Family Law Association of Ireland Pensions & Family Law - Problems and Pitfalls

1. Family Law Association of IrelandPensions & Family Law - Problems and Pitfalls Paul Kenny Pensions Ombudsman

2. Pension Provisions of the Family Law Acts • designed to allow distribution of pension to “other spouse” • pensions last in line - other property first • all forms of pension included - occupational, AVCs, self-employed, buyout bonds, etc.

3. PAOs do not seem to be as common as value of assets implies • Are pensions traded off against other assets? • Do parties realise the real value of pensions?

4. If PAOs to be applied for… • PAOs will have to be applied for, • for each scheme, • and for each type of benefit • Therefore essential to be able to identify and understand what is there

5. Example of pension value • Public servant, salary €50,000 • When 40 years completed, pension 25K, gratuity 75k, Spouse 12.5k plus post retirement increases • Official value then (65), about €600k • Open market annuity cost more like €800k • At age 45, has “earned” about half of that – value at 65 about 300k. • Actuarial value declared is c. €113k discounted at 5%, €93k at 6%

6. That’s not the full picture…. • The transfer value is the present value if the asset is taken out of the scheme • If it’s left where it is, it benefits from future pay increases, promotion etc (though not future service) • Potential value may be enormous • (If he became Sec. Gen., 50% of half his pension is worth €1.24M)

7. Alternative Asset • Perhaps, a house? • Assuming no mortgage: • Value in 2007, €600,000 • Value today, €400,000 • Value at 65? • But house is immediately disposable asset, pension is not

8. Types of pension arrangement covered by the Act • Occupational Pension Scheme per Pensions Act 1990 • Retirement Annuity Contract (personal pension) • RAC under Trust • Approved Policy (“buyout bond”) • Any other scheme or arrangement • Designed to provide benefits • on retirement, leaving, cessation of employment • for widow/er, dependants or other persons, on death

9. Occupational Pension Scheme • Occupational Pension Schemes may be Statutory – set up by or pursuant to public statute, by Ministerial Order • If not statutory, must be constituted under irrevocable trusts

10. Retirement Annuity Contracts • Contract between member and provider (s.235, ITA 1967, s.784 TCA 1997) • Normally effected by self-employed • Open to anyone in non-pensionable employment • Personal property of member • Unless effected under trust • S. 235 (4) ITA 1967, s. 784(4) TCA 1997

11. Approved Policy (buyout bond) • Effected with a provider by trustees of Occupational Pension Scheme • On leaving service • Or as a result of winding-up • Or by transfer resulting from a PAO • Contract is direct liability of provider to Member

12. Any other arrangement…. • PRSA (personal Retirement Savings Account) • Very like RAC, but never under trust • Personal property of holder • Annuity, immediate or deferred • Unfunded promise Some things don’t look like pension schemes: e.g., Retained Fire Officers’ Gratuity scheme

13. Two types of Pension Scheme • DEFINED BENEFIT[DB] AND DEFINED CONTRIBUTION [DC] • defined benefit • makes a promise of benefits, usually expressed as fraction of final salary [also called "final salary" schemes] • cost not determined in advance • defined contribution • makes no benefit promise, only contribution • whatever that buys is the benefit • cost known and fixed

14. DB or DC • Occupational schemes may be DB, DC or both • RACs are always DC • PRSAs are always DC • Additional Voluntary Contributions (AVCs) may be DB (rare) or DC • and may be made to main scheme or to legally separate arrangement • Buyout bonds DC with rare exceptions

15. Arrangements not defined in the Act • “Target” benefit: always DC • “Hybrid” schemes –usually a combination of DB and DC - may have to be treated for PAO purposes as two different schemes • This may also happen in DB scheme with DC AVC arrangement under the same trusts NB: If any element of DB present, legally DB

16. Self-Administered Schemes • Self-administered so called to distinguish from traditional insured vehicles – means “directly invested” • “Small self-administered schemes” a special category • Pensioneer trustee • Now almost all one-member arrangements • They are the only schemes allowed to borrow • Watch net asset values, gearing/borrowing, liquidity

