Aer Lingus 2011 Annual Report Download - page 15

Annual Report 2011
OPERATING AND FINANCIAL REVIEW Aer Lingus Group Plc
Aer Lingus and the other sponsoring employers have no obligation to
contribute anything other than the fixed rate of contribution to the
IASS and in the absence of the assumption of additional voluntary
funding commitments, the trustees will be required to take measures to
improve the IASS financial position. If, as seems likely given the current
funding position of the IASS, such measures result in a reduction in
member benefits, it is likely that there will be an adverse effect on
employee relations. There is therefore a risk that the Group could
become involved in industrial disputes with its employees, which could
be significantly detrimental to the operations of the airline and its
financial performance. It is also possible that the Group’s position that
it has no responsibility for the deficit in the scheme could be subject to
legal challenge on various grounds from various potential claimants.
Any such challenge would be strenuously defended. Lengthy litigation
could ensue. If, contrary to the firm legal advice that the Group has
received (that such a challenge is unlikely to succeed), a Court were to
find against the Group in any such litigation, significant or very
significant losses could arise. No proceedings have been issued to date
and it is not therefore practicable to estimate the financial exposure, if
any, to the Group should such claims be made and succeed.
The funding shortfall in the IASS and the related potential reduction in
pension benefits for employees represent a significant employee
relations issue for Aer Lingus. For this reason, the Group is in
continuing discussions with parties involved in the IASS under the
auspices of the Labour Relations Commission (“LRC”). These parties
include trade unions representing Aer Lingus members of the IASS as
well as DAA and representatives of DAA staff.
The current LRC discussions have two principal components. Firstly,
the parties are exploring options to address the funding position of the
IASS. Options under consideration include the possible freezing of the
Scheme to reduce the risk that the deficit may increase further in the
future as well as possible changes to the IASS investment strategy.
These changes may include the purchase by the IASS of sovereign
annuities or similar products to improve the expected return earned by
the IASS on its investments and so reduce the deficit. These measures
seek to preserve a higher level of pension benefit for IASS members
than would be the case if this scheme were wound up, which Aer
Lingus believes is inevitable in the absence of corrective action.
The funding of the IASS, including the potential freezing of the scheme
or changes to its investment policy remain matters for the IASS
Trustees alone. Any proposals which result from the current discussions
can only be implemented by, and with the consent of, the Trustees.
The second component of the current discussions is to explore options
for the provision of viable pension arrangements for future service.
These discussions are based on the assumption that all parties will
reach agreement that the IASS should be frozen so that no future
contributions would be made to the scheme. In such circumstances,
Aer Lingus and DAA will need to establish new pension arrangements
for future service. Aer Lingus believes that the best interests of all
parties will be served by creating separate pension schemes for DAA
and Aer Lingus employees for the future. The discussions are complex
and at an early stage. No agreements have yet been reached and
negotiations continue.
At 31 December 2011, the Pilots’ Scheme had 895 members,
comprising 431 active members, 118 deferred members and 346
pensioners. The most recent triennial actuarial valuation performed by
the trustee’s actuary showed an MFS deficit at 31 March 2009 of
¤217m. As part of the Greenfield agreements negotiated in late 2009
under the auspices of the LRC, Aer Lingus and the Irish Airlines Pilots
Association agreed to certain changes to the scheme with the aim of
addressing the deficit over time. The changes included an increase in
retirement age from 55 to 60, a reduction in accrual rate for future
service from 45ths to 60ths and an increase in member contributions
from 7% to 11% of salary. There was no change in employer
contributions which remain at 21% of salary. The changes were
approved by the Pilots’ Scheme trustees and became effective as from
1 January 2011.
The latest available information is that the Pilots’ Scheme was
estimated to have an MFS deficit of ¤170 million as at 31 October
2011. The Group’s position that it has no responsibility for the deficit
in the scheme could be subject to legal challenge on various grounds
from various potential claimants. Any such challenge would be
strenuously defended. Lengthy litigation could ensue. If, contrary to
the firm legal advice that the Group has received (that such a challenge
is unlikely to succeed), a Court were to find against the Group in any
such litigation, significant or very significant loss could arise. No
proceedings have been issued to date and it is not therefore
practicable to estimate the financial exposure, if any, to the Group
should such claims be made and succeed. The Group is not in formal
discussions with its pilots’ representatives about the deficit in the Pilots’
Scheme.
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