INDUSTRIAL RELATIONS ACTS, 1946 TO 2004
SECTION 26(1), INDUSTRIAL RELATIONS ACT, 1990
BANK OF IRELAND
- AND -
IRISH BANK OFFICIALS' ASSOCIATION
Chairman: Mr Duffy
Employer Member: Mr Doherty
Worker Member: Mr Nash
1. Pension Dispute.
2. The Bank announced in May, 2006 that with effect from 1st October, 2006 it would introduce a new pension scheme for new entrants and was closing the existing Defined Benefit pension scheme to them. The new scheme has two elements (a) Retirement Capital Account which guarantees a capital sum for the purchase of retirement benefits and (b) an optional Personal Investment Account to enhance an employee's pension benefits. No changes will be made to the personal benefits of existing employees and pensioners. Currently the Bank operates 18 different mostly Defined Benefit Schemes. The Bank states that lower bond yields and improved mortality rates are resulting in Defined Benefit scheme liabilities growing rapidly thereby causing accounting deficits which impact directly on the employer's financial position. These factors are combining to inhibit the Bank's ability to grow its business. The Bank considers that the introduction of the new pension scheme for new entrants would provide competitive progressive pension benefits in a manner that minimises volatility of pension surpluses while maintaining costs at an acceptable level. The Union rejected the basis on which the Bank justified its new scheme. It sought a commitment that the Bank would be prepared to enter into full consultation, negotiation and agreement with the Union in accordance with agreed procedures and agreements and if necessary, the involvement of experts on pension schemes to assist the discussions. The Union also sought the deferment of the implementation date. The Bank was not prepared to defer the implementation date of 1st October, 2006 stating that any delay in the implementation strategy would have significant financial implications for the Bank. The dispute was referred to the Labour Relations Commission. Two conciliation conferences were held but agreement was not reached. The dispute was referred to the Labour Court on the 3rd October, 2006 in accordance with Section 26(1) of the Industrial Relations Act, 1990. A Court hearing was held on the 9th November, 2006.
3. 1. Bank of Ireland is one of the country's most successful and profitable companies. There is no justification for the Bank to change its existing DB scheme for new staff based on profitability.
2. The Bank's decision to introduce the new pension scheme for new entrants, while negotiations are in progress is a breach of existing negotiation procedures. The Bank's decision to unilaterally change the pension scheme is a fundamental breach of the "Mulvey" Cost and Capability Agreement that underpinned the Bank's change programme between 2005 -2008. The Bank's decision is in breach of the principles of engagement agreed under Mulvey.
3. An independent evaluation of the Bank's balance sheet and financial accounts totally rejects the Bank's argument that the introduction of the new pension scheme is justified at this time. An independent evaluation of the new pension scheme, proposed by the Bank, clearly establishes that it does not provide the same benefits to staff and in addition, staff must make higher contributions than existing staff. An independent evaluation of the Bank's proposal shows that the Bank will make significant cost savings by introducing the new pension arrangements.
4. The Bank of Ireland staff pension fund is more than fully funded with a funding of 108%, clearly showing that there is no funding difficulties in relation to the existing pension fund.
5. The other main banks have retained their Defined Benefit schemes and AIB, who have a Defined Contribution scheme, are in negotiations with IBOA, arising from an Independent Tribunal, aimed at moving away from Defined Contribution schemes for new staff.
6. The introduction of the Bank's new proposal for new staff will be divisive and have long term implications for pay and other terms and conditions. The impact of the Bank's proposals could be major as the Bank has failed to give any legal guarantees that it will honour existing benefits into the future.
7. Bank of Ireland salaries are significantly out of line with its major competitor AIB and any change in pension provision will further erode relativity between both Banks.Based on similar cases before the Court and given the Bank's profitability and the strong funding of the existing pension funds, there is no justification for the new pension arrangements. The Bank's failure to provide detailed information to justify its new pension proposals clearly undermines the basis for the Bank's case for its proposal.
8. The Bank's actions in breaching agreements and unilaterally introducing the new scheme, seriously undermines trust between the Bank and IBOA and this needs to be addressed into the future.
