Defined Contribution Pension Holders To Pay For Shortfall In Defined Benefit Schemes
The minister for finance has announced in the recent budget a new 0.15% levy on pension assets. This will come into effect in 2014. The previous levy in 0.6% will not cease until the end of 2014 resulting in an overall levy charge of 0.75% on pension holders during 2014.
The previous levy was designed to raise funding for employment creation schemes and the new levy will continue to do this. It will also raise funds to provide a provision to fund defined benefit pension schemes of insolvent companies which are in deficit.
This is required as in April 2013 The European Court of Justice ruled that the Irish government must protect the pension rights of employees in cases where they are made redundant and there is insufficient cover within the defined benefit schemes of which the employees are members.
This ruling could leave the government with significant potential liabilities should companies with defined benefit schemes in deficit go under.
As it stands, the new levy of 0.15% will apply to pension asset values for 2014 and 2015. The Minister is yet to indicate if the levy will be extended beyond the end of 2015.
The levy will apply to the following pension products:
- Occupational pension schemes, trust retirement annuity contracts, small self administered pensions schemes and singles member schemes;
- Buy out bonds;
- Individual retirement annuity contracts including retirement annuity contracts for dependants;
- PRSA contracts.
The following pension products are excluded from the levy:
- A scheme where the trustees have passed a resolution to wind up the scheme, and the employer is insolvent for the purposes of the Protection of Employees (Employer’ Insolvency) Act 1984;
- Approved retirement funds;
- Individual retirement annuity contracts including retirement annuity contracts for dependants, where the lump sum has been paid;
- A trust retirement annuity contract in respect of which a lump sum has been paid to the individual entitled to an annuity under the trust retirement annuity contact;
- PRSA contacts, where the lump sum has been paid or made payable to the PRSA contributor;
- Annuity policies held by pensioners directly.
Summary
At a time when the state pension fund will be under strain and individuals should be prudently putting money aside to fund their own retirement rather than relying on a state pension, this will put further pressure on individuals pension funds. It is likely that the impact of the levy will offset any modest gains made by funds in a struggling investment market.