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PRINCIPAL RISKS AND UNCERTAINTIES Aer Lingus Group Plc
ANNUAL REPORT 2012
25
Pensions
IASS
The great majority of Aer Lingus staff (other than pilots)
are members of the Irish Airlines Superannuation
Scheme (“IASS”). This pension scheme is unusual for a
number of reasons.
Firstly, it is a multi-employer scheme, with the principal
other employers being the Dublin Airport Authority
(“DAA”) and Shannon Airport Authority (“SAA”).
Secondly, the contribution rate is fixed and cannot
be changed without the agreement of employer
and employee. For this reason, from the employer’s
perspective, it is a defined contribution scheme.
However, under the trust deed and rules, the pension
scheme targets benefits linked to final salary and length
of service. The funding rate and investment performance
is inadequate to support these target benefits and, as
a result, a substantial deficit has arisen in the scheme.
On 31 December 2012, this deficit was estimated to be
some €779 million on the minimum funding standard
basis. Mathematically, approximately 65% of the
schemes liabilities are associated with current or former
members of Aer Lingus staff.
Aer Lingus strongly believes that the current funding
position of the IASS is unsustainable and that it must
now be addressed by the IASS trustees. The deficit in the
scheme is so significant that, had the IASS been wound
up on 31 December 2012, current employees and
former employees who are not yet in receipt of a pension
(deferred members) would have received approximately
5% of their expected IASS pension benefits.
IASS
Aer Lingus is attempting to assist in the achievement of a fair
outcome that will improve the pension prospects of affected
IASS members in a way that will balance the interests of all
parties, including shareholders and is seeking to achieve this
in a manner that reflects its firm view that it has no legal
obligation for the deficit in the scheme.
The key elements of the Aer Lingus proposal are as follows:
Firstly, the IASS would be closed to new members and benefit
accrual for members would cease. The IASS investment
policy would be changed by the trustees to reduce risk by
investing in fixed income products whose cashflows broadly
match the IASS obligations. This approach would result in
higher pensions than on a wind-up of the IASS, but is at the
sole discretion of the IASS trustees. Aer Lingus would make
no financial contribution to the IASS (beyond its regular
contributions), which in any event would be discontinued
when the IASS closes to future accrual.
Secondly, Aer Lingus would establish new defined
contribution arrangements on competitive terms in respect
of the future service of its own employees. Subject to the
uptake of Aer Lingus employees, the overall increase in
employment costs attributable to the new DC Scheme is not
expected to be significant.
Thirdly, Aer Lingus is prepared to put in place arrangements
to improve the future pensions of affected IASS members
provided the balance between costs and benefits is in the
interests of all parties, including shareholders. In particular,
Aer Lingus is seeking employment cost stability over the
coming years. If put in place, any such arrangements are
likely to include a once off initial contribution by Aer Lingus
to any new DC funds of those affected IASS members, and
such contributions would favour those closer to retirement,
or on lower incomes. However, the extent to which Aer
Lingus would be prepared to make a contribution would
be linked to the strength of the commitment of staff to
stabilising employment costs.
In combination, these three elements have the potential to
provide fair and sustainable pension benefits for affected
IASS members significantly beyond the level of coverage
which the IASS current funding status can sustain.
The discussions which were held during 2012 at the LRC,
and which subsequently involved the Labour Court, staff
representatives and a technical group of actuaries and
lawyers are complex and involve many parties. In November
2012 Aer Lingus agreed to participate in a process proposed
by IBEC and ICTU in which the Labour Court would set out
an interim recommendation regarding the main parameters
for the resolution of the pension issues.