4. 1. The Bank believes that it has a responsibility to all its employees, shareholders and customers to take timely action to prevent the Group's pension liabilities deteriorating to the stage where more drastic action may be needed.
2. Most large corporates have closed their Defined Benefit schemes in recent years due to factors such as longevity, long term interest rates, or Bond Yields have fallen steadily over the years and are now at historically low levels. Long term interest rates are used to quantify the 'promise' inherent in a Defined Benefit pension scheme. The effect of the low rates is to magnify the scale of the combined promises of existing staff. The lower the interest rate, the greater the size of the liability. In addition the new accounting rules (FRS 17), which sets out the accounting treatment for retirement benefits, requires companies to recognise the pension scheme assets or liabilities in their balance sheet. The Bank's Consolidated Balance Sheet for the period ended 31st March, 2006 reflects a significant deficit due to Retirement Benefit Obligations. The scale of this deficit and in particular the projected substantial increases in scheme liabilities poses a major challenge to the Group. Failure to address this challenge could result in a threat to the Group's ability to support the pension entitlements of existing staff.
3. The above trends have the potential to create significant difficulties for the Group. Doing nothing was not an option. Waiting in the hope that Bond Yields would improve is not an option. In addition, this is not a contribution issue. Increasing contributions would do nothing to address the cost liability/volatility issue. The fundamental issue is the scale of the liabilities and the volatility relating thereto.
4. The Bank has illustrated what the new scheme introduced for new employees will achieve, assuming full individual contributions. It shows that they will have the prospect of securing retirement benefits in line with best in class i.e. two-thirds pension on full service at normal retirement date, plus state pension. The Bank has confirmed that no changes will be made to the pension benefits of existing staff and pensioners. The Bank has emphasised to IBOA at all times that the Group Pensions Strategy, as introduced on 24th May, 2006, is the full agenda. However, the Bank has also outlined to the Union that failure to implement the new scheme would mean that the current benefit arrangement for all staff would become unsustainable.
5. Since the Bank first introduced its proposal for a new pension scheme for new employees, it has been committed to a process of full consultation with employee representative bodies, notwithstanding that the introduction of the new pension scheme does not impact on existing employees. The Bank gave a detailed presentation to IBOA on the Group Pension Strategy on 24th May, 2006. The Bank also met IBOA on two occasions in August, 2006, and provided detailed clarifications in response to issues raised by the Union. At all times the Bank stressed to the Union that the introduction of the new pension strategy was intended to manage the scale and volatility of its pension liabilities. It is not a cost reduction strategy. The Bank has also given repeated assurances that it has no plans to amend the value of benefit for existing employees.
The Union contends that in introducing different pension arrangements for new staff without negotiation and agreement the Bank contravened a Collective Agreement in force between them. The Union referred the Court to an Agreement based on the recommendations of a facilitator covering the Group Strategic Transformation Programme, 2005 – 2008 which sets out principles for dealing with change. This Agreement commits the parties to deal with the introduction of change through“consultation, negotiation and agreement”. The agreement also commits the parties to “a mutual problem-solving approach to the resolution of issues in dispute”.
Bank Management contends that the exigencies of the situation in which they found themselves were such as to require urgent action. They further contend that the changes only affected new staff and in those circumstances the agreement of the Union was not strictly required. They pointed out that the Union were fully informed of the decision and were provided with all relevant information.
It is clear to the Court that the original pension arrangements had become an established condition of employment applicable to the grades associated with this claim. It seems equally clear that the voluntarily agreed processes could and should have been fully used to address the banks desire for change in the established arrangements before unilateral action was taken. The Court accepts that situations can arise in which urgent action is required and the full utilisation of procedures may not be feasible. The Court cannot accept that this was such a case.
It is a well-understood requirement of good industrial relations practice that employers and trade unions honour the terms of the collective agreements to which they are party. The Court is satisfied that the agreed procedures were not fully utilised in this case and that, in consequence, the manner and timing in which the disputed changes were introduced was not in accord with the agreement concluded between the parties in 2005. The Court is further of the view that any viable settlement of the issues now in dispute can best be achieved through a process of engagement of the type envisaged by the 2005 Agreement.
