax avoidance. Investment of the Funds One of the characteristics of early SSASs in the UK was that they lent themselves to forms of investment that allowed the employer to retain the use of scheme

(ii)

(iii)

(iv)

* Now Chapter 30, Part 1,Taxes Consolidation Act, 1997

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assets. Restrictions introduced by the Irish Revenue authorities are specifically designed to deter this: Acquisition of employer-owned property: Purchase of property as an investment will be approved only if it is not for letting or disposal to the employer or its directors or associated companies. Borrowing to acquire property is not encouraged.The persons from whom the property is bought must be at arms length from the scheme, the employer, its directors and associates.The investment of scheme assets must ensure the availability of cash to allow annuities to be bought for retiring members where required by the Revenue rules. Property is not liquid it is not easily or quickly turned into cash and could be difficult to sell at a time when cash was needed. It might also be the sole or main asset of a small scheme and might have to be sold to buy annuities.This problem would be worse if the employer was a tenant. Borrowing: Borrowing by the trustees of small self-administered schemes was discouraged by Revenue; However, the Finance Act 2004 provided that a scheme shall not cease to be approved, nor the Revenue Commissioners prevented from approving a scheme because of any provision in its rules that would permit borrowing. Loans: Trustees are not allowed to lend scheme assets to members of schemes, or to anyone who has a contingent interest in the scheme (e.g., dependants of members).This is again to prevent tax avoidance. In addition, the 1972 Finance Act forbids any charge to be made against a benefit entitlement under a pension scheme, so there would be a problem in securing a loan against a members benefit entitlement from a scheme. Property Development: Any involvement by the trustees in acquiring property for development and resale is not regarded as an investment activity for pension schemes and will not therefore qualify for the tax exemptions normally available to pension scheme investments. Self Investment: This term is used to describe investments linked to the employer which sponsors the pension scheme. It includes shares in the employer company or in companies connected with it, property owned or used by the employer, loans to the employer, and so on.The Revenue Commissioners actively discourage self investment in relation to SSASs.This is because they are afraid that self investment is likely to give rise to tax avoidance. Consequently, they will not approve any scheme of investment which involves the buying of shares or debentures in the employing company or property for letting to the employer. Purchase of properties such as holiday homes is also discouraged, unless it is clear that they cannot be used by anyone connected with the scheme, and are clearly arms length investments. Finally, the Revenue Commissioners will not approve investment in what they call pride in possession articles works of art, stamps, vintage cars, etc. Incidentally, since 2003, acquisition of such assets by an Approved Retirement Fund (see Section 13) in this case, referred to a tangible moveable assets gives rise to a tax charge.

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Why start a Small Self Administered Scheme? Although quite clearly the original purpose of Small Self Administered schemes involved an element of tax avoidance, and this is not possible with current investment restrictions, many such schemes are still being set up.Those who advocate the use of such schemes believe that they represent better value for money for the employer overall.They feel that the cost of running an SSAS will be lower than the cost of running a scheme through more conventional means and they may also feel that it is possible to generate higher investment returns.There is not a lot of good information readily available which would either prove or disprove these theories. Supervision of SSASs These schemes are subject to a good deal more supervision by the Revenue Commissioners than ordinary pension schemes.The Revenue expect Actuarial Reports at three yearly intervals and have the right to examine the assumptions that the Actuary makes to arrive at the recommended funding rate.They also require Annual Accounts.Although the Pensions Act requires actuarial valuations for all defined benefit schemes, the size of the membership of Small Self Administered schemes would usually mean that they would be exempt from preparing audited accounts, so the Revenue requirements are more stringent in these cases than the Act would require.The Revenue also take an interest in the investment policy being pursued and it is their intention to conduct random audits of the conduct of these schemes. Special Requirements The Revenue Commissioners have imposed a number of other special requirements on SSASs: Pensions should not be paid out of the fund that represents the assets of the scheme, but must be bought out by an annuity purchased from an insurance company. Some flexibility is allowed here if the pension is guaranteed payable for five years, the annuity need not be bought until the guaranteed period has run out.This means that the Trustees may be able to choose a time when annuity rates are favourable, rather than being forced to buy at the time of the members retirement, regardless of how annuity rates are behaving at that time. In practice, this rule will have little impact on many members of SSASs, as quite a few of them are Proprietary Directors, who would have the option of using their funds for investment in Approved Retirement Funds (see ARFs, Page 67). If increases are to be paid in the pension to take account of increases in the cost of living, the money to finance this may also be retained in the fund rather than being paid out when the annuity is being bought. However, if a fixed rate of increase (at 3% or less) is involved, this must be bought out. Money to finance a spouses or dependants pension payable on the death of the pensioner after retirement may also be retained in the fund. In practice, this might work out to be more expensive than buying it out at the time of the members retirement. Any death-in-service benefits promised under the rules, which are greater than the value of the fund available for a members retirement benefits, must be insured.

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The conditions relating to the approval of Small Self Administered schemes are set out in chapter 19 of the Revenue Pensions Manual, issued by the Revenue Commissioners.

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SECTION 9

THE SELF-EMPLOYED AND THOSE IN NONPENSIONABLE EMPLOYMENT

These two categories of people have been brought together in this section because they share one very important characteristic they must make their own pension provision. In the case of the self-employed, there is no employer to sponsor a scheme. In the case of non-pensionable employment, there quite simply is no scheme attached to the job. For the purpose of making pension provision, the two categories are treated almost identically. Until February 2003, they had to use Retirement Annuity Contracts (RACs), which are often called Personal Pension Plans (PPPs).This is the abbreviation that I shall use throughout this Section. PPPs in Ireland should not be confused with the type of Personal Pensions which have been much in the news in the UK.Although Personal Pensions replaced the old-style RAC contracts in that country, they are very different in the way they operate. Irish PPPs cannot accept contributions from employers, to give one example. Since the implementation of the Pensions (Amendment) Act, 2002, both of these categories have the choice of purchasing a Personal Retirement Savings Account (PRSA).These are explained in Section 12.While they were designed to replace PPPs, they have not done so completely it is still possible to continue contributions to existing PPPs and to purchase new ones Question 9.1 What is the Difference Between a PPP and an Occupational Pension Scheme?

There are quite a few differences: In a PPP, there is no employer to pay contributions, so all benefits are paid for by the individual member of the PPP. PPPs are always set up as Defined Contribution Schemes; a defined benefit option is not available. In a PPP, what is limited by law are the contributions that are allowed for tax purposes, while in theory there is no limit placed on the benefits that may be provided. In a PPP, there is no such thing as Normal Pension Age.The benefits may be taken at any age between 60 and 75, whether the member has actually retired from work or not. In a PPP, the option to retire and take benefits at any age before 60 does not exist if the member is in good health PPPs are not subject to the Pensions Act, though they are pension schemes for the purposes of the Family Law Acts.

There are many other, more minor differences, some of which will appear as we discuss these arrangements.

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Question 9.2

Who May Take Out a PPP?

Any person who is either self-employed or is employed in non-pensionable employment may take out a PPP. If there is an scheme in force in your workplace, you must check to see if you will be eligible to join it for pension benefits. If you will be allowed to join, even after a waiting period, you may not take out a PPP. However, if the pension scheme provides you with death-in-service benefits only, you may take out a PPP to provide yourself with a pension. Question 9.3 May I be a Member of Both Kinds of Pension Arrangement the Same Time?

For purposes of tax relief, only if you have more than one source of taxable income. It is quite possible for a person who is in a pension scheme in his/her main employment to pension other taxable income from, say, a part-time job, by taking out a PPP. In other cases, entry to pensionable employment used to mean that the PPP would have to be discontinued for example, a self-employed person who changes to being employed by a company that runs a pension scheme would have to stop paying premiums to his/her PPP.This would then become frozen until age 60, when the benefits could be paid. However, it is now possible to continue a PPP after entry to an occupational pension scheme, but no tax relief will be given on the continuing premiums. Question 9.4 What Contributions May be Paid to a PPP?

The maximum contribution that a person may pay to a PPP is 15% of pay if under 30, 20% between 30 and 39, 25% from 40 to 49, and 30% over that age.Pay in this context is actual earnings for tax purposes if you are an employee. If you are selfemployed, it is net relevant earnings, which means earnings from your selfemployment less expenses and interest allowed against income tax.The maximum earnings figure is 254,000. If you are a professional sports person, such as a footballer, athlete, swimmer, rugby player, cyclist, jockey, etc., you may pay 30% of your net relevant earnings regardless of your age. However, all contributions to all types of pension arrangement are added together when assessing the earnings cap of 254,000 and the total amount allowed for tax relief purposes, even if there is more than one simultaneous employment.* Question 9.5 Do All My Contributions have to buy Pension Benefits?

No.You may apply any amount up to 5% of pay to purchase death benefits, to provide cover for your dependants in the event of your death before your PPP matures. However, although this means you get full tax relief on a life assurance premium, it restricts the amount available to buy your pension, as the cost must come out of the maximum allowable contribution of 15% to 30%, as appropriate. Question 9.6 May I Take any of my PPP Benefits as Tax-Free Cash?

Yes. Up to 25% of the total fund available at maturity may be paid to you as a lump sum, tax free.The remaining three quarters of the fund must either be paid out in
* Finance Act, 2003

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pension form, or may be diverted to an ARF or AMRF, or even be paid out in cash, subject to tax. See ARFs, page 67. Question 9.7 May I take Early Retirement under a PPP?

Unless you are in ill health, your PPP must remain in place until you reach the minimum age of 60. From then on, you may draw it down anytime up to age 75 and you dont have to retire from your employment or self-employment to do so.There is really no such thing as a normal pension age in a PPP. One advantage is that, if you have a number of separate PPP contracts, perhaps taken out at different times and/or with different insurance companies, you could begin to draw them at intervals after reaching age 60.This process would allow an individual to withdraw from work progressively over a period a sort of phased retirement. Question 9.8 May I Provide for my Dependants on Death After Retirement?

Yes.When your pension is being purchased, a pension or pensions can be built in, to provide for one or more dependants on your death while the pension is in payment. The Revenue attach a condition to this: the amount of the dependants pensions may not be greater than the amount of the annual pension which you, yourself, will receive. If you invest your money in an ARF, there are rules about its treatment for tax purposes on your death. See ARFs, page 67. Question 9.9 How is the Pension Secured?

The pension is bought by purchasing an annuity from an insurance company. It doesnt have to be the company with which you built up your retirement fund.All these policies carry an open market option, which means that you can ask for the pension to be bought from whatever company is offering the best rates at the time. It is advisable to shop around for the best rates, and expert advice is essential in this area. Question 9.10 May I change a PPP from one insurance company to another?

Yes, it is now possible, if the providers agree, to transfer assets from one PPP provider to another.

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SECTION 10 INCOME CONTINUANCE PLANS

Income Continuance Plans are an attempt to solve the problem of providing a reasonable income for an employee who is unable to work due to sickness or accident, either for long periods or permanently. This type of plan is marketed under a variety of titles: Income Continuance Plan, Group Permanent Sickness Scheme, Salary Protection Plan or even Permanent Health Insurance are all commonly used. Prolonged Disability Insurance is probably the most accurate description of the purpose of the cover. Two Types of Scheme There are two main methods of providing income continuance cover. Probably the most common is for the employer to provide it through a plan that is separate from the pension scheme, although it will most likely be administered in tandem with it.The second method is through a voluntary plan, in which the member pays for the cover himself. An employer-sponsored income continuance plan typically works like this: It is set up alongside the pension scheme, with the twin objectives of providing an income during disablement of scheme members and of keeping their pension scheme membership alive without extra cost while they are unable to work; It is usually non-contributory for members, the total cost being borne by the employer; The plan is designed to pay a disability income after a fixed period of absence from work.This is known as the deferred period. It can be anything from 13 to 104 weeks the shorter the deferred period, the more expensive the cover will be. Generally, employers choose a deferred period to tie in with whatever sick pay arrangements they may have to cater for shorter-term illness.The most common deferred period is 26 weeks, but 52 weeks is becoming more common in recent times, mainly for reasons of cost. The promised income will be some percentage of pre-disablement earnings. Commonly, it will be somewhere in the range of 50-75%, but taking account of Social Welfare Disability Benefit or Invalidity Pension. Often, the benefit may be expressed as an amount equal to the members pension expectation under the pension scheme itself, but based on pre-disablement pensionable salary, and assuming that all pensionable service had been completed at the date of disablement. Sometimes the benefit is linked to after-tax income, in which case higher percentages may apply. Insurers restrict the cover they offer, both in percentage terms and in absolute money terms, so very highly paid people may have a lower fraction of earnings covered. The benefits are paid to the employer, who is the person insured under the policy, and paid on through the payroll system to the member, so they are subject to tax and PRSI. Benefits in payment may increase, usually at a fixed percentage rate each year.

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In addition to the income benefit, it is usual to have a pension premium allocation (PPA).The PPA enables the employer to pay both its own and the members contributions to the company pension scheme during disablement.This means that funding for the members pension continues, and could even mean that his/her full pension will be funded when he/she retires. More importantly, it means that his/her death benefit is kept in force. Insurance companies underwriting pension scheme death-in-service benefits are usually willing to maintain cover for absent members if there is an income continuance plan in force. Proportionate benefits are usually paid in cases where a member is partially disabled, leading to a loss of earning capacity. Some schemes cover only total and permanent disability; others cover temporary disability as well.

Some Questions Question 10.1 What Medical Evidence is Required?

On joining the scheme Medical evidence may be required when the member is joining the plan in the first place, and could be needed when benefits increase in line with pay increases during membership.The first step is the completion of a proposal form.This may be followed by a medical examination, a report from the members own medical attendant and by additional investigations if the insurer considers it necessary. In larger schemes, however, there is often no need even to complete a proposal form, as insurers operate a system known as non selection limits. People with benefits below these limits are accepted for cover without formality. Members who are accepted for cover on the basis of medical evidence may be accepted at ordinary rates of premium. If they are not in perfect health, an extra premium may be imposed.Alternatively, the amount of cover may be restricted, or perhaps certain medical conditions which have already affected the member may be excluded from the scope of the policy altogether. If a claim arises When a member has been absent due to disability, the insurer should be notified well before the end of the deferred period. Detailed medical evidence will then be needed before benefits will be paid. Further medical evidence will be required at intervals while the claim is in payment.The nature of this evidence, and how often it will be asked for, will depend on the nature of the illness and on the requirements of the insurer, which can vary from company to company. If the medical evidence indicates to the insurer that the member is no longer unfit for work, the claim payments may cease. Under some policies, there is allowance for a partial payment if some disability remains; others may provide for a rehabilitation payment, to ease the transition back to work. Question 10.2 Are There Any Other Restrictions?

Increasingly, benefit exclusions are being removed from policy rules but, with some insurers, if disablement arises from any of the following reasons, no benefit is paid: Understanding Pensions 51

(a) war, civil war and similar risks; (b) intentional self-inflicted injury; (c) aviation, except as a fare-paying passenger on commercial flights; In some cases, disability arising from pregnancy and childbirth is subject to an extra deferred period the normal deferred period provided for in the policy does not begin to run until (usually) 13 weeks from the end of the pregnancy.This discriminatory practice has now been discontinued by most insurers. Many policies exclude HIV and AIDS, but it is often possible to obtain this cover by paying higher premiums. Question 10.3 How is Incapacity Defined? The definition of incapacity will depend on the rules of the plan, which in turn depend on the policy conditions laid down by the insurance company providing the cover.The most attractive definition from the members point of view is inability, through illness or injury, to perform the duties of the members own employment. More stringent definitions are much more common for example, inability to do his/her own job or any job for which he/she is suited by training or experience. Question 10.4 What Happens if Illness Recurs?

That depends on the policy conditions. In some cases, if an illness returns after a relatively short period following the members return to work, payment would be resumed without the need for a new deferred period. However, even if a new deferred period does apply, the cover will still be in force it cannot be cancelled by the insurance company simply because a claim has already been paid for the illness in question. Question 10.5 What Happens if the Plan is Discontinued?

Income continuance insurances are often described as non-cancellable they cannot be terminated by the insurer without the agreement of the employer who is the policyholder. However, the premium rates are generally guaranteed for very short periods. If claims experience has been poor, the employer may decide not to continue the cover on cost grounds. If this happens, most insurers will continue to pay claims already admitted until the members concerned retire, return to or commence work, recover from the disability, or die. Question 10.7 What Happens if Employment is Terminated?

This differs from one policy to another but, generally speaking, benefit payments will cease if the employer / employee relationship is disturbed. In a small number of schemes, the member may be entitled to continue to benefit even if the contract of employment is terminated. In general, if termination of the contract is forced because the employer goes out of business, payments would continue direct to claimants whose claims are already in force at the time.

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Question 10.8 Are Voluntary Plans Different? Essentially, voluntary plans operate in the same way as those sponsored by employers. There are some differences: Voluntary plans are approved by the Revenue Commissioners under the Finance Act, 1979 and members contributions qualify for tax relief, up to 10% of income; Tax relief on contributions by the member is now normally given at source, as would be the case with pension contributions; Benefit payments are taxed at source by the insurance company; Because the level of take-up in most voluntary schemes is a reasonably low percentage of those eligible to join, the insurers do not usually give any concessions in the area of acceptance; proposal forms are always required and medical evidence is more likely to be asked for. Most of the voluntary plans that currently exist are in Public Sector employments, so the benefit structures are designed to take account of the sick pay conditions of the public sector. Ill health early retirement pensions payable under the pension schemes of public sector bodies are also taken into account in the design of these schemes. Tax and PRSI Members receiving benefit in employer-sponsored plans are paid through the company payroll, and are taxed under PAYE. Both the employer and the member paid PRSI contributions on the income paid to sick members. PRSI was charged at the normal Class A rate, unless the employee concerned changed from receiving a Social Welfare Disability Benefit to an Invalidity Pension, in which case only the Class K levies were payable by the member, and no payment was due from the employer.This practice has now changed, and only Class K1 levies should be payable. In approved (contributory) schemes, only the Class K levies were payable by the employee.

