The following article was carried in the Industrial Relations New published on June 9th.

ESB trustee to seek legal advice on new pension proposals

COLMAN HIGGINS
Legal advice on the new ESB pension proposals is being sought by Joe LaCumbre, one of the scheme trustees and a former deputy chairman of the company.

At a meeting of retired ESB electricians last weekend, he said the proposals place too little of the burden of dealing with the pension scheme on the company, while placing too much of it on retired workers.

Mr LaCumbre, who is also a former worker director, said he recognised that the pension scheme was in a crisis that should be resolved. The scheme has a deficit of €1.6 billion and the ESB Group of Unions said last month that if it was wound up now, it could only meet 90% of its commitments to pensioners, leaving nothing for existing staff.

However, LaCumbre feels that the new proposals – which are due to be explained to staff at a roadshow starting next week – do not represent a fair way of distributing the burden of adjustment. “It sells out pensioners and serving staff”, he argues.

He also argues that by almost completely eliminating the current pension deficit, the proposals effectively remove the last major remaining obstacle to privatisation of the ESB, as the outstanding pension liabilities have up to now made the company unattractive to private sector buyers.

However, an ESB spokesperson said the proposals are “equitable and fair”, adding that a “full consultation process will take place over the summer”. It is understood that the consultation process was due to begin next week.

END OF PARITY LINK
A key element in the proposals is the removal of the long-standing parity link with the wages of current workers, to be replaced by a link to the consumer price index, up to a maximum of 4% per annum.

This parity link – based on that which also currently exists in the public service – is not set out in the regulations governing the scheme and, in strict legal terms, is at the discretion of the trustees.

However, it has been part of the industrial relations agreements at the ESB since 1981 and LaCumbre has cited an April 1986 employee handbook on pensions as saying that “adjustments in pensions are granted in accordance with the arrangements approved by the Government for public service pensions” and “pensions are adjusted in line with salaries of serving staff in the ESB”.

Retired members of the scheme, when added to a relatively small number of ‘deferred’ members (i.e. those who have left the company but have not yet reached retirement age), now slightly outnumber the ‘active’ workers still with the company.

However, retired and deferred members did not have a role in the recent talks between the ESB and its Group of Unions, as the only change proposed for them was a reduction in the indexation, which is not strictly a contractual condition.

It is argued by one union source that the ESB scheme is unlikely to pay out its discretionary pay increases to pensioners in the next few years, if the scheme remains in deficit.

It is also argued that up to now, actuaries measuring the solvency of the ESB pension scheme have tended to assume large future increases in pension benefit, to ensure that they are covered for pension increases that are linked to pay increases for existing workers.

Allowing the actuary to put a cap on increases to pensioners would have a relatively large effect on the pension deficit figure, because such cautious assumptions would no longer need to be made, because of the extra certainty on what pensions will cost in the future.

CAREER AVERAGING
The active members, by contrast, will see their future pension service calculated on a ‘career average’ basis from 2012 onwards, rather than on their final salary – albeit with a relatively generous indexation rate of inflation plus 1%.

This means that service up to 2012 will be calculated on the basis of the salary applicable at that date – indexed of course by the rate of inflation plus 1%. The pension accrued each year after that, until retirement, will be based on 1/80th of the salary in that particular year, subject to the same indexation factor.

Union sources argue that unless a worker receives significant promotions, the indexation rate agreed for the career averaging system means that unless annual pay increases outstrip inflation by more than 1% each year to retirement, the career average pension can provide similar benefits to a final salary scheme.

PENSIONER CONSULTATION
But LaCumbre argues that the change in indexation alone will save the pension scheme up to €0.9 million, which means that a significant part of the deficit will be borne by existing pensioners, in violation of an industrial relations agreement that was still in place at the time they retired or left the company (even if the new proposals are approved and become a valid industrial relations agreement for the current workforce).

The question of retired and deferred members of pension schemes having a say in any restructuring that may affect their benefits is an issue that may come up more and more in the coming months.

Up to the 2009 Social Welfare and Pensions Act, deferred and retired members of pension schemes could not have their benefits reduced as part of a pension restructuring, which meant that the burden of restructuring was borne entirely by existing workers (through higher contributions or reduced benefits) or the company (through higher employer contributions).

The 2009 change meant that deferred and retired members could now be asked to contribute. The Pensions Board guidelines state that if the application for approval of the restructuring of a defined benefit (DB) scheme is made under Section 50/50A, member consent is not necessary and the decision rests with the trustees.

But in practice, in a unionised company, an industrial relations agreement is generally regarded as necessary for a pension restructuring to succeed. This can be achieved through negotiations – like those just completed at the ESB.

However, there is not the same imperative to reach agreement with retired and deferred members, as they are no longer workers and cannot object to a restructuring through industrial relations procedures and actions. In the case of the deferred members, the pension scheme may not even have an up-to-date address for them, making consultation problematic.

The Pensions Board guidelines do state that information should be provided to all pension scheme members, giving at least one month for them to make “observations” on the proposed reduction.

They add that as part of the proposed application to the Pensions Board to approve of the restructuring, pension scheme trustees “must confirm to the Board that all members of the scheme have been issued with a communication at their last known address. The trustees should enclose a copy of this communication with their application.”

A spokesman for the ESB Retired Staff Association said it was examining the new proposals and it was expected to make a response in the coming weeks.

€591M COMPANY CONTRIBUTION
Another issue raised by Mr LaCumbre is the size of the company’s contribution towards alleviating the deficit. It is understood that this is €591 million, over one-third of the €1.6 billion.

But he points out that while the company/employee share of ‘pain’ in pension restructuring is not set down legally, the precedent has tended to be for two-thirds to be borne by the company and one-third by the staff. He argues that the new proposals effectively reverse this, to one-third by the company and two-thirds by the staff, with a large part of the staff burden being carried by retired members of the scheme.

Another issue in relation to the company contribution is the role of the final 2.5% increase under the second phase of the Transitional Agreement, which fell due at the company on May 1, 2009.

There had been speculation that this would be foregone in return for a substantial company contribution to the pension deficit. If the final text of the deal provides for this, it would mean a pay increase to the value of €10 million per annum being foregone. Over a decade or more, this would amount to a significant chunk of the €591 million company contribution now being made, assuming the deal goes through.