The New Pension Scheme.
All Bank staff with full service (other than those in the disputed scheme) are guaranteed a pension of 2/3rds of final salary (hereafter referred to as the established scheme). The responsibility of ensuring that the pension fund is sufficient to meet that liability is on the employer. The Bank insists that the new scheme similarly assures a specified rate of benefit and is properly characterised as a defined benefit scheme. The scheme is augmented with an optional defined contribution scheme with matching funding by the Bank and the scheme member. The Bank say that the combined effect of both schemes will be that participating employees can still look forward to a pension of 66.7% of salary.
The Union do not accept that this is the case. They point out that the scheme provides a fund on retirement from which the employee may purchase annuities. They say that there is no guarantee as to what the fund will purchase at the time of retirement. Thus, they say, the risk involved in funding a pension is transferred from the Bank to the employee. The Union also contend that the cost to the employee of providing a pension under the new scheme similar to that guaranteed under the established scheme would be significantly greater.
The Court has not attempted to engage in a detailed evaluation of the various assumptions on which the conflicting contentions of the Bank and the Union are based. What is clear, however, is that the new scheme transfers from the employer to the employee, in part at least, the financial risk inherent in any pension scheme. Thus, while the Bank is confident that the pension provided by the new scheme will be at least as favourable as that provided by the established scheme, unlike the established scheme, it does not guarantee that result. This is the principal reason for the Union’s opposition to the new arrangements.
Reason for the Change.
It is clear that the change introduced is not in response to financial difficulties per se. It is not disputed that the Bank is highly successful and manifestly capable of meeting the costs associated with the established scheme. Moreover, the established pension scheme is currently funded at 108% of its liabilities.
The Bank have, however, told the Court that the principal underlying reason for closing the established scheme is the growing liability of the Bank arising from the guarantee inherent in a defined benefit pension scheme. This growing liability arises from: -
• The fact that people are living longer
• Long term interest rates, or bond yields have proved to be highly volatile, have fallen steadily over recent years and are now at an historically low level.
Furthermore, new accounting rules (FRS17), which set out the accounting treatment for pension benefits require companies to recognise pension scheme assets or liabilities in their balance sheets at the time of reporting. The Bank contends that the combined effect of these factors will be to reduce the net worth of the company to an unacceptable degree over time. This, the Bank submitted, is a matter which it cannot ignore for business reasons.
The Court accepts that the factors which motivated the Bank in introducing the disputed changes are regarded as impacting on its vital long term interest. Consequently they must be fully taken into account in formulating any proposals to resolve the current impasse. Equally, the Union is concerned at what it sees as the uncertainty inherent in the scheme introduced by the bank in relation to the final pension which will become available to its members. These concerns must also be addressed in any final settlement.
The Court recommends that the parties should seek to reconcile these seemingly competing objectives through an intense process of engagement. It is not for the Court to prescribe the range of issues which could be examined in such a process. They should, however, include such matters as the future structure of pension schemes, the funding arrangements, and the provision of assurances as to the ultimate value of pensions available on retirement. In so doing the parties should have regard to relevant developments elsewhere in the financial services sector. Appropriate professional experts should assist the parties and the services of the LRC should be utilised.
The Court is of the view that a single process involving both Union representing affected staff would be most conducive to achieving final agreement on the issues involved. The Unions should seek to put arrangements in place by which this could be accomplished.
The process should continue for a period of not more than three months after which outstanding issues should be referred back to the Court. In that event the Court will facilitate the parties with the earliest possible hearing.
The Court further recommends that the parties reaffirm their commitment to resolving issues of difference by constructive dialogue and where necessary by fully utilising established procedures.
Finally, in keeping with the spirit of the Strategic Transformation Programme Agreement, and until the recommended process is completed, any individual staff member recruited since 1st October, who so requests, (and would have been entitled to join under the rules of the scheme) should be given a once-off option to join the established scheme.
Signed on behalf of the Labour Court
23rd January, 2007______________________
Enquiries concerning this Recommendation should be addressed to Tom O'Dea, Court Secretary.