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SECTION 11 THE FAMILY LAW ACTS AND PENSIONS

DIVORCE AND JUDICIAL SEPARATION
There are two Family Law Acts (the Acts) that concern pension benefits: the Family Law Act, 1995 addresses the issue of pension benefits in the context of judicial separations and foreign divorces recognised in Ireland. Similar legislation relating to Irish divorces is laid down in the Family Law (Divorce) Act, 1996 which, however, also contains the mechanism by which decrees of divorce are granted in this country. Until this legislation, there has been no facility by which pension rights could be distributed between parties as part of a financial settlement following marital breakdown.While some separation agreements formal or informal did (and still do) attempt to take account of pension rights these, in so far as they deal with pension rights, are neither legally binding, nor could they be enforced against trustees of a pension scheme. Trustees could not lawfully pay a benefit from a pension scheme to someone who was not entitled to it under the rules of the scheme.Therefore, legislation was needed if pensions were to be a distributable asset of a family. The two pieces of legislation require that the Court takes account of pension rights where, following a judicial separation or divorce, a party to the marriage (or a person on behalf of a dependent member of the family) applies to the Court for one or more of the various types of financial adjustment order available under the Acts for the purpose of making financial provision for both parties and, perhaps, for other dependants. In addition, the Acts have given the Court power to direct the trustees of a pension scheme to pay benefits in accordance with a Court order which would then override the trusts and rules of the scheme. Essentially, one of two approaches may be taken by the Court in recognising the value of pension benefits. In the first place, the Court may serve an order (known as a Pensions Adjustment Order (PAO)) on the trustees of the pension scheme of which either spouse is a member, requiring them to pay a proportion of the pension benefits to the other spouse or for the benefit of a dependent family member or both.The legislation describes the spouse who is in a pension arrangement as the Member Spouse. Alternatively, the Court may take account of pension benefits by means of any other type of order under the Act (e.g. by making an adjustment to the allocation of nonpension property of the couple). The important thing is that pensions are on the table, to be taken into account like any other family possession. A Pensions Adjustment Order may be made as well as, or instead of, any other type of order under the Family Law Act, 1995 or the Family Law (Divorce) Act, 1996, such as maintenance orders, Property Adjustment Orders, financial compensation orders, and so on. The legislation applies where the decree is granted, or the marriage dissolved, after the relevant Act was brought into operation i.e. 1st August, 1996 (judicial separations and

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foreign divorces) or 27th February, 1997 (Irish divorces). It does not apply to separation agreements that do not involve the Court making an order. Pension benefits for this purpose includes rights earned under any type of scheme or arrangement: benefits arising from membership of a company pension scheme (including additional benefits acquired due to payment of AVCs); or payment of contributions to a pension policy for the self employed (Retirement Annuity Contract). Rights arising under policies to which pension scheme assets have been transferred (buyout bonds) are included. Pension benefits arising from participation in a pension arrangement overseas are also within the scope of the legislation.The Pensions (Amendment) Act, 2002, extended the definition of pensions to include PRSAs as well. Benefits payable under the Social Welfare Acts and disability benefits arising under an insured income continuance policy or scheme are not pension benefits for this purpose. Types of Benefit The legislation distinguishes between two basic types of benefit. 1. Retirement Benefits This includes all benefits payable to the member of the pension scheme or to his/her dependants at or after the time of retirement or earlier withdrawal from service retirement pensions; retirement lump sums or gratuities; benefits such as dependants pensions payable following the members death in retirement and increases on all pensions in the course of payment; benefits arising from a previous employment which have not yet commenced; retirement pensions currently in payment and benefits from a current employment which will be payable at some time in the future. 2. Contingent Benefits Generally referred to as death-in-service benefits in the context of company pension schemes, this term includes anything that is payable under a scheme or a selfemployed contract or PRSA if death occurs before retirement takes place. It includes lump sum benefits and pensions payable to survivors. Where the Court decides to make a Pensions Adjustment Order, it may apply to either or both types of benefit. An order in relation to retirement benefits may be made in favour of either the dependent spouse or a named person for the benefit of a dependent child.The order is served on the trustees of the pension scheme and requires them to pay a specified part of the retirement benefits earned by the member in question (called the member spouse) to the person named in the order. An order relating to contingent benefits may be made in favour of the dependent spouse and/or a named person for the benefit of a dependent child.The order is served on the trustees of the pension scheme and requires them to pay a specified part of the contingent benefits to the person(s) named in the order. Separate orders are required if the Court decides to make an order in relation to both retirement benefits and contingent benefits.

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Although the Court must take pension benefits into account, it is not bound to make a Pensions Adjustment Order.The Court may decide to take retirement benefits into account by making a different type of order (e.g. it may decide to adjust the split of non-pension assets).The Court could decide that adequate financial provision can be made for the dependent spouse and children by requiring the other spouse to take out and maintain a suitable life assurance policy, rather than making a pension adjustment order in relation to contingent benefits payable under a pension scheme. The Court will not make a pension adjustment order on its own initiative one or other of the spouses or a person representing the dependent children must first apply for an order. In deciding whether or not to make the order, the Court is required to consider whether there is already adequate provision, or whether it can be made by making any of the other types of Order (e.g., Property Adjustment Orders) that are available under the legislation pensions are effectively last in the queue. Of course, there may be situations where the biggest or even the only asset available for distribution is a pension benefit.

QUESTIONS ON FAMILY LAW AND PENSIONS

Question 11.1 How Do I Obtain Information on Pension Benefits of my Spouse?

If proceedings have been taken for any of the Orders allowed for by the legislation, each spouse is required to give particulars of his/her property and income to the other spouse or to a person representing dependent children.This includes rights under a pension scheme. Normally the trustees of a scheme will need the Member Spouses consent to disclose the information. It is advisable to consent to this. If not,The Court may direct the trustees to provide more specific information in relation to pension benefits the only result of withholding consent is delay and expense. The information which must be provided by the trustees is as follows:
GENERAL INFORMATION: the name of scheme or policy number and the members name; the date on which member first qualified for retirement benefits; his/her current pensionable salary; additional benefits arising from payment of any AVCs or from a transfer of accrued rights from another scheme; and a contact name and address for further enquiries. RETIREMENT BENEFITS: The nature of the information will depend on whether the Member Spouse participates in a defined benefit or a defined contribution scheme.

In a defined benefit scheme, the trustees must specify: The amount of each element of retirement benefits accrued to a specified date; how retirement benefits are calculated; the date when they will become payable; whether there is provision for them to increase during payment; and their actuarial value. In a defined contribution scheme, the information needed is: The accumulated value of the contributions paid by, or in respect of, the member for the purposes of retirement benefits up to a specified date; the date on which the retirement benefits become payable, together with a brief explanation as to how these will be calculated.

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CONTINGENT BENEFITS: The information required is the amount of each element of

contingent benefits and the method of calculating them. Question 11.2 How do I apply for a Pensions Adjustment Order?

Notice of your intention to seek a PAO must be given to the trustees of the scheme or schemes, and they may make representations to the Court on behalf of the scheme if they wish, and the Court may have regard to those representations in making an Order. Either spouse may apply to the Court for a PAO relating to either retirement benefits or contingent benefits.A person representing dependent children may also apply on their behalf. No order will be granted if the person applying for it has remarried. Orders relating to contingent benefits must be applied for within one year of the decree of divorce or separation, but orders affecting retirement benefits may be applied for at any time even after the payment of the benefits has begun, provided the Member Spouse is still living. If the Member Spouse participates in more than one scheme, a separate order is needed for each one. Care is needed here, as a pension scheme member who appears to be in a single scheme may be making AVCs to a legally separate AVC scheme, or to a PRSA. In the Public Sector, it is normal to find separate schemes for retirement benefits pensions and lump sums payable to the member, and those payable on death in service (which count as contingent benefits) or on death after retirement (which count as retirement benefits),Thus, in a typical Public Sector scheme, it may be necessary to look for three separate orders or four, if the member is also contributing to a separate AVC scheme. Question 11.3 How is the Dependent Persons Share of the Benefit Calculated?

If an order is made in relation to retirement benefits, this will specify that a proportion of the retirement benefits accrued at the time of the granting of the decree of judicial separation or divorce (or at such earlier date as may be specified by the Court) must be designated for payment to the other spouse or for the benefit of a dependent child.When providing information in respect of retirement benefits, the trustees must have regard to retirement benefits accrued to the date of the decree of divorce or separation. If the decree has not yet been granted, the information may relate to any date within the preceding 12 months that the trustees choose. In making an Order, the Court calculates the designated benefit by reference to a Relevant Period and a Relevant Percentage. The Relevant Period may be any period of time specified by the Court, as long as it ends on or before the date of the decree of divorce or separation. It could be based on the period of marriage, the time for which the member spouse was a member of the scheme or any other time that the court decides to take into account as the period over which benefits to be divided were earned by the member. The Relevant Percentage is the proportion of retirement benefits earned in the Relevant Period, which the Court is allocating to the non-member spouse or other person specified in the Order.The Order is served on the Trustees, who must notify

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beneficiaries of the amount and the nature of the benefit to be provided for them under the order, as required by the Disclosure Regulations under the Pensions Act. In calculating the designated benefit, the trustees must base it on the rules of the scheme in force at the time of the decree.Any changes made later to the rules have no effect. Equally, if a transfer of benefit from another scheme takes place after the Order is made, it does not affect the transferred-in benefits. Question 11.4 Are Defined Benefits and Defined Contributions treated differently?

In a defined benefit scheme, the designated benefit is calculated by reference to the benefits that are deemed to have been earned by the member during the Relevant Period. In a defined contribution scheme, they are calculated by reference to earmarked contributions the contributions actually paid by the member and on his/her behalf during the Relevant Period. If part of the benefits is on a defined benefit basis and part on a defined contribution basis, the two elements are calculated separately. Question 11.5 If I am a Dependent Person, how is my share of the benefit payable?

Generally, it will be paid at the same time, in the same manner and subject to the same conditions as the Member Spouses benefits.Thus, if the member retires before Normal pension date, the dependent spouses benefit is paid at the same time. If the member is entitled to take cash in lieu of part of the benefit, a proportionate cash entitlement must be offered to the dependent. However, instead of accepting the designated benefit, the dependent could opt for an Independent Benefit under the scheme (see Question 11.6, below). Certain options that the member may exercise such as giving up part of his/her pension in favour of another dependant do not affect the calculation of the dependent Persons share. The Dependent Persons benefit will continue to be paid for as long as both he/she and the Member Spouse are alive. It may cease payment on the member spouses death, unless the rules of the scheme provide for a benefit to be payable after that. Question 11.6 What happens if I dont wish to be affected by whatever the member spouse wishes to do (e.g., retire early)?

In that case, you can opt to have an Independent Benefit set up for you in the scheme, instead of retaining your entitlement to the designated benefit.This can be done at any time before the Member spouses benefits come into payment.This option is not open to a dependent child. If you ask for an Independent benefit to be set up, this can be done in any one of a number of ways. In the first place, a transfer payment is calculated, which is the actuarial value of your designated benefit.This can then be applied in the same scheme to set up a benefit for you, or it can be transferred to another pension scheme of which you are already a member, or to a buy-out policy or bond in your name.

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The transfer payment is calculated as if the member spouse was leaving service on the date of the transfer, and a proportionate value is then allocated to the dependent spouse.You should realise that the decision to set up an independent benefit may mean that your eventual benefits may fall short of the value of the parallel designated benefit, because you will no longer receive the benefit of future increases in the pensionable pay of the member spouse. A transfer to another occupational pension scheme can take place only if the transfer payment came from an occupational scheme or, in limited circumstances, from a PRSA. If you wish to establish an independent Benefit, you should apply to the trustees of the scheme in writing and supply them with whatever information they may need to facilitate the transfer.They must actually make the transfer payment within 3 months of receiving a valid application. Question 11.7 As a non-member spouse, can a transfer of benefits be made without my consent?

In limited circumstances, yes: If the designated benefit originated in a defined contribution scheme; OR If the member spouse leaves service and opts to transfer his/her benefits to another scheme. You must receive written notice of the proposal to make the transfer payment at least 30 days before the proposed transfer date; this gives time to consider alternative transfer options. However, it cannot be transferred if there is already an outstanding request from you to the trustees to make a transfer payment on your behalf to another scheme. The trustees must notify you, and the Registrar or Clerk of the Court where the PAO was made, of the amount transferred and provide details of the scheme or policy to which the payment was made. Question 11.8 As a non-member spouse, what happens to my share of the benefits if I die before they are paid?

If you die before the designated benefit comes into payment, an amount equal to the actuarial vale of your entitlement must be paid to your estate, within 3 months of the date of your death. It is calculated as if you had asked for an independent benefit to be set up immediate before your death. If you, or the trustees if appropriate, had actually decided to make a transfer of your benefits to another scheme or policy, death benefits would be paid in accordance with the terms of the scheme or policy. Question 11.9 What happens if I die before the member spouse, after the benefits are in payment?

If this happens, a payment must also be made to your estate, being the actuarial value of the remaining benefits that should have been payable to you if you had lived as long as the member spouse is expected to live.

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Question 11.10 What happens to my share if the member Spouse dies? If the member spouse dies before the designated benefit becomes payable, a payment must be made to you, being the actuarial value of what otherwise would have been payable. If the member spouse dies after the benefits have come into payment, then it depends on the rules of the scheme whether there is any further payment due to you. Question 11.11 When does an order in favour of a dependent child ceases to be effective? A PAO in favour of a dependent child ceases to have effect on the death of the child, or when he/she ceases to be dependent. A child in fulltime education may be regarded as dependent for the purposes of these Acts up to age 23 otherwise it ceases at age 18. Regardless of age, a child is considered dependent if he/she has a mental or physical disability. Question 11.12 What happens if a dependent spouse remarries? The remarriage of a dependent spouse has no effect on a PAO relating to retirement benefits. However, an order relating to Contingent benefits ceases to be effective on remarriage. If the dependent spouse has remarried before an order is made, the Court will not then make the order. Question 11.13 What happens to a contingent benefit if the member spouse leaves service? In general, the contingent benefit would cease if the member spouse leaves service. If this happens, you must be notified to that effect, and you must then consider what options are open to you to make application to the Court to replace this benefit such as seeking an order for the provision of a life policy. Question 11.14 Can the terms of a PAO be changed? If the PAO relates to contingent benefits, it cannot be changed. If it relates to retirement benefits, it may be changed or discharged at a later date, unless, at the time it was made, the Court ruled otherwise. Sometimes, you will see a PAO for a very tiny amount, with an order from the Court that this cannot be varied. This is done as a means of protecting the pension from the possibility that the nonmember spouse might seek to share in it at a later date. Question 11.15 If I am entitled to benefit under a PAO, how does this affect my entitlements under other pension schemes? Your entitlement under a PAO does not affect your entitlements under other occupational or private pension schemes.The Revenue limits for those schemes are calculated without any reference to benefits that you might have from your former spouse, and you may receive maximum benefits from your own scheme in addition.