17. The Public Sector • Although Public Service benefit patterns are broadly similar, lots of differences of detail between schemes: e.g., Local Government, Civil Service, Semi-States , Health service (3 main schemes); Defence Forces, Judiciary, etc etc. • All have separate schemes for Spouses’ and Children's benefits • Separate (Union-sponsored) schemes for AVCs may also exist

18. In the Public Service…. • You may need up to six separate elements in a PAO • Main scheme: covers retirement pension for member and lump sum (gratuity at retirement or death): pension and retirement gratuity are retirement benefits • Death gratuity is contingent benefit

19. Public Service –cont’d • Spouses’/children’s scheme separate: • Death-in-Service pensions contingent; • Pensions separate for spouse/children • Children’s pensions double on spouse death • Non-marital children benefit • Death-in-Retirement benefit is retirement benefit • If separate AVC scheme exists, benefits are both retirement and contingent • Careful: Some older schemes may have non-standard rules

20. Information Required - General • Requirement to give particulars of property- including pension rights • General information on pensions: • Scheme name or other identification • Member name • Date first covered • Pensionable pay / calculation • AVCs details • Rights transferred into scheme

21. Information from the Trustees - DB • Calculation of each element of retirement benefit- as if leaving service • Method/s of calculation • Date/s payable • Provision for Increase? • Actuarial value • Solvency caveat

22. Information from the Trustees - DC • Accumulated value of fund • Date/s payable • Explanation of how fund translates to Retirement Benefit

23. Information from the Trustees – Contingent benefit • Calculation of amount of each element of DB • Assuming death of member spouse • Specify scheme rule or policy number • Method/s of calculation

24. Trustees • May make representations to the Court • Are entitled to expenses, costs incurred in complying with a PAO or a direction of the Court • Costs payable by parties • 50/50 if no Order • Trustee may apply to Court to recover costs from benefits

25. Order served on Trustees • To be served by Registrar or Clerk of the Court. • Member record must be tagged by trustees to show existence of PAO

26. The need to record... • PAOs can be affected by later events…. • death of the beneficiary • death of dependant or cessation of dependency • death of the member spouse • leaving service • early retirement - ill-health or normal health • transfer of benefits • Records must highlight that PAO exists, so that appropriate action is triggered

27. Disclosure requirements cover… • Regulation 17 and Schedule G of Disclosure Regulations SI 301 of 2006* • Request for Information on Designated Benefit • Receipt of a PAO • Defined Benefit Scheme • Defined Contribution Scheme (or section) • Retirement – early, normal, late • Death before/after: member, spouse, child dependant • Termination of relevant employment • Notification to the Court * Similar requirements for Trust RACs SI 182 of 2007

28. The Prudent Trustee • Does not accept PAO at face value • Tests for feasibility of implementation • Cost of review –can be expensive • Not paid from scheme funds • Queries to us on PAOs more common: 2003-07: 11 in total;2008: 12; 2009:16; 2010 to August: 14 • Most problems have yet to surface!!

29. Problems with PAOs • Sometimes drafted on back of envelope • No resemblance to what the Notice of Motion asked for • Specified percentage and period not clear • When an order is not an order… • “Sorted if he dies, before or after retirement” (but not if he lives to collect his pension) • Was the PAO actually served?

30. More problems… • Public Service “old” schemes – second spouse not covered if remarriage after retirement • Divorce Decree referred to pension - not a PAO; real PAO referred to S&C scheme – trustees confused • Order referred to Retirement Benefits – intention was only death-in-retirement – ex parte application, new PAO • Affidavit of Means - “Not in receipt of…”

31. And More • Non-member spouse may find it hard to get information • Insurer/broker/client relationships • Client (employer/trustee may be member spouse) • Irish member of UK scheme – PAO not enforceable under UK statutory regime • Transfer/clean break if scheme insolvent?

32. And finally…. • The Acts were not drafted by pensions people • Unforeseen consequences, e.g., death of non-member spouse • Public service issues

33. Office of the Pensions Ombudsman • 36 Upper Mount St, Dublin 2 • Phone 01 647 1653 • Fax 01 676 9577 • E-mail info@pensionsombudsman.ie • Web www.pensionsombudsman.ie