An occupational pension is a pension provided by your employer. They are also known as company or employers’ pension plans. Occupational pension schemes provide a regular income after retirement. Some also give you a lump sum payment when you retire.
There is no legal obligation on employers to provide occupational pension schemes for employees. In general, large employers in Ireland have occupational pension schemes, but many smaller employers do not.
If your employer does not have an occupational pension scheme, they must give you access to a type of pension plan called a Personal Retirement Savings Account (PRSA).
Each pension scheme has its own set of rules. Pension schemes are generally regulated by the Pensions Authority. Members of schemes have certain rights, for example, to information about their pension.
You can get tax relief on contributions to pension schemes.
Types of occupational pensions
Occupational pension schemes may be:
- Contributory or non-contributory
- Funded or unfunded
- Defined benefit, defined contribution or a hybrid of both
In contributory schemes, both you and your employer pay contributions towards the scheme.
In non-contributory schemes, you do not contribute but your employer does.
Most occupational schemes are funded – the contributions are put into a designated fund and the benefits are paid from that fund.
The most notable exception is the public service pension arrangement, where there is no fund and benefits are paid out of current government funds.
Defined benefit and defined contribution
In a defined contribution scheme, the pension contributions you make are set and the benefits you get depend on the amount of the contributions you make.
In a defined benefit scheme, the benefit you are entitled to is set in advance. It could, for example, be linked to your length of service.
Occupational pension schemes can offer aspects of both defined benefit and defined contribution schemes. These are known as hybrid schemes. This means that you can predict a certain amount of income, as in a defined benefit scheme, and the remainder may vary as it will be subject to defined contribution rules.
Defined contribution scheme
A defined contribution scheme is where the contribution is fixed by agreement but the benefits are based on the value of the fund built up from the contributions. The value of the fund may change over time. This means that you do not know the amount of pension you will get.
Both you and your employer pay regular contributions, normally a fixed percentage of your salary. This money creates a pension fund, which is normally invested to ensure that its real value is not reduced by inflation.
Your pension fund at retirement may be worth less than the total value of your contributions, because:
- Investment performance may fall as well as rise
- Management fees are paid to the person or company managing the pension fund
Defined benefit schemes
A defined benefit scheme is where the benefit entitlement you get when you retire is defined by reference to your earnings, your length of service, an index, or a fixed amount. This means that you know in advance that your pension will be, for example, half of your final salary if you have 40 years’ service or that it will be a certain amount each week. In defined benefit schemes, the contributions may have to be varied from time to time to make sure that the fund can meet the level of benefits. Some schemes allow the employer to top up the fund if necessary.
Rules on wind-up of defined benefit schemes
When a defined benefit pension scheme is being wound up, its assets are distributed in a specific order of priority. If the scheme is fully funded then all liabilities are met, which means you will get the pension you expected from the scheme. If the pension scheme is underfunded or insolvent, then people with a lower order of priority do not get what they expected from the scheme.
These rules differ depending on whether or not the employer is solvent.
Single insolvency order – if the employer is solvent
This order applies where the defined benefit scheme is insolvent but the employer is solvent. The first priority to be paid is additional voluntary contributions and defined contribution benefits.
The second priority is the pensions payable to current pensioners but there are now limits on the amounts to which priority is attached as follows:
- The first €12,000 annually of pension
- 90% of pensions between €12,000 and €60,000 with a minimum of €12,000
- 80% of pensions over €60,000 with a minimum of €54,000
The next priority is 50% of the pensions of future pensioners. After that, the priority is:
- The remaining pension of current pensioners
- Remaining pensions of future pensioners
- Any other remaining benefits
This means that existing pensioners could have their current pensions reduced. Pensions under €12,000 may not be reduced. The maximum reduction is 10% of pensions under €60,000 (but they cannot be reduced to less than €12,000) and 20% of pensions over €60,000.
Double insolvency order – if the employer is insolvent
The priority in the winding up of a defined benefit pension scheme where the employer is insolvent is as follows:
- Additional Voluntary Contributions (AVCs) and defined contribution benefits
- 50% of current pensioner and future pensioner benefits
- Pensioner benefits up to €12,000 a year
- Remaining benefits for current pensioners
- Remaining benefits for future pensioners
Where the scheme does not have enough funds to pay 50% of pensioner and future pensioner benefits and pensioner benefits up to €12,000 a year, the Minister for Finance must provide the necessary funding.