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However, if you are a member spouse and part of your benefits are subject to a PAO in favour of your former spouse or other dependant, then your maximum Revenue limits are reduced by the amount of the designated benefit, and you may not make this up by AVCs. Question 11.16 How are benefits taxed? Pension payments made under a pension adjustment order are treated as income of the person who receives them and chargeable to income tax under the PAYE system. Separated spouses will be assessed to income tax as single persons unless they elect for joint assessment.Where a divorce has been obtained, each spouse will automatically be assessed to income tax as a single person unless he/she remarries. Lump sum payments on retirement, which are part of either a designated benefit or an independent benefit established by a transfer payment, are paid free of tax under present Revenue practice. Payment of these lump sums does not interfere with your right to receive a lump sum under the pension scheme of your own employer, or from a Retirement Annuity Contract or a PRSA effected in connection with your own employment or self-employment. Where a designated benefit consists of a refund of the contributions made by the Member Spouse, such refunds are currently chargeable to tax at the rate of 25%. Payments made under a pension adjustment order in relation to retirement benefits following the death of either the dependent spouse or the Member Spouse are not subject to income tax.They may be liable for Capital Acquisitions (Inheritance) Tax, as they are treated as an ordinary inheritance for this purpose. Payments made under an order in relation to contingent benefits receive similar treatment. Where a divorce has been obtained, any payment on the death of the Member Spouse to the dependent former spouse on foot of a pension adjustment order is exempt from Capital Acquisitions Tax Question 11.17 Why cant I just agree with my separating spouse on how the pension benefits will be treated? Sometimes, people who are separating choose not to go through the formal proceedings of a Court action for judicial separation. In these cases, the parties often reach an agreement between themselves as to how property will be divided, and sometimes apply to the Court after the event, to have their agreements made into an Order of the Court. Often, these agreements mention pensions. Usually, they do so in one of two ways: The member spouse agrees to pay part of the pension to the non-member spouse; or The non-member spouse agrees not to make a claim against the pension scheme in the event of the death of the member spouse. Neither kind of agreement will be capable of being enforced. In the first case, the member cannot assign his/her pension benefit to another person (this is forbidden by the Taxes Consolidation Act, 1997, under which schemes are approved by the Revenue Commissioners).Therefore, even if part of the pension were paid to the (former) Understanding Pensions 61

partner, the member would still have to pay tax on it, and the non-member would have no legal right to the payments. In the second case, if the non-member spouse fell into a category of people recognised in the scheme rules as dependants, or as beneficiaries, the trustees would have to consider that persons right to benefit, whether he/she wished to benefit or not. Eventually, the trustees might decide not to include such a person in the distribution of the benefit, but the duty to consider them as a beneficiary is something the trustees must take into account when they are arriving at their decisions. One of the drawbacks of the Family Law Acts at present, therefore, is that they dont at present contain any mechanism for recognising informal (and therefore usually cheaper) arrangements for separation and the division of family property.The programme of planned legislation announced in late 1997 mentioned a new Family Law Act designed to apply to these situations, but no details were published and there has been no progress in this area up to the time of writing, though it appears possible that a Bill may be published before the end of 2004. Question 11.18 If a part of a Member Spouses death benefit is subject to a Pensions Adjustment Order, what happens to the other part? The scheme rules still apply to the part that is not subject to the Order. If the trustees have discretion to choose the person(s) who will receive the death benefit, they retain that power over the part of the death benefit to which the Pensions Adjustment Order does not apply.That means that this part of the benefit might be paid on the members death to another dependant, or perhaps to the members estate, depending on the provisions of the trust deed and rules of the scheme.The trustees, exercising their discretionary powers, might even decide to pay the balance of the death benefit to the person/s in whose favour a Pensions Adjustment Order had already been made in relation to a part of the benefit.Their decision must be made in the light of the facts and circumstances of each case. Question 11.19 As a Member Spouse, can I instruct the trustees to deal with the rest of the death benefit in a particular way for example, to provide for a new dependant? No.The trustees will be bound by the provisions of the trust deed and rules.You could indicate to them, by means of a wishes letter, what you would like to happen to your benefits but, at the end of the day, the trustees will have to reach their own decision, and your wishes cannot bind them in advance. If the trustees have power to pay to your estate instead of to a dependant, they might very well choose to do this, knowing that, if you had made a will, the death benefit would then be distributed according to your wishes. If there are no dependants as defined in the scheme rules, they might have to pay your estate in any case. If you dont make a will, your next of kin will inherit. In the case of people who are separated, the spouse is still legally next of kin. Question 11.20 Who is responsible for the Trustees costs if they have to become involved in a Family Law action? Trustees are entitled to apply to the Court for their costs they are not permitted to allow them to be borne, in effect, by the other members of the scheme. If the Court

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makes an order in relation to these costs, the order may be made against either of the parties concerned, or both. If no order is made, the parties must bear the costs equally. If the trustees cannot obtain payment of the costs from a person who is liable for them, they may apply to the Court for an order which permits them to deduct the costs from any benefit payable to the person in question. Involving the trustees will almost certainly result in a reduction of the value of available benefits another reason why pensions should, if possible, be the last port of call when dividing family assets. Question 11.21 To Whom is a Pensions Adjustment Order addressed if the scheme has no Trustees? In the case of a self-employed person or a PRSA contributor, a scheme may not have trustees.The same is true of many public sector schemes. Buyout policies dont have trustees either. In these cases, the law says that the scheme administrator is the trustee for this purpose. In the case of Retirement Annuity Contracts, this means the insurance company with which the policy is placed.The same is true of buyout policies. It means the provider in the case of PRSAs and the administrator in the case of an Approved Retirement Fund (ARF), into which pension assets can sometimes be transferred by a member spouse on retirement. In public sector schemes, the administrator is the Government Department or other body that actually administers the scheme. NOTE You are recommended to read the booklet issued by the Pensions Board, entitled A Brief Guide to the Pension Provisions of the Family Law Acts, which gives examples of how Designated Benefits are calculated, and details of the disclosure requirements and the contents of documents that must be furnished in various circumstances. Pension Scheme trustees and Administrators should avail of the very detailed Guidance Notes issued by the Board when asked to furnish information or when served with a Pensions Adjustment Order. Great care should be taken, when a member requests information, to ensure that the guidance is followed if the information is needed for the purpose of a Family Law action.

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SECTION 12. PERSONAL RETIREMENT SAVINGS ACCOUNTS (PRSAS)

A new type of pension vehicle known as the Personal Retirement Savings Account (PRSA) was introduced by the Pensions (Amendment) Act, 2002.This was a principal recommendation of the National Pensions Policy Initiative and its aim is to improve the extent of pension coverage.The first PRSAs were approved in early 2003. What is a PRSA? A PRSA is a vehicle which can be used for long-term retirement provision by everyone employees, self employed, homemakers, carers and the unemployed. It is a contract between an individual and a PRSA provider in the form of an account that holds units in investment funds managed by PRSA providers.The PRSA contributor is the owner of the PRSA assets unlike an occupational pension scheme, where trustees hold the assets on behalf of the member. There are two types of PRSA a Standard and a Non-Standard PRSA.The difference between the two is that a Standard PRSAs charges are capped at 5% of PRSA contributions paid and 1% per annum of PRSA assets. Non-standard PRSAs have no such cap on charges.The other main difference is that standard PRSAs can invest only in unit funds, whereas non-standard products have a wider choice of assets. No charges can be made for transfers of assets or the suspension and resumption of contributions. Proposals to alter charges must be notified to contributors. A standard PRSA may not be marketed or sold if its purchase depends on the contributor buying any other product. An employer who does not operate a pension scheme, or whose scheme limits eligibility or imposes a waiting period of more than a six months, will be obliged to allow access by his excluded employees to at least one Standard PRSA; provide a contribution deduction facility if required and allow reasonable access to financial advisers.The employer is not, however, obliged to contribute to a PRSA, but may do so. Contributions- including any made by the employer must be transferred to a custodian account of a PRSA provider within 21 days following the end of the month in which the deduction is made. PRSAs are mainly designed to act as a vehicle for retirement savings for those who are not members of occupational pension schemes, but will also perhaps replace Retirement Annuity Contracts (RACs) and may be used as a vehicle for additional voluntary contributions (AVCs). In fact, if a pension scheme doesnt have an AVC facility, employers must make a standard PRSA available to employees for this purpose. Disclosure PRSA providers have to make specific disclosures to contributors.These will include: A preliminary disclosure to prospective contributors stating, in general terms, the level of benefits that they could reasonably expect to get. Regular Statements of Reasonable Projection showing the level of benefit that can reasonably be expected 64 Understanding Pensions

 Regular statements of individual and employer contributions, including transfer value and disclosure of commissions/charges (requirements for Standard and non-Standard PRSAs differ) Investment PRSA providers have to provide a Default Investment Strategy for each product. This is an automatic investment strategy to be applied unless the contributor indicates otherwise.The Default Investment Strategy is linked to general good practice for investment for retirement and is certified by the PRSA Actuary. Tax Treatment Tax treatment of PRSAs is similar to that given to occupational pension schemes tax relief on contributions, tax-free buildup of the fund. Limits on employee contributions are the same as those that apply to occupational schemes and Retirement Annuity Contracts. However, if an employer contributes to an employees PRSA, this has the effect of reducing the maximum contribution that the employee is allowed for tax purposes. If the total of employer and employee contributions exceeds the personal contribution limits, the excess becomes a benefit-in-kind on the employee. Benefits PRSA benefits may be taken from age 60 onwards, or earlier in the event of death or permanent incapacity and in a few other limited circumstances. 25% of the fund value is payable tax free.The balance is used to provide a pension, or invested in the ARF/AMRF options set out in the 1999 and 2000 Finance Acts (see ARFs, Section 13). Transfers Transfers out of PRSAs may also be made and a provider must permit the transfer of assets to another provider without any transfer charge being levied.Transfers from other forms of pension arrangement into PRSAs are a bit more difficult. An RAC can be converted into a PRSA if the provider agrees. However, no transfer can be made from an occupational pension scheme to a PRSA, even if the scheme is winding up, if the member concerned has been in the scheme for more than 15 years. In addition, strict requirements bind the prospective PRSA provider, including a need for very heavy professional indemnity insurance. PRSA Providers A PRSA provider is an authorised investment firm, insurance company or credit institution which has submitted one or more PRSA products to the Pensions Board and the Revenue Commissioners for approval. A PRSA provider may, in turn, contract out the management of the PRSA investments wholly or partly to an investment manager, which must also be an investment firm, insurance company or credit institution.

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Regulation and Supervision The Pensions Board is responsible for the regulation and supervision of the PRSA regime and will monitor and supervise the activities of the PRSA providers and the provision of PRSA products. Financial supervision of providers based in Ireland is the responsibility of the Irish Financial Services Regulatory Authority. Overseas providers, if any, will be supervised by the authorities in their home countries. Key features of the regulatory role include Approval of PRSA products jointly with the Revenue Commissioners The monitoring and supervision of the actual operation of the PRSA providers Review of charges and compliance generally Collection of fees from providers to pay for the cost of supervision Ordering the withdrawal or suspension of PRSA contracts under certain conditions Preparing and updating a code of conduct for the sale and marketing of PRSAs Interaction with Occupational Pension Schemes The introduction of PRSAs has no direct effect on defined benefit pension schemes. As far as defined contribution schemes are concerned, employers may decide to opt for the simpler regime offered by the PRSA rather than for the more heavily regulated occupational pension scheme framework. However, it should be noted that the contributions paid become the property of the employee as soon as they are paid. There will be no minimum period before benefits become preserved (2 years membership in occupational pension schemes). Tax relief on employee contributions (including those made to PRSAs) has been improved for members of occupational schemes. However, an earnings cap has also been introduced, limiting reliefs to aggregate pay from all sources of 254,000. Normal Revenue limits continue to apply to the aggregate of occupational and PRSA benefits, and these will have to be policed by pension scheme trustees. Some members of defined contribution schemes, in particular, may feel that they would be better off to opt out and contribute to a PRSA, so that they can invest their entire pension account in an ARF, rather than just the portion represented by their AVCs (see Section 13, below). Existing contributors to AVC arrangements may terminate those arrangements and transfer the assets into PRSAs if the rules of the AVC arrangement allow. If a pension scheme does not include an option to allow members to pay AVCs at all, the employer is obliged to permit employees to participate in one or more standard PRSAs. Finally, the legislation imposes a time limit for transmission of employee contributions (whether these are payable to PRSAs or occupational pension schemes) to the provider, trustees or manager. This must happen within 21 days of the end of the month in which the contribution has been deducted from pay by the employer. A similar time limit applies to the employers own contributions due to PRSAs and to defined contribution pension schemes. Once the contributions are received, trustees must have them invested, and a further 10 days are allowed for this to happen. PRSA

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contributions must be under the control of a custodian within the 21-day period.

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SECTION 13 ARFS & AMRFS

The Finance Act 1999 introduced new pension options. Originally, they were directed at the Self-Employed and Proprietary Directors. At that time, proprietary directors were defined as those who held more than 20% of the voting rights in a company or in its parent. Shares held by the directors spouse or minor children were taken into account also, as were those held by trustees of any settlement to which the director or his/her spouse had transferred shares. From 6th April 1999 a proprietary director in a pensionable employment had the option of taking his/her benefits in the traditional format, or adopting a new format which was also available to the self-employed. Normally, proprietary directors benefits would be treated the same as those of other employees a cash option based on final remuneration and years of service, with the balance of benefits emerging as a compulsory pension. Actually, they had less flexibility than ordinary employees, as their final remuneration had to be calculated as an average over at least three years.The new system gave the proprietary director the option of taking 25% of the accumulated fund in cash, regardless of the amount of their final remuneration.With the other three-quarters, an annuity could be bought in the same way as before. Alternatively, the money could be drawn down in cash, subject to conditions and also subject to tax, or invested in one of two new investment vehicles, the Approved Retirement Fund (ARF) or the Approved Minimum Retirement Fund (AMRF). What are ARFs and AMRFs? These are funds which are managed by Qualifying Fund Managers.This term is explained below. An ARF is a fund which pays no tax on its investment income or capital gains while the money is invested in it. However, if the money is withdrawn, it is subject to income tax at the individuals marginal rate. An AMRF is similar, but has the effect of locking away the individuals capital until he/she reaches age 75 years. Income can be drawn from an AMRF, but the original investment cannot. An ARF is open to a qualified person who is either over 75 years, or has a guaranteed pension income for life of 12,700 per year at least.You may include in this figure any pension payable under the Social Welfare system to you personally (but not allowances paid for dependants).The pension must actually be in payment you cannot anticipate pensions that have yet to be paid. If you do not pass this test, you may have to choose an AMRF.This means that the first 63,500 of your remaining fund, or the whole fund if it is less, would have to be invested in such a way that the capital is not available to you until you reach 75 years, though income generated by the fund can be drawn down. Alternatively, you can buy an annuity with 63,500, and any balance of the fund can then be invested in an ARF, or taken in cash subject to tax. These options applied automatically to anyone who invested in a new Retirement Annuity Contract on or after 6thApril 1999. For existing contributors, the agreement of the provider had to be secured before the new options would apply. In the case of proprietary directors in Occupational Pension Schemes, the rules of the scheme 68 Understanding Pensions

needed to be amended before the new options could be taken if the schemes were approved by Revenue before 6 April 1999. The one complication about the operation of ARFs and AMRFs from April 1999 onwards was their treatment for tax. Under the system as it was introduced, a distinction was made between capital gains and income generated by the fund that was invested. If capital gains were made, they would be taxed under Capital Gains Tax rules. However, if the funds generated were regarded as income such as dividends, then they would be subjected to income tax.These taxes were payable even if the profits in question were not drawn down. This was changed in the Finance Act 2000 and the position was greatly simplified so that anything drawn from an ARF or an AMRF is now subject to income tax as it is drawn down the fund pays no tax while it remains invested. In that way, its treatment is similar to that of pension schemes. However, further changes were made so that the income tax is now deductible at source under PAYE by the Qualifying Fund Manager who operates the ARFs/AMRF on behalf of the individual.This applies even to self-employed people who may account for the rest of their taxes in arrear. Re-definition of Proprietary Directors In April 2000, the term Proprietary Director as used in this legislation was re-defined. Instead of needing to control more than 20% of the voting shares in a company or its parent, a person who controlled more than 5% of these shares was regarded as a proprietary director for the future, and thus eligible to invest in ARFs/AMRFs. However, for the purpose of calculating overall maximum benefits, or the traditional salaryrelated lump sums at retirement, the old definition 20% shareholders still applies. 5% Directors have their final remuneration calculated in the same way as ordinary members. AVCs The biggest change made in April 2000 was the extension of ARFs/AMRFs to everyone making Additional Voluntary Contributions (AVCs) to enhance their benefits.This meant that the new investments were available to a very large number of people.The rules for calculating the tax free lump sums payable to ordinary employees with AVCs have not changed.There is no option to take 25% of the fund in cash the tax free lump sum must be calculated in the old way, related to salary and service.The big difference for AVC contributors now is that any part of their AVC fund that is not taken in tax-free lump sum form can now be invested in an ARF/AMRF at the holders option, rather than being directed to a compulsory annuity, as before. Tax Treatment on Death Special rules apply to distributions made from an ARF/AMRF on the death of the person who holds it. In general, any amount distributed is treated as if it was income of the deceased person for the year in which his/her death occurs. However, where a distribution is made to the spouse of the holder of an ARF/AMRF or to their child who is under 21 years at the date of the holders death, no income tax is

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charged. In the case of a child there is, of course, the possibility that Inheritance Tax (C.A.T.) could apply. If a distribution is made on the later death of the surviving spouse, or to a child of the original holder who is 21 years or over on the death of the holder, tax is deducted at the standard rate for the year when the distribution is made. This charge to tax does not affect the childs personal tax rate and is not affected by it. Inheritance Tax would not apply in this case. If a distribution is made to a person who is neither a spouse nor a child of the holder of the ARF, then full income tax and inheritance tax liabilities arise. Qualifying Fund Managers The role of the Qualifying Fund Manager (QFM) is mainly to account for any tax that may be due on distributions from ARFs/AMRFs. Those eligible to apply for Qualifying Fund Manager status include: Banks (this includes banks licensed in another EU Member States); Building Societies Credit Unions The Post Office Savings Bank Life Assurance Companies (again including those licensed in other European countries) Certain bodies authorised to raise funds for collective investments, such as Unit Trusts, UCITS, authorised investment companies, etc. Authorised members of the Irish Stock Exchange or member firms, which carry on business outside the State, or in the Stock Exchange of another EU Member State, who have notified the Revenue Commissioners of their intention to act as Qualifying Fund Managers. With effect from the year 2000, when banks and insurance companies from other EU Member States where included, the list was also expanded to include investment intermediaries authorised either in Ireland or in another EU state to hold client money but not Restricted Activity Investment Product Intermediaries. If a Qualifying Fund Manager is not resident in Ireland, they must appoint a resident agent who is responsible for all the duties and obligations surrounding the management of ARFs/AMRFs most particularly, the collection of the tax that may be due. Changes to the Rules on Distributions The 2003 Finance Act made some changes to the rules relating to ARFs.These changes were designed to make it more difficult for ARF holders to enjoy the proceeds of their investments without first paying the necessary tax. Rather than forbidding certain practices altogether, the Finance Act simply treated certain activities as Distributions. In other words, if certain things were done with the money that was invested in an

* In this context, a connected person is a member of any of the classes named in Section 10 of the Taxes Consolidation Act, 1997, and includes spouses or near relatives, partners in a business partnership, related companies, trustees of certain settlements and their settlors, and so on. By S. 14, Finance Act, 2003.

