A significant minority of Irish pension schemes have vesting periods longer than the legal minimum of two years, according to an EU-sponsored study on pension portability published in March 2008. The study concludes that about a quarter of Irish employers permitted employees who were leaving the company to transfer employer pension contributions only after two years had elapsed.
About the study
In March 2008, the results of the EU-funded study ‘Quantitative overview on supplementary pension provision’ (974Kb PDF) were published. The study was carried out on behalf of the European Commission by Hewitt Associates – a company which provides human resources outsourcing and consulting services. In the context of the proposed EU Directive on improving the portability of supplementary pension rights (2005/0214 (COD)), the study was undertaken in nine EU countries, including Ireland.
As a basis for the study, results were used from a specific survey on supplementary pension practices involving major organisations in Europe. In all, about 1,700 organisations throughout the nine countries – Belgium, France, Germany, Ireland, Italy, the Netherlands, Poland, Spain and the UK – were directly invited to participate in the survey. In total, about 200 Irish-based, mainly large private sector organisations, were approached to take part in the study. Of these, 35 organisations responded, covering 52 pension schemes.
Proposed directive on pension portability
If enacted, the proposed EU directive on pension portability will make more flexible the conditions of acquisition of pension rights, such as different qualifying periods before which workers acquire rights. The directive would also provide for increased flexibility in relation to the conditions of preservation of dormant pension rights – such as pension rights losing value over time – and the transferability of acquired rights.
Study findings
Vesting periods
Under Ireland’s Pensions (Amendment) Act 2002 (311Kb PDF), vesting periods – the period after which employers permit employees who are leaving the company to transfer employer pension contributions – cannot be longer than two years. This raises the possibility that if employers try to enforce longer vesting periods in their pension scheme rules, they could be subject to legal action by the affected members.
On average, about a quarter of the Irish pension schemes examined as part of the EU-sponsored study only allowed employees leaving a company to take employer contributions with them after more than two years. This proportion was highest in defined contribution (DC) schemes (33%), followed by hybrid or mixed schemes (25%) and defined benefit (DB) schemes (17%). A DB pension scheme gives members a guaranteed pension based on their service and their salary. In contrast, a DC scheme is typically one in which both the employer and the employee make regular payments (premiums) to a retirement fund for the employee. However, the value of DC schemes depends on the performance of financial markets. A hybrid scheme represents a combination of DC and DB schemes.
Preserved benefits
According to the study, a key factor in making pensions portable is the way in which ‘preserved benefits’ dating from previous employment, in respect of which no new contributions are made, are valued when it comes to the date of retirement. For DC schemes, which are based on investment returns, 73% of schemes, as expected, used the measure of investment returns to value preserved benefits. Among other schemes, the single most common method of revaluation is by applying the inflation rate, used by 43% of DB schemes and 25% of hybrid schemes. Almost a quarter of DB schemes adjusted preserved benefits in line with pay rises, which is more common in the public sector, and 10% of such schemes used a fixed rate of revaluation, defined in the pension scheme rules.
Transferability of pension rights
In terms of transferring accumulated pension rights from previous periods of employment into a new employer’s pension scheme, most pension schemes allowed for this at all times – 64% of DB schemes and 76% of DC schemes. However, 5% of DB schemes did not allow the transfer of accumulated pension rights and as many as 27% of DB schemes and 24% of DC schemes only allowed transfers into the schemes at the discretion of the employer or trustee.
Transfers out were allowed by 68% of DB schemes and 80% of DC schemes at all times, with the remainder of schemes allowing transfers out at the discretion of employers or trustees. A worker has a statutory right to transfer pension schemes for up to two years after leaving a job. However, in practice, most schemes are willing to pay transfers at any time up to the statutory retirement age.
Waiting periods
The study found that, in Ireland, waiting periods between commencing employment and joining the employer’s pension scheme were generally relatively short. Up to 74% of DB schemes and 52% of DC schemes had no waiting period. Overall, 48% of DC schemes had waiting periods of less than six months, with just 22% of DB schemes having these short waiting periods.
Eligibility for joining pension schemes
The study revealed that many pension schemes had reduced eligibility requirements in the last three years – 33% of DB schemes and 17% of DC schemes. This could be due to greater awareness of age discrimination legislation under the Employment Equality Acts 1998 and 2004. For DC schemes, up to 17% had changed the waiting period, and 13% the vesting period, mostly in favour of employees.
No DC scheme had a specified minimum age for new entrants to join the scheme, which was also the case for almost half of the DB and hybrid schemes. Half of the hybrid schemes had set a minimum age for joining of 20–21 years, while the minimum ages for the DB schemes ranged from under 20 to 25 years of age.
Communication with pension scheme members
The most commonly used methods of communication with members of DB schemes are paper-based booklets and benefit statements. These forms of communication are also used to a great extent under DC schemes. Moreover, the latter are the highest users of emails and seminars out of the three types of schemes. The usual methods of communication for members with preserved benefits, who are not available in the workplace, include paper-based benefit statements, as well as telephone helplines and emails.
Tony Dobbins, IRN Publishing