Occupational pensions and social welfare pensions
However, it is common for occupational pensions to take into account the level of social welfare pension received in calculating the level of benefit. For example, some schemes provide for a benefit, which, together with the social welfare pension, will give you a half or two-thirds of your final salary. This may be done when you start to receive your pension but your occupational pension may not be subsequently reduced because your social welfare pension is increased. These schemes are sometimes called integrated or co-ordinated schemes.
You may prefer not to join an occupational pension scheme, or you may not have the option to do so (for example, if you are self-employed or your employer does not offer such a scheme). In these cases, you can save for retirement by choosing a different type of pension plan. These are normally known as personal pension plans or private pension plans and are managed by a life assurance or investment company.
The two main types of personal pension plan are Personal Retirement Savings Account (PRSA) and Retirement Annuity Contract (RAC).
If your employer offers a PRSA rather than an occupational pension, they must deduct contributions from your salary and send these payments to the PRSA provider. The employer may also contribute to the PRSA but does not have to do so.
You can be a member of an occupational pension scheme and also arrange a personal pension. However, it may not be possible to claim tax benefits for both. You cannot contribute to an occupational pension scheme and a personal pension arrangement at the same time for the same employment. However, you can make a personal pension arrangement for earnings from another employment or from self-employment.
Your rights as a pension scheme member
The Pensions Authority is the regulatory body for occupational pensions. Occupational pension schemes must register with the Authority.
The Financial Services and Pensions Ombudsman is the body responsible for dealing with complaints against pension providers and regulated financial service providers. For more information, see making a complaint about your pension.
The Pensions Authority publishes information leaflets on the pension laws. It provides information to members of pension schemes about your rights under the legislation. If you have a complaint, the Authority will advise you about your rights.
If necessary, the Authority has extensive powers to inspect the scheme's books and records, to enter premises and to require people to give explanations. It may apply to the High Court to have pension scheme trustees replaced in order to protect the interests of the members.
Some of the most important rights you have as a member of a pension scheme are the right to information and the right to be involved in the scheme.
The right to information
The trustees of the scheme must provide information to members, prospective members, their spouses, people entitled or prospectively entitled to benefits under the scheme and to representatives of trade unions.
You are entitled to get information about the scheme, about how it is administered, what rights you have and what obligations you have. The trustees must tell you if more than 5% of the scheme's assets are invested in the employer's business or in any one investment.
The trustees issue a report each year on the running of the pension scheme, including the main issues affecting the scheme and information about the scheme’s membership and investment performance.
Active and deferred members must get a pension benefit statement each year. Deferred members are members who have left an employment but kept an entitlement to pension benefits in the future. The pension benefit statement includes:
- The pension benefits you have built up.
- The amount of pension contributions paid by you and your employer over the last 12 months.
- Your estimated pension benefits at retirement age. For defined contribution schemes, this will include estimates for 2 situations: one best estimate and one for unfavourable circumstances.
For defined contribution schemes, the pension benefit statement also includes the costs deducted by the scheme over the last 12 months.
For defined benefit schemes, the statement also includes information on the funding level of the scheme.
The right to be involved in the scheme
In certain cases, you are entitled to be involved in the selection of trustees. This is the case if your scheme has 50 or more qualified members or 12 or more qualified members of a directly invested scheme. A qualified member is a member of the scheme currently in employment or a pensioner, but does not include a member who is covered only for death in service or a non-member (for example, a dependant) who is receiving benefits from the scheme.
Members can elect half the total number of trustees (excluding the chairperson), subject to a minimum of two.
Pension scheme rules
Pension schemes can set their own rules about contributions and benefits. However, there are some rules set out in legislation which they must follow.
Preservation and transfer of benefits
There are specific rules about what happens if you leave the pension scheme, for example, if you change jobs or you become self-employed or retire early without a pension. Your benefits from the pension scheme may be preserved within the scheme or transferred to another scheme. If you have at least 2 year's service, you are entitled to a preserved benefit if you leave before the normal retirement age. A preserved benefit means that you get a pension when you reach the scheme's normal retirement age.
You can also ask the trustees to transfer your pension rights to a new pension scheme.
Find out more about the preservation and transfer of benefits.
The trustees must meet the minimum standards of funding for funded occupational schemes.
Providing for dependants
Pension schemes usually have benefits for you when you retire and for your widowed spouse and dependent children after your death. Not all schemes have arrangements for dependants.
The maximum benefit that can be provided for a spouse or dependent is now 100% of the pension.
Some schemes may allow you to designate the person who should benefit under the scheme so it is possible, in some cases, to nominate a person other than a spouse.
Information about your own scheme is available from the trustees of the scheme. Information on pensions and your rights is available from the Pensions Authority.