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ARF, it would be regarded as if it had been paid out to the holder and therefore would be immediately subject to tax which the QFM is obliged to deduct and account for. From 6thFebruary 2003, the Revenue Commissioners regard it as a distribution if the ARF (AMRFs are included) is used: To make a loan to the holder or to a Connected Person, or to use it to secure a loan for such a person; To acquire property from the holder or a Connected Person; To acquire property to be used as holiday property, or as a place of residence for the ARF holder or a Connected Person.* If the property is acquired for some other reason (for example, to be let to third parties) and is subsequently used as a holiday property or residence by the holder or a Connected Person, the change of use immediately makes this a taxable transaction. Any money used to repair or improve the property will also become taxable at that stage; To acquire shares or other interests in a closely held company in which the holder or Connected Person participates; To acquire any tangible moveable property this is aimed at discouraging the use of ARFs to buy works of art, vintage cars and other collectable items. Where assets held in an ARF or AMRF are sold to the holder or a Connected Person, this is also regarded as a distribution and therefore taxable. Qualifying Fund Managers are in future required to notify the Revenue Commissioners within one month of the date when they begin to act as a QFM. Managers already acting in that capacity had three months in which to notify the Revenue, after the passing of the Finance Act. A Health Warning on ARFs For those whose pension savings, or a substantial part of them, may be destined for ARF treatment at retirement, it is worth making a few observations arising from the peculiar nature of the products: ARFs and AMRFs are not pension schemes except for the purposes of the Family Law Acts (see Section 11).They are investment products, and should be approached with the same care and attention as any other investment. Advice is desirable, not just at the time the original investment is made, but all during the periods when they are held. ARFs and AMRFs are personal property.They cannot be secured as a joint account, so they do not pass automatically to a spouse or other dependant when you die.Therefore, you must deal with them in your will, or risk them being dealt with under the rules of intestacy if you dont make a will. Failure to deal with them specifically in your will could mean that they would go into the residue of your estate, perhaps with unforeseen consequences. Because the ARF/AMRF is not a pension, but personal property, there is no option to make payments from it to someone else (e.g., family or carers) if the holder becomes unable to act for him/herself. Professional advice should be taken on how best to deal with this problem.

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 Because they will pass into your estate on your death, it may be difficult to deal with them for some time, until your estate can be administered, which could be awkward if they represented a substantial source of income to your family. Under the law as it stands, if the person entitled to invest in an ARF dies before it can be set up, their spouse or other dependant does not inherit the right to invest.Therefore, the only option open to a surviving spouse, for example, may be the purchase of an annuity.

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SECTION 14 THE PENSIONS OMBUDSMAN

The Pensions Ombudsman investigates and decides complaints and disputes concerning occupational pension schemes and Personal Retirement Savings Accounts (PRSAs). He is completely independent and acts as an impartial adjudicator. His appointment and powers operate under the Pensions Act, 1990, as amended by the Pensions (Amendment) Act, 2002.The first Pensions Ombudsman was appointed on 28 April 2003. The Pensions Ombudsman is assisted by experienced and well qualified staff who have authority to write on his behalf; though the final decision on any complaint must be made by the Pensions Ombudsman himself. There is no charge for bringing a complaint or dispute to him. What can be investigated? The Pensions Ombudsman investigates complaints that allege maladministration by those responsible for the management of occupational pension schemes and PRSAs. The complaint may be against trustees, managers, employers, former employers and administrators (including PRSA Providers).The Pensions Ombudsman also investigates disputes of fact or law with trustees or managers or employers concerning pension schemes. Maladministration can include bias, neglect, inattention, delay, incompetence, ineptitude, perversity and arbitrariness. It means administration that is poor, or that has failed in some way. It can be something that was done, or something that was not done. It will include: Irregularities or mistakes in the administration process; discrimination or unfairness; failure to understand, interpret or properly operate the rules of a scheme; Failure to honour the terms of a PRSA contract; unnecessary delay in making payments or giving information; abuse of power; not providing sufficient information, or not giving clear information; neglecting to obtain the proper information needed to exercise a power; Failure to get advice or failure to ask advice of the proper person. This is not a complete list, and many different kinds of action or failure can be classed as maladministration. To succeed with a complaint, it is not enough that the complainant just disagrees with what has been decided by those managing a scheme or a PRSA.The person who complains must have reason to believe that the decision was not properly made or implemented.

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Disputes of fact or law usually arise as part of a complaint of maladministration, without needing a separate investigation.Whether a complaint involves maladministration or a dispute of fact or law is for the Pensions Ombudsman to decide. What is excluded? The Pensions Ombudsman cannot investigate: A complaint or dispute where court action has already begun unless the action is stayed (i.e. suspended) by the court.This can be done if the case has not gone very far i.e., before pleadings are entered. Ask your lawyer for advice if you are in doubt. An industrial tribunal counts as a court for this purpose. A complaint or dispute about a State social security benefit (for example, Social Welfare Retirement or Old Age Pensions). In addition, when it comes to pension schemes, the Pensions Ombudsman must not investigate a complaint or dispute about whether a scheme is complying with the requirements of the Revenue Commissioners or with the Pensions Act, or other issues concerned with the general running of the scheme, or complaints or reports on the conduct of the scheme generally as opposed to a complaint affecting only an individuals benefits. A complaint that has been the subject of a Determination by another Ombudsman will not be considered. Matters of general compliance with the Pensions Act are the responsibility of the Pensions Board.The Board also has statutory power to determine certain matters prescribed by the Pensions Act in particular, whether a pension scheme is a defined benefit or a defined contribution scheme; whether a persons service in relevant employment has been terminated; and certain matters concerning equal treatment of men and women. Other equal treatment issues are the concern of the Director of Equality Investigations and are also excluded from the Pensions Ombudsmans powers. The Pensions Ombudsman cannot make any findings of fact about non-compliance with the Pensions Act or the matters that come under the statutory powers of the Pensions Board. However, it is possible that a complaint may involve both financial loss to an individual and failure by some other person to comply with the Pensions Act. If this is so, both the Board and the Pensions Ombudsman may investigate the matter. How does the process work? When you have a complaint or dispute, you should first try to sort it out with the persons responsible for the management of the pension scheme or PRSA. Where the pension scheme or PRSA has an Internal Disputes Resolution (IDR) procedure, the Pensions Ombudsman cannot as a rule investigate the complaint or dispute until the matter has been submitted to that procedure and the trustees or PRSA managers have issued their notice of decision. Under the Pensions Act, all pension schemes and PRSAs must operate an IDR procedure.There are no hard-andfast rules covering the way they operate. Scheme trustees in the private sector and PRSA providers set up their own procedures, though they must be approved by the

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Pensions Board in the case of PRSAs. In Public Authority schemes, where there is provision for an appeal to one or more Government Ministers, an appeal to the relevant Minister/s satisfies the need for an IDR procedure.The Local Government Superannuation Scheme has a separate IDR process. In some cases, where there is a trust in place for a Public Authority scheme as well as regulation, it might be necessary to have more than one IDR procedure in place. So the IDR procedures can vary, from something fairly informal in a small pension scheme, to a much more structured arrangement in a PRSA, or a fairly elaborate appeals procedure in a public sector scheme. Parties are not bound by recommendations arising out of an IDR procedure, unless they agree in writing to be bound by it. So, if a person is unhappy with the outcome of this process, they can then take their complaint to the Pensions Ombudsman.The same applies if the person complained against fails to implement any recommendation that came out of the IDR process. Certain pension schemes, such as those already in winding-up when the Pensions Ombudsman Regulations were signed, may not be required to provide for an additional internal disputes resolution procedure.The same applies to frozen schemes where there is no participating employer still trading. In addition, those people who had disputes or complaints considered by the Pensions Board before the Pensions Ombudsmans appointment may not be required to submit to any further procedures. Contact the Pensions Ombudsmans Office for information. Making the Complaint If you want the Pensions Ombudsman to investigate a complaint or rule on a dispute: Check that your complaint or dispute comes within his authority and that you are eligible to complain.This means that you must have gone through a disputes resolution process first, or that you are happy that there is no need to go through further procedures. If it is a complaint that the Pensions Ombudsman can consider, write to him explaining your complaint or dispute and saying what you think the persons responsible for the management of the pension scheme should do to put matters right.There is a standard form which you must use.This form is available from the Office of the Pensions Ombudsman, from the Pensions Board, from your local Social Welfare Office or can be accessed on the Pensions Ombudsman website: www.pensionsombudsman.ie., from where it can be sent to the Ombudsmans office in electronic form. Enclose all relevant documents and correspondence (copies will do) including any you have received from your pension scheme or employer or administrator. Complaints by telephone cannot be accepted. You may get someone else to write for you (for example, a solicitor, accountant or trade union representative) so long as they have your written authority to represent you. However, if you employ a professional person you will be responsible for costs.

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What happens next? When he receives your form and any documentation you submit with it, the Pensions Ombudsman must than decide whether the matter is one that he is allowed to investigate. If, for any reason, the Ombudsman cannot investigate your complaint or dispute, you will be informed.This could happen because the matter falls outside the Pensions Ombudsmans terms of reference, or because the time-limits provided for in the Pensions Act have expired. In general, the Pensions Ombudsman will not investigate a complaint which has already been the subject of a Determination by another Ombudsman. If the Ombudsman does decide to investigate your complaint or dispute you will be notified and you may be asked for further information. It is important and in your own interest that you provide that information requested without delay. Other parties to the complaint or dispute, named in your application form, will be given copies of any documentation the Pensions Ombudsman receives from you.You will also receive copies of documentation which the Ombudsman obtains from other parties. All parties must observe confidentiality in relation to any documents they receive. Investigation and Preliminary View The length of time taken for an investigation will vary, depending on how complicated the matter to be investigated may be. Investigators from the Pensions Ombudsmans office may need to contact the parties to an investigation to seek additional documents, or to seek face-to-face interviews with them. Application can be made to the Circuit Court to obtain papers that are not forthcoming.When an investigation is near its end, the Pensions Ombudsman will in many cases give a Preliminary View to all parties to the complaint or dispute.This will summarise the facts that were uncovered in the course of the investigation. It will also indicate the likely ruling by the Pensions Ombudsman. At that stage the parties will be given a chance to provide any further information or evidence that may not have been given up to then. The Pensions Ombudsman will not give a preliminary view in all cases but will do so, at his own discretion, where he believes this to be suitable. Shortly after that, he will make a final determination of the issue which has been the subject of the complaint or dispute. Financial compensation may be awarded in a case were the Pensions Ombudsman concludes that an individual who has complained has been at a financial loss due to the maladministration of a pension scheme or a PRSA.The financial compensation that may be given is limited to the amount of any actual loss. No awards may be made for suffering or general inconvenience.The Pension Ombudsmans determination is final, but may be appealed to the High Court by any party. Oral Hearings The Pensions Act provides that the Pensions Ombudsman has power to hold oral hearings before coming to a determination in a matter under investigation.The question of whether such a hearing is required is for the Pensions Ombudsman alone to decide. If an oral hearing is to be held, the Pensions Ombudsman will fix the time and date and give due notice to the parties.The Pensions Ombudsman may adjourn a hearing if he wishes.

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Parties to the complaint or dispute are invited to inform the Pensions Ombudsman whether or not they intend to attend the hearing, or be represented, or call witnesses. Anyone who does not attend an oral hearing may make submissions in writing, to be taken in to account at the hearing. In general, oral hearings will be held in public, but the Pensions Ombudsman may decide to hold them in private in limited circumstances for example, where intimate personal information or commercially sensitive matters are to be discussed at the hearing. Every party to a complaint or dispute has the right to the request the Pensions Ombudsman to hold an oral hearing before making a determination. If someone does not request an oral hearing, they may not complain later if none is held. If one is requested, the Pensions Ombudsman may or may not agree, and the final decision is his alone. He may also decide to hold an oral hearing even if none of the parties has asked for one. As a general rule, it is the policy of the Pensions Ombudsman to hold an oral hearing in the following circumstances: Where there are differing accounts of a particular event and the credibility of witnesses needs to be tested; Where the integrity or honesty of one of the parties has been questioned, and that person has asked for an oral hearing; Where there are disputed material and primary facts that cannot properly be determined from the papers uncovered by the investigation on their own. The Pensions Ombudsman may decide, even if none of these conditions applies, that an oral hearing is desirable and necessary.

ENFORCEMENT AND APPEALS

Enforcement Any determination made by the Pensions Ombudsman in relation to a complaint or dispute will be communicated in writing to all parties.The Pensions Ombudsman also has power to publish a report on any investigation. If a party to a complaint or dispute fails or refuses to comply with the determination with the Pensions Ombudsman, the Circuit Court may make an order directing that party to carry out the determination. Such an order may be requested by the other party to the complaint or dispute, or by the Minister for Social and Family Affairs, if the Minister considers it appropriate to do so. Appeal to the High Court A party to an investigation may appeal to the High Court from a determination of the Pensions Ombudsman within 21 day of the date of that determination and the High Court may, if it thinks fit, annul the determination, confirm it or modify it.

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A GLOSSARY OF PENSIONS TERMINOLOGY

SECTION A: OCCUPATIONAL PENSION SCHEMES
The purpose of this glossary is to explain as simply as possible a number of technical terms used in relation to occupational pension schemes. In a book of this size, it is not possible to cover all the terms used and you should ask your pension scheme trustees or administrators to explain anything that you do not understand. A separate glossary of terminology which tends to be particular to schemes in the State sector appears in Section B. Throughout, any explanation which includes a term or phrase defined elsewhere in the glossaries appears in bold type. Accrual Rate The rate at which pension benefit is built up as pensionable service is completed in a defined benefit scheme. Often expressed as a fraction of pensionable salary, e.g., 1/60th for each year of service. The benefits for service up to a particular point in time, whether vested rights or not.These benefits may be calculated in relation to current earnings or projected earnings and allowance might also be made for any increases provided for by the scheme rules or by legislation. Sometimes known as accrued rights. A member of a pension scheme who is in reckonable service i.e., currently in the employment to which the scheme relates, and who is included in the scheme for a pension benefit. In a defined benefit scheme the set of assumptions made by the actuary as to rates of return, inflation, increase in earnings, mortality, etc. which form the basis of an actuarial valuation or other actuarial calculation.

Accrued Benefits

Active Member

Actuarial Assumptions

Actuarial Funding Certificate A certificate required by the funding standard under the Pensions Act, stating whether the scheme is capable of meeting specified liabilities in a statutory order of priority in the event of its being wound up on the date of the certificate. Actuarial Reduction A reduction made to the accrued benefits of a member to offset any extra cost arising from the payment of benefits before normal pension age. An investigation by the actuary into the ability of a pension scheme to meet its benefit promise.This is usually done to calculate the recommended contribution rate which takes account of the actuarial Understanding Pensions

Actuarial valuation

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values of assets and liabilities of the fund. Such an investigation is also needed so that the actuary can complete a funding certificate. Actuary An adviser on financial matters involving the probabilities relating to mortality and other contingencies affecting pension scheme financing.The Pensions Act regulates who may function as actuary to a scheme. In the context of PRSAs, the Act also defines a PRSA Actuary, an actuary who must be employed or retained by a PRSA provider. In private sector schemes this means the provision of extra benefit by adding a period of pensionable service in a defined benefit scheme, arising from the payment into the scheme of a transfer value, the payment of additional voluntary contributions, or by way of augmentation.The term may have different meanings in the context of public sector schemes (see separate glossary). Contributions made by a member over and above his/her normal contributions, if any, in order to secure additional benefits. See Section 4. 1. A person regarded by the Revenue Commissioners as responsible for the management of a pension scheme. 2. In a less formal sense it means the person or body which manages the day to day administration of the scheme. 3. Under the Pensions Ombudsman Regulations, the Administrator can include a great many persons who provide services to a scheme, or who apply or interpret its rules. One of the available methods of choosing member trustees under the Pensions Act regulations. Under this method, members are asked to approve the employers proposals for putting member trustees into place. If the members reject these proposals, an election under the standard arrangement takes place. The Pensions Act requires the trustees of a pension scheme to communicate information about the scheme, its administration and its financial position on a regular basis.The content of the annual report is specified in the disclosure regulations. A shorter annual report may be issued for defined benefit schemes with fewer than 50 active members and for all defined contribution schemes. 79

Added Years

Additional Voluntary Contributions (AVCs) Administrator

Alternative Arrangement

Annual Report

Understanding Pensions

Annuity

A series of payments made at stated intervals until a particular event usually the death of the person receiving the annuity occurs. It is normally secured by the payment of a single premium to an insurance company. It may remain level during payment, or increase to compensate in whole or in part for increases in the cost of living. It can be designed to be paid only to the individual annuitant for life, or may be paid on to a surviving dependant on the death of the annuitant. An Approved Retirement Fund which is subject to restrictions on the drawdown of capital before age 75. Needed if an individual does not fulfill minimum income conditions. A fund managed by a qualifying fund manager in which a self-employed person or a proprietary director can invest the proceeds of a retirement annuity or an occupational pension scheme on retirement. Non-pensionable employees who hold retirement annuity contracts also qualify.The proceeds of additional voluntary contributions can also be invested in an ARF (or AMRF) if the trusts of the scheme permit this. See also Approved Minimum Retirement Fund. An occupational pension scheme which is approved by the Revenue Commissioners under Chapter II Part I of the Finance Act 1972. See also Exempt Approved Scheme. Approved Retirement Fund Approved Minimum Retirement Fund The property, investments, debtors, cash and other items of which the trustees of a pension scheme are the legal owners. Employment which is other than fulltime and permanent; usually understood to embrace part-time, temporary, fixed-term contract and seasonal working. An individual or firm appointed to report on the accounts of a company or other entity (such as a pension scheme). The term used to describe the provision of additional benefits for or in respect of individual members, where the cost of this provision is borne by the pension scheme itself and/or by the employer.

Approved Minimum Retirement Fund

Approved Retirement Fund (ARF)

Approved Scheme

ARF AMRF Assets

Atypical Employment

Auditor

Augmentation

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Authorised Trade Union

A trade union which has a negotiating licence under the Trade Union Acts and which represents members of the pension scheme. A scheme where the benefit accruing for each year of membership is related to pensionable earnings for that year.These schemes are not common. One hundredth of one per cent (0.01%) Target or measure against which performance will be judged used to assess the performance of a fund or investment portfolio. A person who is entitled to benefit under a pension scheme, or who will become entitled in specific circumstances (e.g. on the death of a member). Benefit given other than in cash which forms part of remuneration; if taxed under Schedule E, it may be included for pension purposes under Revenue rules (but may or may not be included in pensionable pay by the scheme rules). A statement of the benefits payable in respect of an individual in certain circumstances, e.g., death, retirement, etc. In unit-linked investment contracts, the difference between the price at which units can be purchased (Offer price) and the price at which they can be sold back to the investment manager (Bid price) on any given day. Certificate of debt issued by a company, a government or other institution. Bond holders are creditors of the issuer and interest is paid at the rate stated at the time of issue. The term bond is also used to describe a buyout policy. See Personal Retirement Bond. Unfunded pension scheme which is accounted by a provision in the employers accounts. Common in some European countries. An additional pension paid between the date of retirement and some later date, when it will reduce or be discontinued.The most common type of bridging pension is paid in the interval between the date of retirement and the Social Welfare pension age, where Social Welfare benefits are taken into account in calculating the scheme pension, but members retire before these become payable.

Average Earnings Scheme

Basis Point Benchmark

Beneficiary

Benefit in Kind

Benefit Statement

Bid-Offer Spread

Bond

Book Reserve Scheme

Bridging Pension

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Buy-Out

The purchase by the trustees of a pension scheme of an insurance policy or bond in the name of a member or other beneficiary following termination of service, retirement, or on winding up of a scheme.The bond is bought in substitution of the members rights under the pension scheme or under a pensions adjustment order. Under the Pensions Act, purchase of such a bond on leaving service may be at the option of the member or, in certain circumstances, at the option of the trustees. An alternative term for an average earnings scheme. An alternative term for commutation. A pension scheme that does not accept new members. A document confirming that a person in receipt of a pension is still alive. An option given to a member to replace a series of future payments by an immediate lump sum.The exchange of pension for immediate cash is regulated by the Revenue Commissioners. See Section 5. The mathematical factors used by the trustees to determine the amount of pension which needs to be given up in order to provide a given lump sum benefit.

Career Average Scheme Cash Option Closed scheme Certificate of Existence Commutation

Commutation Factors

Compulsory Purchase Annuity An annuity that must be purchased on retirement for a member of an insured pension scheme or for the holder of a personal retirement bond. Concentration of Investment Placing a significant proportion of the assets of a pension scheme in any single investment or category of investments.This is subject to disclosure under the Pensions Act and may also impact on the schemes ability to meet the funding standard under the Act. Benefit whose payment depends on the happening of a particular event, often the death of a member or pensioner specifically used in the context of the Family Law Acts to mean benefits payable from a pension scheme on the death of a member during the employment or self-employment to which the scheme relates. A facility offered by an insurance company that insures the death benefits under a scheme, whereby a member leaving the scheme can effect a life policy similar to that used under the scheme, without evidence of health. Such options are now becoming less common. See also substitution option.

Contingent Benefit

Continuation Option

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Contribution Holiday

A term used to describe a period under which employers and/or members contributions are suspended.This usually happens when the fund is in surplus. A scheme in which active members are required to make contributions towards the cost of their benefits. A funding plan which has regard for the liabilities of a defined benefit scheme as a whole, rather than for those of individual members. A company which acts as a trustee. A deed admitting a new employer to participate in an existing scheme A legal document by which a trustee is appointed. An automatic investment strategy required by law to be applied under a PRSA contract unless the contributor indicates otherwise.The Default Investment Strategy is linked to general good practice for investment for retirement and certified by the PRSA Actuary.Trustees of a defined contribution scheme may specify a particular strategy as a default if they are offering members a choice of alternative strategies. An annuity which commences from a future date. Any benefit whose payment is delayed, e.g., until a person reaches normal pension age. Most often used to refer to benefits which accrue to a scheme member on leaving service. A person entitled to a pension payment at a future date. Normally this would be an early leaver but the term can also be used to describe someone whose retirement has been postponed. Another term for late retirement. A scheme in which the pension and other benefits which will be paid to the members and/or their dependants are clearly stated in the rules of the scheme. Most defined benefit schemes are final salary schemes.

Contributory Scheme Controlled Funding

Corporate Trustee Deed of Adherence: Deed of Appointment Default Investment Strategy

Deferred Annuity Deferred Benefit

Deferred Pensioner

Deferred Retirement Defined Benefit Scheme

Defined Contribution Scheme Also known as a money purchase scheme a scheme where the individual members benefit is determined solely by reference to the contributions paid into the scheme by or on behalf of that member and the investment return earned on those contributions.

Understanding Pensions

83

Definitive Trust Deed

The detailed trust deed governing a pension scheme which contains details of all the trustees powers. It is usually accompanied by the rules of the scheme. A person who is financially dependent on a member or pensioner, or was so at the time of death or retirement of the member or pensioner. For Revenue purposes, a child of the member or pensioner may be regarded as dependent until he/she reaches the age of 18 or ceases to receive full time educational or vocational training if later. Under the Family Law Acts, children may be dependent up to age 23. Generic term for financial instruments used to manage investment portfolios, such as financial futures and traded options. A term used to describe the portion of a member spouses pension expectations allocated by the Court to a non-member spouse or dependant by means of a pension adjustment order made under the terms of the Family Law Act, 1995 or of the Family Law (Divorce) Act, 1996. 1. Decision of the trustees or other relevant person in an internal disputes resolution procedure. 2. Final and binding ruling of the Pensions Ombudsman in a complaint or dispute, subject to appeal to the High Court.

Dependant

Derivatives

Designated Benefit

Determination

Directly Invested Scheme

A scheme whose assets are not invested exclusively in certain named categories of investment, such as insurance policies, cash, unit funds. Such schemes become subject to the member trustee regulations if they have more than 12 active members. A benefit payable to an employee who is unable to work for medical reasons.This may be paid from a pension scheme as an ill-health early retirement benefit or it may be payable by the employer either directly or under the terms of an insurance policy or income continuance plan (which is not part of the pension scheme). A disability benefit can also arise under a voluntary disability insurance scheme, paid for in full by its members. Not to be confused with Social Welfare Disability Benefit. 1. Requirements under the disclosure regulations. 2. Rules on information to be supplied by intermediaries and sales staff to purchasers of

Disability Benefit

Disclosure:

84

Understanding Pensions

financial products, in relation to commission and other remuneration received by them. Disclosure Regulations Regulations issued under the Pensions Act requiring disclosure of information about pension schemes and their benefits to interested parties, including members, their beneficiaries and Trades Unions. Cessation of contribution payments to a scheme, leading to its becoming paid up, or with a view to its windingup. Actuarial valuation conducted on the basis that the scheme is to be discontinued. Powers conferred on the trustees or on the employer by the trust deed and rules of a pension scheme whereby issues (for example, the destination of death benefits) can be determined at their discretion. An increase in benefits which is awarded on a discretionary basis, as against one to which the member is entitled under the rules. Can be ad-hoc or regular in nature. see Internal Disputes Resolution. see Offset. A person who ceases to be an active member of a pension scheme, other than on death, without being granted an immediate retirement benefit. The retirement of a member with immediate benefits, before normal retirement date.The benefit may be reduced for early payment. See also Ill-health Early Retirement. In the context of the Family Law Acts, contributions paid by or for a person under a defined contribution scheme during a period specified by the Court. Limit, currently 254,000 per annum, on earnings from all sources for the purpose of calculating allowable tax relief on personal contributions to all forms of pension arrangements, including PRSAs. Separate or simultaneous employments or self-employment no longer generate separate allowances The conditions which must be met for a person to be a member of a pension scheme or to receive a particular benefit. Eligibility conditions may include provisions relating to age, completion of service, status and type of employment. 85

Discontinuance

Discontinuance Valuation Discretionary powers

Discretionary Increase

Dispute Resolution Disregard Early Leaver

Early Retirement

Earmarked Contributions

Earnings Cap

Eligibility

Understanding Pensions

Employer

The person or body with whom the member of a pension scheme has a contract of employment relevant to that scheme. A policy which provides for a lump sum at a future maturity date or on earlier death. Identical entry conditions for men and women.The Pensions Act requires this. The principle requiring one sex to be treated no less favourably than the other, as embodied in EC Council Directive 86/378 and the Pensions Act (Part VII), which also requires equal treatment on grounds other than sex. A system whereby pensions in payment and/or preserved benefits are increased regularly at a fixed or variable percentage rate.The percentage increase applied may be limited to the increase in a specified index. Escalation may be promised and paid for in advance of retirement, or may be granted on a discretionary basis after retirement takes place. A method of creating a pension scheme trust, in which a letter from the employer constitutes all or part of the documentation of an individual pension arrangement. A copy of the letter is signed by the employee to acknowledge its terms. An employee who will not be eligible for membership of an occupational pension scheme within six months of joining service, and who must therefore be offered membership of a standard PRSA. A benefit provided by the employer which it is not legally required to provide. Payment of such a benefit cannot be enforced by the member. An approved scheme which is established under irrevocable trusts, giving rise to the tax relief allowed for in the Finance Acts. A unit trust specifically designed for pension schemes and charities, which receives the same tax treatment as a directly invested pension scheme. See Wishes Letter. The Family Law Act of 1995, which, among other things, enables the Courts to allocate part of a members pension entitlement under a scheme to the spouse who is not a member of the scheme in the course of judicial Understanding Pensions

Endowment Assurance Policy Equal Access Equal Treatment

Escalation

Exchange of Letters

Excluded Employee

Ex-Gratia Benefit

Exempt Approved Scheme

Exempt Unit Trust

Expression of Wish Family Law Act

86

separation. In force from 1st August 1996 and applies to foreign divorces as well as judicial separation. Family Law (Divorce) Act The Family Law (Divorce) Act, 1996. As well as facilitating the redistribution of property, including pensions, between parties to a divorce action, this act contains the primary mechanism for the granting of decrees of divorce. In force from 27th February 1997. US Financial Accounting Standards, dealing with the treatment of pension costs in employers accounts. FAS 88 applies when schemes are wound up or when benefits are settled on termination of employment.

FAS 87 and 88

Final Pensionable Earnings / The pensionable earnings, at or near retirement or Final Pensionable Salary leaving service, on which the pension is calculated.This may be fixed at a particular date or may be based on the average of a number of years. Final Remuneration The term used by the Revenue for the maximum amount of earnings which it will permit to be used for the purpose of calculating maximum approvable benefits.The permissible alternatives are set out fully in the practice notes issued by the Retirement Benefits District of the Revenue Commissioners. A Defined Benefit Scheme whose benefits are calculated by reference to pat or salary at, or close to, retirement. A system of benefit provision in which employees are given a choice on the makeup of their total benefit package from an employer.Typically, under such a system, employees may choose how much of the money made available by the employer would be used for the provision of pensions, death benefits, disability health insurance, holidays, etc. Minimum limits may be laid down for certain benefits, either because they are specified by the scheme design or are made necessary by employment law or by Revenue Practice. Often called, simply,Flex. Employee earnings not paid on a fixed basis, but additional to basic wage or salary. Includes bonuses, commissions, benefits in kind, share option gains. Termination or suspension of all or part of the benefits under an occupational pension scheme. Forbidden in relation to preserved benefits by the Pensions Act, it can still happen in public sector schemes which are exempted from Part III of the Act.

Final Salary Scheme

Flexible Benefits

Fluctuating Emoluments

Forfeiture of Benefits

Understanding Pensions

87

Forgoing

An agreement in writing whereby the employee forgoes part of his/her future earnings in return for a corresponding payment by the employer into a pension scheme. The maximum amount of death benefit which an insurance company covering a group of members for death benefits is prepared to insure for each individual, without production of evidence of health. A deferred benefit, strictly one which is not subject to revaluation. A scheme which provides benefits only for members whose service has terminated; or a scheme where continuing service in employment does not entitle members to accrue new pension benefits, and to which no new members are admitted. A scheme whose benefit promises are backed by a fund of assets set aside and invested for the purpose of meeting the schemes liability for benefit payments as they arise. Only funded schemes may receive transfer payments relating to preserved benefits under the Pensions Act without trustee consent. The provision in advance for future benefit liabilities by setting aside money in a trust or other arrangement, which is separate from the employers business, to finance the payment of retirement and death benefits. A certificate issued by the actuary under the funding standard provisions of the Pensions Act. The relationship, usually expressed as a percentage, between the actuarial value of a schemes assets and its actuarial liability. The approach used by an actuary in an actuarial valuation. A variety of methods can be used, but whatever method is employed should be adequately described in the valuation report. The agreed timing of contributions with the aim of meeting the cost of a given set of benefits in a defined benefit scheme. A proposal for restoring the solvency of a defined benefit scheme which fails to meet the funding standard.The proposal must be signed by the trustees and employer(s) and must be submitted to the Pensions Board for approval

Free Cover

Frozen Benefit Frozen Scheme

Funded Scheme

Funding

Funding Certificate Funding level

Funding Method

Funding Plan

Funding Proposal

88

Understanding Pensions

Funding Rate

The rate at which contributions are payable to support the liability for benefits. Often used as shorthand for recommended contribution rate. Provisions under the Pensions Act, by which defined benefit schemes are subject to periodic actuarial valuation and completion of a funding certificate, to ensure that their scheme complies with what is termed the funding standard.This is designed to ensure that, at a minimum, the scheme has sufficient funds to secure specified pension rights which members have built up, if the scheme should have to be wound up at any stage. Schemes are usually wound up when the employer company goes out of business. An insurance policy issued to cover more than one individual. A right to apply the proceeds of an insurance policy to purchase an annuity at a rate guaranteed in advance in the policy.

Funding Standard

Group Policy Guaranteed Annuity Option

Guaranteed Payment Period A period, most often 5 years, for which payment of a pension will be guaranteed by the scheme rules, whether the pensioner lives or dies. Hancock Annuity An annuity for an employee, former employee or dependant purchased at or after the employees retirement, death or leaving service. It is called after a decided tax appeal, which allowed the full purchase price for tax purposes in the year of payment. An investment fund that takes a higher than normal degree of risk, often using borrowed money, in the hope of achieving a high absolute return. A strategy aimed at reducing potential losses in an investment. An example would be a forward transaction in a currency at an agreed future price to protect against exchange rate fluctuations. A scheme which combines features of two or more types of pension design e.g., a defined benefits scheme with a defined contribution element. see Internal Disputes Resolution. Retirement on medical grounds before normal retirement date.The benefit payable in these circumstances may be greater than that paid to a member retiring early in normal health.

Hedge Fund

Hedging

Hybrid Scheme

IDR Ill-Health Early Retirement

Understanding Pensions

89

Immediate Annuity Incapacity

An annuity which commences immediately, or shortly after, it is purchased. Inability to continue working due to ill health or disability. Its precise meaning in practice is determined by the rules of each separate scheme. One of the terms for prolonged disability insurance. The system under which pensions in payment (and possiblyalso preserved benefits) are increased automatically at regular intervals by reference to the rate of increase in a specified index of prices or earnings. A form of sex discrimination- usually unintentional which is deemed to exist if conditions are applied to a group of workers which, though not expressly related to sex, are more likely to be met by one sex than the other. A pension scheme with only one member, whose documents relate only to that member. See Indexation and Escalation. A pension scheme where the sole long term investment medium used by the trustees is an insurance policy (other than a managed fund policy). The system of designing scheme benefits to take into account all or part of the benefits payable by the state under the social welfare arrangements. Known in public sector schemes as co-ordination. A form of trust deed used to establish a pension scheme by stating its provisions in broad terms and promising to make the definitive deed and the rules at a later date. Known as IDR, this is a requirement that a complaint or dispute must be subjected to a resolution process within the pension scheme or PRSA in which it arises, before it can be submitted to the Pensions Ombudsman. The process by which contributions and net income of a scheme are used to increase the value of pension fund assets by means of cash deposits, the purchase and sale of equities, bonds, property and other assets as authorized by the trust deed and by law. The person or body to which the investment and management of all or part of the scheme assets is delegated by the trustees, subject to the provisions of the trust documents.

Income Continuance Plan Indexation

Indirect Discrimination

Individual Arrangement Inflation Proofing Insured Scheme

Integration

Interim Trust Deed

Internal Disputes Resolution

Investment

Investment Manager

90

Understanding Pensions

Investment Performance Measurement

Comparison of the rate of return on an investment portfolio and/or its constituent parts with one or more of: (1) the notional return of a model fund; (2) actual rates of return on other funds; (3) movement in market indices, over a period or a range of periods. A Trust which cannot be revoked or taken back by the employer who establishes it. Such trusts are required by the Revenue Commissioners in order to give tax free build up to the assets of the pension scheme.The trust has the effect of separating scheme assets from the assets of the employer, but tax free build up wont be given if there is a possibility that the employer could take back the assets. The retirement of a member with immediate payment of benefits, after normal pension date. See Exchange of Letters. The obligations of a scheme to pay amounts of money either immediately or in the future. Liabilities whose payment is dependent on unpredictable future events (such as the death of a member) are calledcontingent liabilities. A scheme which provides only a benefit payable on the death of a member. An asset allocation strategy used mainly in defined contribution schemes, in which a members investments are adjusted depending on age and term to retirement.Typically, assets are invested in equities for younger members and systematically switched to bonds and cash as retirement approaches. A term used under the Pensions Act to describe the benefit payable at or after normal pension age, assuming that the member remains in relevant employment until then.The term includes personal benefits in lump sum or pension form and any benefit payable to surviving dependants on death after retirement. An investment contract under which an insurance company or other investment manager offers participation in one or more funds consisting of a collection of pooled assets. A defined benefit scheme in which the proportion of pensioners to active members is high, so that

Irrevocable Trust

Late Retirement Letters of Exchange Liabilities

Life Assurance Scheme Lifestyle Investments

Long Service Benefit

Managed Fund

Mature Scheme

Understanding Pensions

91

contributions may be less than the outflow of benefit payments. Maximum Approvable Benefit The maximum benefit which the Revenue Commissioners will permit to be paid under an approved scheme to an individual, taking account of factors such as remuneration and service completed. An earnings limit imposed by Government to determine eligibility for non-contributory pensions and other social assistance payments, and for certain dependants allowance payable with contributory benefits. A person who has been admitted to membership of a pension scheme and is entitled to benefits under the scheme.This will include active members, pensioners and deferred pensioners. For Family Law Act purposes, the spouse who is a member of the pension scheme in question. Trustees who are appointed by members or whose appointment by the employer has been approved by the qualified members in accordance with the regulations made under the Pensions Act. The earliest age at which pension scheme rules would allow a member to retire with an immediate pension, other than on grounds of ill health. Another name for a defined contribution scheme. An arrangement in a defined benefit scheme whereby a certain minimum benefit accrues on a defined contribution basis. Usually of benefit to early leavers. An absolute measure of the rate of return achieved on assets, which is affected by the timing of cash flows into and out of the fund. See also Time Weighted Return. An arrangement which links the insured benefit plans of a multinational company in different locations worldwide, to obtain cost savings, improved service, possibly better non-medical limits and better financial information. May be arranged with a single insurer or a group of participating insurers in different countries. A Board established by the Minister for Social Welfare in 1986 to advise the Minister on pension matters. Not to be confused with the Pensions Board.

Means test

Member

Member Spouse Member Trustees

Minimum Retirement Age

Money Purchase Scheme Money Purchase Underpin

Money Weighted Return

Multinational Pooling

National Pensions Board

92

Understanding Pensions

National Pensions Policy Initiative

NPPI (known as Nippy), this initiative was sponsored by the Department of Social, Community and Family Affairs and the Pensions Board, in the light of an ESRI report on pension coverage in 1997.The introduction of PRSAs was one outcome of the Boards 1998 report, Securing Retirement Income. A term now practically in disuse to refer to the code of practice relating to the approval of pension schemes by the Revenue Commissioners under the 1972 Finance Act. The naming by a member of a person or persons to whom he/she wishes any death benefit to be paid.This will usually not be binding on the trustees. Also called a wishes letter. A pension scheme whose rules do not require any contribution from active members i.e., the employer is liable for all contributions needed to support the scheme. In the context of a pensions adjustment order given under the Family Law Acts, the spouse who is not a member of the scheme in which an order is being sought. Employment in which an individual has no right to benefits from an occupational pension scheme other than lump sums and dependants benefits payable on death in service. A PRSA that is approved by the Pensions Board but does not meet the investment criteria imposed on standard PRSAs. Its charges are not capped. The age by reference to which the normal retirement date is determined. See also Normal Pensionable Age. The date at which a member of a pension scheme normally becomes entitled to receive retirement benefits.This date is the benchmark which determines early retirement and late retirement. This term has a specific meaning in the Pensions Act. It is the later of (a) age 60 and (b) the earliest date at which a member is entitled under the rules of the scheme to receive immediate retirement benefits on leaving service, other than in circumstances where consent is required or where the benefits are subject to an actuarial reduction in excess of 3% per annum.

New Code

Nomination

Non-Contributory Scheme

Non-member spouse

Non-pensionable Employment

Non-Standard PRSA

Normal Pension Age / Normal Retirement Age Normal Pension Date / Normal Retirement Date

Normal Pensionable Age

Understanding Pensions

93

Occupational Pension Scheme

This is formally defined in the Pensions Act as a scheme which is approved under the 1972 Finance Act, or the 1967 Income Tax Act, or whose approval has been applied for to the Revenue Commissioners.The term Occupational Pension Scheme is generally used to distinguish job related pension schemes from state Social Welfare schemes. A buyout bond is not an occupational pension scheme under the Pensions Act. Neither is a PRSA, even if the employer contributes to it. An amount of salary which is disregarded under the rules of a scheme, to take account of a Social Welfare pension. Can also be applied to a deduction from the members pension to take account of a Social Welfare pension. See Integration. A derivative financial instrument under which payment of a sum of money gives the right, but not the obligation, to buy or sell something at an agreed price on or before a specified date. An arrangement under which a dependants pension comes into immediate payment on the death of a pensioner, while a minimum guaranteed period of payment of the main pension is still running. The application of statutory requirements to pension schemes by means of provisions which expressly override the scheme rules. All the provisions of the Pensions Act and its Regulations are overriding legislation. A benefit secured for an individual member under a contract of insurance whose premiums have ceased to be payable in respect of that member. One form of deferred benefit. See Paid Up Benefit. A scheme where no further contributions are being paid, but whose assets continue to be held by the trustees and applied under its rules. An employer whose employees have a right to be members of a scheme. Used where schemes cater for more than one employer. A style of portfolio management that links the investments to a particular index or indices, so that their value tracks changes in that index or those indices.

Offset

Option

Overlap

Overriding Legislation

Paid Up Benefit

Paid Up Pension Paid Up Scheme

Participating employer

Passive Investment Management

94

Understanding Pensions

Past Service

Service before a given date frequently used to indicate service before the members entry into the pension scheme. A benefit granted in respect of past service. A term describing the present value of all benefits accrued to the date of the calculation, by reference to projected earnings. Strictly speaking, this is the assets of a pension scheme but the term is very often used for the scheme itself. An arrangement, other than accident insurance, to provide pension and/or other benefits for members on leaving service or retirement and for the members dependants in the event of death. In the Family Law Acts, the term is given a very broad definition, so that it includes, not only occupational pension schemes as defined in the Pensions Act, but also retirement annuities, buyout policies, PRSAs and unfunded schemes. Another term for pension scheme. The earnings on which benefits and/or contributions are calculated. The period of service which is taken into account in calculating a pension benefit. An individual with pensions experience approved by Revenue to act as trustee of a small self-administered scheme. Cannot be outvoted by other trustees on matters concerning the winding-up of the scheme. A member who is currently receiving payment of a pension from a pension scheme. An Act of 1990 for the regulation of pension schemes, which provides for preservation of benefits, a funding standard in the case of defined benefit schemes, disclosure of information, equal treatment of men and women, the duties and responsibilities of trustees and a Pensions Board to supervise the operation of the Act. In the United Kingdom jurisdiction, the term refers to an Act of 1995 which contains many provisions similar, but not identical, to those of the Pensions Act 1990. An order made to the trustees of a pension scheme by a Court in the course of a judicial separation or divorce action, or at any time after the making of a 95

Past Service Benefit Past service Reserve

Pension Fund

Pension Scheme

Pension Plan Pensionable Earnings / Pensionable Salary Pensionable Service Pensioneer Trustee

Pensioner Pensions Act

Pensions Adjustment Order

Understanding Pensions

separation order or divorce decree, whereby the trustees must pay part of a member spouses benefit, called a designated benefit, to the non-member spouse. Pensions (Amendment ) Act, 1996 Pensions (Amendment) Act, 2002 Pensions Board An Act which introduced extensive amendments to the Pensions Act 1990, extended the powers of the Pensions Board and introduced whistle blowing. An Act which extended the Pensions Act, increased preservation rights, introduced PRSAs and established the office of the Pensions Ombudsman. The statutory body set up under the Pensions Act to monitor and supervise the operation of the Pensions Act and pension developments generally, and to approve, jointly with the Revenue Commissioners, PRSA products submitted to it. An officer appointed under the Pensions Act, to investigate and determine complaints or disputes involving occupational pension schemes and PRSAs, to award financial redress where appropriate, and to decide disputes of fact or law. One of the terms for prolonged disability insurance. A rule of trust law setting a maximum period within which the benefits in a trust must vest absolutely. Designed to prevent perpetual trusts. Removed as a condition for pension scheme trusts by the Pensions (Amendment) Act 1996. An alternative method of individual pension provision available in the United Kingdom, but not in Ireland.The term is often used in Ireland to describe a retirement annuity contract. A single-premium insurance contract incorporating Revenue requirements as they apply to pension schemes, purchased to buy out a members preserved benefit, either on leaving service or subsequently, or (most commonly) when a scheme is wound up. PRBs are also used to transfer from a pension scheme the benefit allocated to a non-member spouse by a pensions adjustment order. Familiarly known as a PRSA, this is a vehicle designed to be used for long-term retirement provision. It is a contract between an individual and a PRSA provider in the form of an account that holds units in investment

Pensions Ombudsman

Permanent Health Insurance Perpetuities, Rule Against

Personal Pension Scheme

Personal Retirement Bond (PRB)

Personal Retirement Savings Account

* Now Part 30, Chapter 1, Taxes Consolidation Act, 1997

96

Understanding Pensions

funds managed by approved PRSA providers.The PRSA contributor is the owner of the PRSA assets unlike an occupational pension scheme, where a trustee holds the assets on behalf of the member. See Section 12. Pooled Fund A fund in which several investors hold units, whose assets are not held directly for each client, but as part of a pool. Unit Trusts and managed funds are pooled funds. Guidance Notes issued by the Revenue Commissioners describing their practice in approving pension scheme under the discretionary powers conferred by the Finance Act 1972, and the tax consequences of approval. A poll held under the member trustee regulations to determine whether members wish to appoint member trustees by means of the standard arrangement or accept an alternative arrangement offered by the employer. Describes the obligation which trustees have under the Pensions Act to retain benefits for scheme members who leave the employment and who satisfy certain conditions. This term is often used to describe any benefit emerging on termination of employment or of membership of a pension scheme, which is payable at a later date. Under the Pensions Act it has the specific meaning of that part of the benefits which must be preserved as a result of the operation of the Act. Commonly used in scheme documentation for the particular participating employer which is given special powers or duties in areas such as the appointment of trustees, rule amendments and winding up. Usually the employer that started the scheme or, in a scheme catering for many unrelated employers, one chosen as a proxy for all. Liabilities which are given precedence by the scheme rules in a winding up. Scheme rules are, however, overridden by the statutory priorities in Part IV of the Pensions Act. A description often applied to a self-administered scheme.

Practice Notes*

Preliminary Poll

Preservation

Preserved Benefits

Principal Employer

Priority Liabilities

Privately Invested Scheme

* Part 30, Chapter 3, Taxes Consolidation Act, 1997

Understanding Pensions

97

Prolonged Disability Insurance

An insurance contract taken out by an employer and/or by an employee, designed to pay an income in the event of an employee becoming disabled long term. Benefits under these policies are usually paid after a minimum period of absence from work through illness or injury. A person who, within 3 years of retirement, death or leaving service, held more than 5% of the voting shares in the employer or its parent company. Shares held by a spouse and minor children are counted, as are share held by a trust to which the director concerned had transferred shares. Proprietary Directors qualify to invest in ARFs on retirement. An employee in employment to which a scheme applies who will join or be entitled to join the scheme if he/she remains in the employment and there is no change either to his/her contract of employment or to the rules of the scheme. Personal Retirement Savings Account. See Section 12. See Actuary. A PRSA designed to be used for additional voluntary contributions by members of occupational pension schemes. A statutory scheme to which S. 776 of the Taxes Consolidation Act, 1997, applies or a scheme where benefits are paid for in whole or in part from Central funds or moneys voted by the Oireachtas, and which provide for an appeal to a Minister for the resolution of disputes prior to referral to the Pensions Ombudsman. An occupational pension scheme for employees of central or Local Government, statutory and other semistate bodies. Many of these schemes are not funded. An annuity purchased privately by an individual is different from the type of annuity purchased by pension scheme trustees, which are often described as compulsory annuities. A Purchased Life Annuity is purchased from personal assets rather than from the proceeds of a pension scheme.Therefore, the legislation* provides that part of the instalment payments of a purchased life annuity are exempt from income tax, being treated as a return of those personal assets.

Proprietary Director

Prospective Member

PRSA PRSA Actuary PRSA AVC

Public Authority Pension Scheme

Public Sector Pension Scheme Purchased Life Annuity

98

Understanding Pensions

Qualified Member

In relation to the member trustee selection process, an active member or a pensioner (but not a deferred pensioner or a dependant or other beneficiary receiving payments from the scheme.) Qualified Members may vote in a preliminary poll or an election. A financial institution authorized under the 1999 Finance Act to operate Approved Retirement Funds (ARFs) on behalf of the self-employed and proprietary directors. Includes: banks, building societies, credit unions, the Post Office Savings Bank, bodies authorized for collective investments such as unit trusts, UCITs, etc., and members of the Irish or any EU Stock Exchange who have notified the Revenue Commissioners of their intention to act as QFMs. A term defined in the Pensions Act as the service to be taken into account to entitle a pension scheme member to preserved benefits on leaving service. Currently it is two years reckonable service, including any period represented by a transfer value paid in from another pension scheme. The percentage change in the value of an investment over a period, taking into account the income from it and the change in its market value often expressed as an equivalent annual rate. See Time weighted, Money weighted and Real returns. The difference between the rate of return and a selected measure of inflation (often taken as CPI) over a period. The whole period of a members service (whether fulltime or part-time) in relevant employment while a member of the scheme, but excluding service when the member was covered for death benefit only, or when the member has been notified by the trustees that a period of service does not entitle him to a retirement benefit. Service added or credited to the member, but not actually served, does not count.This term does not necessarily include all of pensionable service, which can take into account service completed before the member joins the scheme.

Qualifying Fund Manager (QFM)

Qualifying Service

Rate of Return

Real Rate of Return

Reckonable Service

* Now Part 30, Chapter 2,Taxes Consolidation Act, 1997

Understanding Pensions

99

Recommended Contribution Rate Relevant Employment Relevant Percentage

The contribution rate recommended by the actuary as being necessary to support the benefit promises made under a defined benefit scheme. Employment to which a scheme applies. The proportion of the member spouses retirement benefits earned during the relevant period, as the court orders to be paid to a dependent spouse or children under a pensions adjustment order. [Family Law] The period to be taken into account, as specified by the court, during which the member spouses retirement benefits were earned, for the purpose of calculating the designated benefit. [Family Law] 1. In relation to any scheme, for the purposes of the rules on whistle blowing, relevant persons are the trustees, actuary, auditor, administrator, insurer, investment manager and anyone employed by such persons. Legal advisers are excluded. 2. For the purposes of the Pensions Ombudsman regulations, the relevant person in relation to a scheme is the trustee/s of the scheme; or the Minister, in a Public Authority Scheme; and, in relation to a PRSA, the PRSA Provider.

Relevant Period

Relevant Person

Reporting, Compulsory

The Pensions Act requires that certain relevant persons providing services to a scheme should report to the Pensions Board any material misappropriation or fraudulent conversion of the assets of a scheme.There are penalties for failure to report as required.This process is also known as whistle blowing. The facility open to anyone to report to the Pensions Board on any matter concerning the state and conduct of a scheme. Anyone who does so in good faith is protected by the Pensions Act against legal action for defamation. A term used by the Revenue Commissioners to denote retirement or death benefits in respect of the earlier service of an employee with a former employer or an earlier period of self-employment.These may have to be taken into account in computing maximum approvable benefits. (See Section 5).

Reporting, Voluntary

Retained Benefits

* Part 30, Chapters 1-3,Taxes Consolidation Act, 1997 ibid, Chapter 1

100

Understanding Pensions

Retirement Annuity

A contract effected with an insurance company under Sections 235 / 235A of the Income Tax Act 1967*. Applicable to the self-employed and to persons in nonpensionable employment. Sometimes called a personal pension. (See Section 9). The branch of the Revenue Commissioners which supervises the benefit and contribution structure of pension schemes granted approval under the 1972 Finance Act.* This has now been renamed and is part of the Large Cases division of the Commissioners (see Appendix II). The application to preserved benefits of compulsory increases in their value prior to the date of payment. Revaluation applies only to defined benefit schemes under the Pensions Act.This term is often used also to describe any similar non-compulsory increases. The organisation charged by Government with the collection of tax revenue and which, through the Retirement Benefits District, monitors the operation of pension schemes which are granted tax approval. Limits which must be included in the rules of a scheme submitted to the Revenue Commissioners for approval under Chapter II Part 1 Finance Act, 1972. These specify the maximum approvable benefits and contributions for members. The current version of the Practice Notes. See Practice Notes. Any threat to the accumulation of benefits or the solvency of a pension fund. Can often arise from the variability of investment returns. Investments with a greater degree of risk built in must offer higher returns to attract investors. Benefits payable in the event of death or disability, which are not pre-funded.These risks are often insured. The extra yield of an investment over the risk-free rate, demanded by investors to compensate them for taking the higher risk. The detailed provisions of a pension scheme, usually set out in a formal way and given authority by the trust deed.They normally accompany the definitive deed. See Forgoing.

Retirement Benefits District

Revaluation

Revenue Commissioners

Revenue Limits

Revenue Pensions Manual Revenue Practice Risk

Risk Benefits Risk Premium

Rules

Salary Sacrifice

Understanding Pensions

101

Scheme Year

A period selected by the trustees of a scheme for purposes of the annual report and accounts. It may be any year beginning on (a) a date specified in the scheme documents; (b) 1 January; (c) such other date as may be agreed between the trustees and the Pensions Board. It can be more than a year in certain circumstances, but can never exceed 23 months. An instruction given to the trustees of a scheme by the Pensions Board, pursuant to Section 50 of the Pensions Act, to reduce the promised benefits under the scheme so that the funding standard can be met. Scheme assets invested by an external investment manager, independently of other funds under its control. Often used to indicate an individual portfolio of stocks and shares in contrast to a pooled fund. A pension scheme where the assets are invested, (other than wholly by payment of insurance premiums by the trustees), through an in-house manager or an external investment manager.The term is not used to indicate the method by which benefits and contributions are administered, but is now almost exclusively used to refer to the way in which the investments are managed. The investment of a schemes assets in the business of the employer or that of an associated company, or loans made to such bodies out of the pension schemes assets. Regulated under both disclosure and minimum funding standards provisions of the Pensions Act. In the context of the Pensions Act, a defined benefits scheme with fewer than 50 active members. See Section 8. Investment strategies or restrictions that take account of the social, environmental or other impacts that a companys activities can have on individuals and on the environment. Any employer or employee contribution not regarded by Revenue as an ordinary annual contribution. See Principal Employer. One of the available methods of choosing member trustees under the Pensions Act regulations. It involves

Section 50 Order

Segregated Fund

Self-Administered Scheme

Self-Investment

Small Scheme Small Self-Administered Scheme Socially Responsible Investment

Special Contribution Sponsoring Employer Standard Arrangement

102

Understanding Pensions

an election under the proportional representation system. See also Alternative Arrangement. Standard PRSA A PRSA approved as a Standard PRSA by the Pensions Board, which means that it complies with certain investment requirements and that the charges it makes to contributors are capped at levels prescribed by law. See Section 12. The age from which pensions are normally payable by the Social Welfare Scheme, currently 65 (Retirement Pension) or 66 (Old Age Pension) for both men and women. A process by which stock is released to a third party for a fixed or an open period, in return for collateral and a fee for doing so. Normally a short-term transaction. The continuous process of selecting which stocks are to be included in a portfolio. Benefit scales of 1/60 and 3/80 of final remuneration per year of service for pension and cash respectively. Can usually be provided under Revenue rules without reference to retained benefits. A facility offered by an insurance company that insures the death benefits under a scheme, whereby a member leaving the scheme can effect a life policy without evidence of health.Whereas a continuation option would allow the member to continue the type of insurance used in the scheme, the substitution option requires him to take out a different type of policy (say, endowment or whole-of-life, instead of term assurance). Such options are now becoming less common. A term used in the Public Service and also frequently in British Commonwealth countries to describe an occupational pension scheme. A scheme to provide benefits over and above the benefits given under another scheme. Also called a topup scheme or top hat scheme. In the UK, may often refer to an unapproved scheme. In a defined benefit scheme, any excess of the value of a schemes assets over its liabilities as calculated by the actuary to the scheme. Sometimes referred to as an actuarial surplus.

State Pension Age

Stock Lending

Stock selection Strict 60ths/80ths

Substitution Option

Superannuation Scheme

Supplementary Scheme

Surplus

Understanding Pensions

103

Surrender Value

In an insurance contract, the available value of the benefits being funded, when the contract is terminated before its projected maturity date. A form of defined contribution scheme which aims for, but does not guarantee, a particular level of benefit. Commonly, contributions paid to such schemes are reviewed at regular intervals and adjusted to take account of factors such as pay increases and investment returns in the period between reviews. An annuity payable for a fixed term or until earlier death. Also called a Term Annuity A policy which provides a lump sum on death before a fixed future date. Such policies are frequently used for the provision of lump sum benefits payable on death in service. A relative measure of the rate of return earned by assets, independent of the timing of cash flows in and out of the fund. See Money Weighted Return. A scheme designed to provide benefits in excess of those provided by an employers main pension scheme. Membership of such schemes is usually confined to senior executives or directors. See Supplementary Scheme. A payment made from one pension scheme to another, or to an insurance company to purchase a buy-out policy, in lieu of the benefits which have accrued to the member under the scheme. In this form, it specifically refers to transfers made under the preservation requirements of the Pensions Act. Other payments from one scheme to another are usually called transfer values. See Transfer Payment. A pension which is so small that it can be subject to full commutation without prejudicing the approval of the scheme by the Revenue Commissioners.The present triviality limit is 330 per annum (but see paragraph 16 of Section 5). A legal concept under which property is held by one or more persons (the trustees) for the benefit of other persons (the beneficiaries) for the purposes specified by the person setting up the trust.The trustees may be beneficiaries.

Target Benefit Scheme

Temporary annuity Term Assurance Policy

Time Weighted Return

Top Hat Scheme

Top-up Scheme Transfer Payment

Transfer Value Trivial Pension

Trust

104

Understanding Pensions

Trust Deed

A legal document, executed in the form of a Deed, which establishes, regulates or amends a trust. See Definitive Trust Deed. Law which consists of principles of equity which have evolved over the centuries in cases decided in the courts and supplemented in later years by a number of statutory provisions, the first important one of these being the Trustee Act, 1893. An individual or a company which, alone or jointly, becomes the legal owner of property to be administered for the benefit of someone else (the beneficiaries), in accordance with provisions of the document creating the trust and the provisions of trust law generally and, in the case of pension scheme trusts, the Pensions Act. Certain schemes, mainly in the public sector, are not set up under trust. In these cases, the Pensions Act includes the administrators of the schemes in its definition of Trustees. A proprietary director who, with other specified connected persons, owns or controls more than 20% of the voting shares of the employer or its parent.The benefits that can be provided to 20% directors are somewhat restricted by the Revenue Commissioners. An occupational pension scheme not designed to be approved by the Revenue Commissioners. Such schemes are not controlled by the Pensions Act. A scheme under which advance financial provision for the payment of benefits is not normally made. Instead the cost of pensions is met from the employers current income in the same way as the salaries and wages of employees.The term may also be used to describe a scheme where funds are set aside to provide for benefit payments only at the time of a persons retirement. A principle applied to calculate a members accrued benefits, in cases where the potential service of the member differs from the period required to earn maximum benefits under the scheme rules.Thus, if the scheme benefit was 30/45ths of salary and the member could serve 35 years, he/she would be deemed to have earned 1/35th of the maximum benefit in each year of service.This principle underlies preservation of benefits under the Pensions Act. Arrangements whereby the contributions paid by the investor purchase units, the price of which fluctuates 105

Trust Law

Trustee

Twenty per cent Director

Unapproved Scheme

Unfunded Scheme

Uniform Accrual

Unit Linked Investment

Understanding Pensions

according to the value of the underlying investment portfolio. See also Pooled Funds. Uplifted 60ths/ 80ths Scales set out in Revenue Practice Notes expressed as more than 1/60th or 3/80th of final remuneration per year of service, for pension and cash respectively. See Strict 60ths/80ths. The trigger which starts the process of selecting member trustees under the Pensions Act Regulations. A term commonly used by actuaries to mean the method used by them to value the assets and liabilities of the scheme and the actuarial assumptions which they use in this valuation. Funds put up by investors to finance new or growing businesses. This has different meanings for different people: For active members, benefits to which they would unconditionally be entitled on leaving service, which may or may not include statutory rights to preserved benefits; For deferred pensioners who have already left the employment, their deferred/ preserved benefits; For pensioners, the pension which they are receiving; including, where appropriate, the related benefits for spouses and other beneficiaries. Volatility Whistle Blowing The frequency and magnitude of price changes of assets. A term for voluntary or compulsory reporting to the Pensions Board as provided under Sections 83 and 84 of the Pensions Act. See entries under Reporting. See Nomination. The process of terminating a pension scheme, usually by applying the assets to the purchase of immediate and deferred annuities or buyout bonds; by transferring annuities already purchased to the ownership of the payees; or by transferring the assets and liabilities to another pension scheme in accordance with scheme documentation. A scheme is not wound up until no further assets remain under the control of its trustees. Tax deducted from overseas investment income. May be reclaimable. An insurance policy under which a share of surpluses disclosed by actuarial valuations of the insurance

Valid Request Valuation Basis

Venture Capital Vested Rights

Wishes Letter Winding Up

Withholding Tax With Profits Policy

106

Understanding Pensions

companys life and pensions business is payable as an addition to guaranteed benefits or as a reduction in future premiums.

Understanding Pensions

107

A GLOSSARY OF PENSION SCHEME TERMINOLOGY

SECTION B: PUBLIC SECTOR SCHEMES
Terms are defined in this section either because they are not in general use in private sector occupational schemes, or because the use of the terminology differs substantially between the private and public sectors. Abatement 1. A system under which the gratuity payable on retirement or death is reduced by an amount calculated by reference to the period during which a person has not contributed to a spouses and childrens pension scheme. Abatement is made even in respect of service before the introduction of such schemes, when it would not have been possible to contribute to them. In practice, abatement at retirement age is treated as a special contribution and relieved from tax. The term abatement is also used to describe a reduction in the pension of a public servant who becomes re-employed in the public service after his/her pension has commenced he/she cannot receive more than the equivalent of a full-time salary from both sources combined.

2.

Added Years

This term has a number of different contexts in the public sector: (i) It is sometimes used to indicate augmentation of benefits. In general in the public sector, enhancement of benefits without cost to the individual member is discouraged but there are limited powers to do it. Such augmentation is usually effected by adding a number of notional years of service to the individuals entitlement. (ii) In the case of early retirement due to ill-health, and sometimes on redundancy, enhancement of an individuals actual service credit by the addition of notional years of service is provided for by regulations. (iii) In cases of members whose service to pension age will be short, facilities exist whereby members can purchase additional benefits for themselves, either by lump sum purchase, or by regular annual contributions from salary.Whichever way this is done, such enhancement of benefit is also calculated by the addition of notional years of service.

108

Understanding Pensions

(iv) Professional Added Years see Professional Service below. Co-ordination A term used in the public sector to indicate that the benefits payable under the Social Welfare system are taken into account in the occupational pension scheme. See Integration in the general Glossary. Coordination is generally required as a matter of policy where Social Welfare retirement benefits are payable. However, the calculation of the gratuity payable on retirement or death is not normally affected by coordination. A tax free lump sum payment, payable at pension age or on death, which may be subject to abatement. See also short service gratuity and marriage gratuity. See Transfer Options. A gratuity formerly paid to a woman who was obliged to leave service as a result of marriage. Now generally in disuse. Pensionable remuneration, less twice the annual rate of the maximum Contributory Old Age Pension payable under the Social welfare system to a person with no dependants, calculated on the last day of service. See Co-ordination Years and days of pensionable service added to what is actually completed, for the purpose of calculating pension entitlements. Usually used to describe the service added in the case of professional/technical/ specialist grades. See also Added Years. In the context of Transfer Networks, the agreed date on which transfer of service between any two participants is automatic. Generally, the later of the dates on which either of two bodies joined the relevant network. See Pre-Operative Date Service. A term used to describe the system of increasing pensions in payment and deferred pensions in line with the pay for the post held by the scheme member before retirement or leaving service, as appropriate. Often abbreviated to PAYG, this is the method of financing pension promises out of the current income of the employer, there being no advance funding of the pension liabilities. It is used for Social Welfare schemes and for many (though not all) public sector occupational schemes. See Unfunded Scheme.

Gratuity

Knock for Knock Marriage Gratuity

Net Pensionable Pay

Notional Service

Operative Date

Pay Parity

Pay-as-you-go

Understanding Pensions

109

Pensionable Remuneration

The sum of pensionable salary and other emoluments (averaged over three years) that are deemed to be pensionable; less, in the case of those appointed on or after 6th April 1995, appropriate deductions in respect of Social welfare entitlements (see Co-ordination and Net pensionable pay). Generally, the annualised salary of a public servant on his/her last day of service. Special calculations apply to job sharers, and averaging over 3 years applies in the case of promotion or special pay increases within 3 years of retirement. All service reckonable under the local Government (Superannuation Act) 1956, the Superannuation & Pensions Act 1963 and any amendment or re-enactment of these can be included in pensionable service. pensionable service does not have to be continuous. See Reckonable Service.

Pensionable Salary

Pensionable Service

Pre-Operative Date Service In the context of transfer networks, service whose transfer is not automatic, as the member left the service of one participating body before the operative date applying to transfers between the two participating organizations. Professional Service A form of added years awarded in cases where a job specification requires a professional qualification.This service is added to actual service in order to compute eventual pension entitlement and is designed to recognise the time taken to gain the relevant professional qualification. A statutory scheme or a scheme where benefits are paid for in whole or in part from Central funds or moneys voted by the Oireachtas, and which provide for an appeal to a Minister for the resolution of disputes.

Public Authority Pension Scheme

Purchase of Notional Service See Added Years. Reckonable Service This is the sum of: service actually completed with the employer, service transferred from other bodies, added years (on death, ill-health, reorganization or abolition of office, professional service and purchased service). Part-time and job-sharing service is included, but most unpaid leave is not. Service is reckoned in years and days. These govern almost every scheme in the public sector and are usually introduced by the Minister in the sponsoring Department and require the consent of the

Regulations

110

Understanding Pensions

Minister for Finance.They are broadly similar throughout the public sector. Entitlement to benefits under the schemes flows from the regulations. If these permit the setting up of funded arrangements, the funding must be done under an exempt approved scheme established in the same way as any private sector scheme and subject to the normal approval requirements of the 1972 Finance Act. Short Service Gratuity A gratuity paid to a person on leaving service, where the length of pensionable service is insufficient to qualify the individual for a preserved benefit. A scheme usually separate from the main superannuation scheme in a public sector body, designed to supplement the superannuation scheme and to provide only pensions payable to spouses and children of deceased members.The pensions are payable on death before, or after, retirement. Such schemes are almost always contributory.When these schemes were first introduced, entry was voluntary but became compulsory for subsequent entrants to service. A scheme whose operation is governed either by an Act of the Oireachtas or by Regulations made under a Statutory Instrument in pursuance of such an Act. A term often used in the Public Service to describe an occupational pension scheme. Also frequently used in British Commonwealth countries. There are two networks in the public service under which the pensionable service given in participating bodies can be transferred in full to any other participating body.The two networks involved are the Public Service Transfer Network (1979) and the Local Government (Transfer of Service) Scheme 1984. Bodies wishing to be designated for the purpose of transfer under both networks must apply separately to the appropriate bodies the Departments of Finance and Environment & Local Government respectively. Transfer Options Participating bodies have available to them a number of methods of dealing with transfers.They are all subject to the agreement of the old and new employers in each case.They are described in Section 7. See general Glossary for Occupational Pension Schemes. This principle is used to convert service transferred between schemes with different accrual rates under the transfer networks. 111

Spouses and Childrens Pension Scheme

Statutory Scheme

Superannuation Scheme

Transfer Network

Uniform Accrual

Understanding Pensions

Up-Rating

This is the practice of increasing the value of a benefit or contribution so that it keeps pace with any changes made in the pensionable pay appropriate to the job which the person holds or held at a particular time. Uprating can apply to deferred benefits, refunds of contributions which become repayable on re-entry to service and to marriage gratuities which are repaid on reinstatement to membership of the scheme.

112

Understanding Pensions

APPENDIX I ABBREVIATIONS FOUND IN CONNECTION WITH PENSION SCHEMES

A
ACII: ADR[P]: AFC: AIIPM: ALIA: AMRF: APLI: APMI: ARF: AVC: Associate of the Chartered Insurance Institute Alternative Disputes Resolution [Procedure] Actuarial funding certificate Associate of the Irish Institute of Pensions Management Associate of the Life Insurance Association Approved Minimum Retirement Fund Association of Pension Lawyers in Ireland Associate of the Pensions Management Institute Approved Retirement Fund Additional Voluntary Contribution Benefit in Kind British and Irish Ombudsman Association Capital Acquisitions Tax Certified Diploma in Pensions Construction Federation Operatives Pension Scheme Compulsory Purchase Annuity Consumer Price Index Combined Performance Measurement Service Defined Benefit Defined Contribution Death in Retirement Death in Service Department of Social and Family Affairs European Federation for Retirement Provision Early Retirement Pension Finance Act Fellow of the Chartered Insurance Institute Fellow of the Faculty of Actuaries Fellow of the Institute of Actuaries Fellow of the Irish institute of Pensions Management Fellow of the Life Insurance Association Fellow of the Pensions Management Institute Final pensionable salary Financial reporting Standard [Accounting] Financial Services Authority [UK}

B
BIK: BIOA:

C
CAT: C Dip Pen: CFOPS: CPA: CPI: CPMS:

D
DB: DC: DIR: DIS: DSFA:

E
EFRP: ERP:

F
FA: FCII: FFA: FIA: FIIPM: FLIA: FPMI: FPS: FRS: FSA:

Understanding Pensions

113

G
GN: Guidance Note International Accounting Standard Irish Association of Investment Managers Irish Association of Pension Funds Irish BrokersAssociation Income Continuance Plan Internal Disputes Resolution [Procedure] Irish Financial Services Regulatory authority Irish Institute of Pensions Managers Legal Personal Representative Member of the Pensions Management Institute (not a professional qualification) Market Value Adjustment Normal Pension Age* Normal Pension Date# National Pensions Policy Initiative Normal Retirement Age* Normal Retirement Date# ( #* interchangeable) [Occupational] Pensions Advisory Service [UK] Occupational Pensions Regulatory authority [UK] occupational pension scheme Pensions Adjustment Order Permanent Health Insurance Professional Indemnity [insurance] Purchased Life Annuity Pensions Law Reports Pensions Management Institute Personal Pension Plan Personal Public Service Number Personal Retirement Bond Personal Retirement Savings Account Pay-Related Social Insurance Paid up Pension (= deferred pension)

I
IAS: IAIM: IAPF: IBA: ICP: IDR[P]: IFSRA: IIPM: L LPR:

M
MPMI (Ordinary) MVA:

N
NPA: NPD: NPPI: NRA: NRD:

O
OPAS: OPRA: OPS:

P
PAO: PHI: PI: PLA: PLR: PMI: PPP: PPS No.: PRB: PRSA: PRSI: PUP:

* Regulator Representative Body

114

Understanding Pensions

Q QFA: QFM:

Qualified Financial Adviser Qualifying Fund Manager (in connection with ARFs) Retirement Annuity Contract Restricted Activity Investment Product Intermediary Retirement Benefits District [Revenue] Refund of Contributions Retirement Planning Council [of Ireland] Retail Prices Index (UK) Statutory Instrument Statement of Recommended Practice [Accounting] Spouses Pension Death in Service Spouses Pension, Death in Service Statement of Standard Accounting Practice Small Self-Administered Scheme Statement of Total Recognised Gains and Losses [Accounting] Taxes Consolidation Act Term (or Temporary) Life Assurance Transfer Value With Profits Widow(er)s Pension Death In Service Widow(er)e Pension, Death In Service

R
RAC: RAIPI: RBD: ROC: RPC: RPI:

S
SI: SORP: SPDIR SPDIS: SSAP: SSAS: STRGL:

T
TCA: TLA: TV:

W
WP: WPDIR: WPDIS: XYZ

Representative body Professional / Educational body

Understanding Pensions

115

APPENDIX II WHERE TO GO FOR HELP

Some useful Addresses The Pensions Board* Verschoyle House, 28/30 Lower Mount Street, Dublin 2. Tel: (01) 613 1900 Fax: (01) 631 8602 Locall: 1890 65-65-65 Website: www.pensionsboard.ie e-mail: info@pensionsboard.ie Irish Association of Pension Funds Suite 2, Slane House, 25 Lower Mount St., Dublin 2. Tel: (01) 661 2427 Fax: (01) 662 1196 Website: www.iapf.ie e-mail: info@iapf.ie Pensions Ombudsman 36 Upper Mount St, Dublin 2. Tel: (01) 647 1650 Fax: (01) 676 9577 Website: www.pensionsombudsman.ie e-mail: info@pensionsombudsman.ie Insurance Ombudsman of Ireland 32 Upper Merrion St., Dublin 2. Tel: (01) 662 0899 Fax: (01) 662 0890 Website: www.ombudsman-insurance.ie e-mail: enquiries@ombudsman-insurance.ie

Representative Body * Regulator Formerly called Retirement Benefits District

116

Understanding Pensions

Irish Brokers Association 87 Merrion Square, Dublin 2. Tel: (01) 661 3067 / 3061 Fax: (01) 661 9955 Website: www.irishbrokers.com e-mail: info@irishbrokers.com Irish Insurance Federation Insurance House, 39 Molesworth St., Dublin 2. Tel: (01) 676 1820 Fax: (01) 676 1943 Website: www.iif.ie e-mail: fed@iif.ie Insurance Institute of Ireland Insurance House, 39 Molesworth St., Dublin 2. Tel: (01) 667 2582 /2753 /2844 Fax: (01) 667 2621 Website: www.insurance-institute.ie e-mail: iii@iol.ie Irish Association of Investment Managers 35 Fitzwilliam Square Dublin 2. Tel: (01) 676 1919 Fax: (01) 676 1954 Life Insurance Association Ireland 183 Kimmage Road West, Dublin 12. Tel: (01) 456 3890 Fax: (01) 455 4530 Website: www.lia.ie e-mail: details@lia.ie Irish Institute of Pensions Managers Insurance House, 39 Molesworth St., Dublin 2. Tel: (01) 662 0320 Fax: (01) 677 2621 Website: www.pensions-pmi.org.uk/iipm/index.htm e-mail: iipm@insurance-institute.ie

Understanding Pensions

117

Retirement Planning Council of Ireland 27/29 Lower Pembroke St, Dublin 2. Tel: (01) 661 3139 Fax: (01) 661 1368 Website: www.rpci.ie e-mail: rpci@clubi.ie Association of Pension Lawyers in Ireland 27/29 Lower Pembroke St, Dublin 2. Tel: (01) 661 3139 Fax: (01) 661 1368 Irish Financial Services Regulatory Authority* PO Box No 9138 College Green, Dublin 2. Tel: (01) 410 4000 Fax: (01) 410 4900 Website: www.ifsra.ie e-mail: info@ifsra.ie Consumer Information: Lo-call: 1890 777 777 e-mail: consumerinfo@ifsra.ie Revenue Commissioners Large Cases Division Financial Services / Pensions, Shelbourne House, Shelbourne Road, Dublin 4. Tel: (01) 631 8920 Fax: (01) 631 8927 e-mail: retirebens@revenue.ie

118

Understanding Pensions

Office of the Director of Consumer Affairs 4-5 Harcourt Road, Dublin 2. Tel: (01) 402 5500 Fax: (01) 402 5501 Website: www.odca.ie e-mail: odca@entemp.ie Consumer Complaints and Enquiries: LoCall 1890-220229; (01) 402 5555 Also at: Norwich Union House, 89-90 South Mall, Cork. Tel: (021) 427 4099 Fax: (021) 427 4109 ODEI The Equality Tribunal 3 Clonmel St., Dublin 2. Tel: (01) 477 4100 LoCall: 1890 344 424 Fax: (01) 477 4141 Website: www.odei.ie e-mail: info@odei.ie Comhairle Hume house, Ballsbridge, Dublin 4 Tel: (01) 605 9000 Fax: (01) 605 9099 Website: www.comhairle.ie e-mail: comhairle@comhairle.ie Oasis database: www.oasis.gov.ie Citizens Information database; www.cidb.ie Consumers Association of Ireland 44 Chelmsford Road, Dublin 6. Tel: (01) 497 8600 Fax: (01) 497 8601 Website; www.consumerassociation.ie e-mail; cai@consumerassociation.ie

Understanding Pensions

119

Dept of Social & Family Affairs Headquarters: Aras Mhic Dhiarmada, Store St., Dublin 1. Tel: (01) 874 8444 Fax: (01) 704 3868 Website: www.welfare.ie e-mail: info@welfare.ie Pensions Services Office: College Road, Sligo. Tel: (071) 69800; (01) 874 8444 Fax: (071) 69926; (01) 704 3417

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Understanding Pensions

APPENDIX III ABOUT THE RETIREMENT PLANNING COUNCIL OF IRELAND (RPC)

The RPC is a body with charitable status and is supported by almost 300 private and semi-state bodies. It was established in 1974 to help individuals become aware of the changes that will take place in the period of retirement after work, and of the necessary adjustments that must be made.This is now much more important as more employees retire earlier and can expect to spend longer in retirement than those who preceded them. The RPC have provided Planning for Retirement courses since it was established and have continued to review them and update them to the changing environment of the past thirty years. Financial planning is usually top of peoples list but it is only one of the four main areas of change that will occur for most people. Equally important are the changes that occur in relationships, health and time. As well as the Planning for Retirement course, the RPC also offers a Mid-Career course aimed at 30-50 year olds who require guidance in planning for, and dealing with, the social and operational changes taking place in the workplace. A similar mid-career course is available exclusively for women. The special needs of Executives are catered for in tailor-made Executive courses. The RPC is unique in that life-long support is available to those who complete a course at no charge.

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APPENDIX IV ABOUT THE IRISH ASSOCIATION OF PENSION FUNDS

Established in 1973, the Irish Association of Pension Funds (IAPF) is a non-profit, noncommercial organisation. IAPF members provide pension cover for over 200,000 employees, pay pensions to nearly 70,000 people who have already retired and are responsible for some 44bln in retirement savings.The IAPF represents members interests at all levels by active lobbying of National Government, the Pensions Board, the Revenue Commissioners and other relevant state agencies. For its members, the IAPF seeks to influence the future direction of pensions in Ireland and to provide for financial security of all retired people. More and more companies are recognising the value of being a member of IAPF.The IAPF is the voice of Irish Pensions and represents your views at all relevant pension fora. IAPF aims to ensure that the environment continues to allow pensions to flourish, reducing red tape in order to provide financial security for scheme members on retirement. Whether you are a trustee, company executive, pension manager, accountant, administrator or service provider, membership of the IAPF will give you impartial guidance and expertise on issues facing you. Representation Influencial voice with Government Depts Pensions Board Revenue Media EU Information Irish Pensions Magazine Emails with latest news Website Policy Documents Press Releases Statements Speeches Events Annual Benefit Conference Annual Investment Conference Numerous Evening Seminars Annual Dinner Annual Lunch Cork Trustee Forum

Contact us at: Suite 2, Slane House, 25 Lower Mount Street, Dublin 2 Phone: + 353 1 661 2427 Email: info@iapf.ie Website: www.iapf.ie

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Understanding Pensions

APPENDIX V MAIN PROVISIONS OF THE PENSIONS ACT, 1990, AS AMENDED

The Pensions Act, 1990 was amended by Social Welfare Acts in 1991, 1992, 1993 (twice), 1997-2000 and 2004, by Pensions (Amendment) Acts of 1996 and 2002 and by the Social Welfare (Miscellaneous Provisions ) Acts of 2003 and 2004. Each Part of the Act is supplemented by Regulations, which are made by Statutory Instruments (Ministerial Orders).These have been made every year since 1990 and there are about 60 of these instruments in force at the time of publication of this book. It should be noted that the Act applies to occupational pension schemes and PRSAs. It does not extend to Retirement Annuity Contracts or personal pensions for the selfemployed and those in non-pensionable employment, nor does it govern the treatment of buyout bonds or policies or Approved [Minimum] Retirement Funds.The Act overrides the rules and trusts of schemes to the extent that these are in conflict with it. The main provisions of the Act are: PART I: Preliminary and General

This Part is concerned with interpretation of the Act and defines certain terms used in it, establishes offences under the Act and provides the framework for the making of Regulations. It empowers the Pensions Board to exchange information with the Revenue Commissioners and with supervisory authorities. PART II: Establishment of the Pensions Board

This Part establishes the Board, covers its composition and its powers, staffing, reporting requirements and registration of, and the payment of fees by, occupational pension schemes to fund the operation of the Board. PART III: Preservation of Benefits and Minimum Value of Contributory retirement benefits

This Part governs the preservation of benefits on the termination of relevant employment and the revaluation of preserved benefits in Defined Benefit schemes, provides for the transferability of benefits between pension schemes, and defines the minimum value to be given for contributory retirement benefits. It allows the Minister to exempt certain (public sector) schemes from its provisions. PART IV: Funding Standard

This Part lays down the funding standard for Defined Benefit schemes and provides for mandatory supervision by an actuary. It allows the restriction of self-investment and concentration of investment, governs the qualifications of scheme actuaries and provides for the production of periodic Actuarial Funding Certificates. Many public sector schemes are also exempt from the provisions of this Part.

Understanding Pensions

123

PART V:

Disclosure of Information

Provides for disclosure of information to members, other beneficiaries and trades unions, requires the mandatory production of valuation reports and audited accounts and the Annual Reports of scheme trustees. It also confers obligations on employers to remit contributions to the scheme. Disclosure of Information regulations made under this Part also extend to situations of legal separation and divorce under the Family Law Acts. PART VI: Trustees of Schemes

This Part covers trustee duties and obligations, including the duty to register the scheme with the Pensions Board; provides the framework for member trustees, and governs the suspension and the removal and replacement of trustees. PART VII: Equal Treatment

Originally, this covered only sex discrimination; but it also covered all Occupational Benefit Schemes not just pension schemes. It was extended in 2004 to cover other grounds of discrimination including religious belief, race, age, disability, membership of the travelling community, nationality or ethnic origin, sexual orientation, marital status or family status. PART VIII: Compulsory and Voluntary Reporting This provides for mandatory reporting to the Board by defined categories of relevant persons, if they have reason to believe that a material misappropriation or fraudulent conversion of the funds of a scheme has occurred, is occurring or may be about to occur. It also provides for voluntary whistle blowing.This Part was added by the Pensions (Amendment) Act, 1996 PART IX: Miscellaneous Applications to the High Court

This provides for the High Court, on the application to it of the Board, to order the restoration of the funds of a scheme, the payment of arrears of contributions and the disposal of assets and the granting of certain injunctions on the application of the Board.This Part was added by the Pensions (Amendment) Act, 1996 PART X: Personal Retirement Savings Accounts

Part X provides the framework for Personal Retirement Savings Accounts (PRSAs), their approval, marketing and sale, mandatory disclosures, supervision and administration.This Part was added by the Pensions (Amendment) Act, 2002 PART XI: Pensions Ombudsman

Part XI established the Office of the Pensions Ombudsman, its powers and procedures for the resolution of disputes and the granting of financial redress for maladministration of pension schemes and PRSAs.This Part was added by the Pensions (Amendment) Act, 2002

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Understanding Pensions

APPENDIX VI PUBLICATIONS OF THE PENSIONS BOARD

BOOKLETS
These booklets are available free of charge from the Pensions Board, or can be accessed on the website: www.pensionsboard.ie What happens to my Pension if I leave? [a guide to your rights on leaving service] Personal Retirement Savings Accounts (PRSAs) A Consumer Guide What are my Pension Options? Personal Retirement Savings Accounts (PRSAs) Employers Obligations Information for Trustees [The Euro] Information for Pensioners [The Euro] Information for Members in Employment [The Euro] Pensions Checklist What Happens When Your Pension Scheme is Wound Up or a Merger/Acquisition Takes Place? The Euro and Your Pension Scheme What Do You Know About Your Pension Scheme? [A guide to the disclosure of information requirements and your rights to information about your scheme] The Pensions Board [Constitution of the Board, its mission and what it does] So Youre a Pension Scheme Trustee? [A guide for pension scheme trustees] Is My Pension Secure? [The protections offered by the Pensions Act] Selecting member trustees [Guide to the processes by which Members have a say in the selection of scheme trustees] Securing Retirement Income National Pensions Policy Initiative A Guide to Your Schemes Annual Report A Brief Guide to the Pension Provisions of the Family Law Acts [Divorce and Judicial Separation] A Brief Guide to Annuities A Brief Guide to Integration [interaction of occupational pensions with Social Welfare pensions] A Brief Guide to Pensions [Booklet giving an overview of occupational pensions] Women & Pensions, a guide on pensions provision for women new edition, 2004

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OTHER PUBLICATIONS OF THE BOARD

The Legislation Service The Board provides a Legislation Service, designed for pension practitioners, which is available by subscription. Subscribers to this service receive a consolidated text of Pensions Act, 1990 (the Act) and the Regulations, including all amendments made to date.The text of the legislation is made available in looseleaf format in two binders one containing the text of the Act, the other, the Regulations which facilitates regular updating. Guidance Notes A series of technical guidance notes on the Pensions Act and its Regulations, designed mainly for pension practitioners, has been prepared by the Board.This is also available on subscription. Notes on the requirements in relation to Disclosure of Information, Member Participation in the Selection of Trustees, Equal Treatment, Preservation of Benefits, Compulsory and Voluntary Reporting to the Pensions Board, Pension Provisions of the Family Law Act, 1995 and Family Law (Divorce) Act, 1996, Determinations by the Pensions Board and Appointment and Removal of Trustees by the Pensions Board are now available. Bulletins and Updates The Board publishes periodic bulletins giving news of current topical issues. News Updates appear from time to time on the website: www.pensionsboard.ie Publications for trustees Trustee Handbook A Trustee Handbook incorporating codes of practice for trustees has been prepared by the Board. It contains comprehensive guidance for trustees on all aspects of their responsibilities for compliance with the Pensions Act, 1990 and on good practice in relation to scheme administration. The Handbook is available in loose leaf format by subscription and subscribers will receive updates where these are required as a result of legislative or other changes. Sets of Codes of Practice are available separately if required, at a lower cost. On-Line Pension Calculator The Board publishes on its website an on-line pension calculator designed to allow you to estimate how much you should be contributing on an annual basis in correspondence with your age and current annual salary.

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ension schemes are complicated. Thats the reaction of most people. In 1994, for the first time in Ireland, a book was published to give the answers to the questions commonly asked by the ordinary pension scheme member. That book turned out to be a best-seller, selling out its original print run. In response to popular demand, the book has been revised and updated in a new edition. New material has been added, to take account of the Family Law Acts, dealing with pensions on separation and divorce. Account has been taken of the effects of the Pensions (Amendment) Acts,1996-2002 and a new section deals with pensions for the self-employed and those in non-pensionable employment, including Approved Retirement Funds and Personal Retirement Savings Accounts. This book is simple, well laid out and informative. Although it was written for pension scheme members, it has proved to be an indispensable tool for those involved in the pensions industry itself, trustees, administrators and consultants, insurance companies, investment managers and everyone concerned with personnel matters. The author, who became Irelands first pensions Ombudsman in 2003, has been working in pensions for over 35 years. A founder Fellow of the Irish Institute of Pensions Managers and a Fellow of the Pensions Management Institute, he has written and lectured extensively on pensions and related topics.

At last, a practical guide...

Leinster Leader

A good model for those seeking to enhance communication about pensions

International Benefits Information Service, Chicago

Sponsored by

Department of Social and Family Affairs

Copyright

Retirement Planning Council of Ireland

Irish Association of Pension Funds