€12 million plan to rescue Lufthansa pensions

Management and unions at the long-established aircraft maintenance plant, Lufthansa Airmotive Technik Ireland, have agreed a proposed solution to their company pension fund crisis. It involves a phased €12 million injection into the fund by the German parent company, and means a transfer from the current defined benefit scheme to a new defined contribution scheme. This will preserve existing member benefits and allow employees a reasonable prospect of a good pension.

Background

A proposal to solve a company pension crisis has been concluded between management and trade unions at the wholly owned Irish-based subsidiary of the German company Lufthansa Technik. It will involve a change from the current defined benefit scheme to a new defined contribution plan. Management and union representatives at Lufthansa Technik Airmotive Ireland (LTAI) have agreed that the deal is necessary to prevent the existing pension fund being wound up. A €12 million injection will be made by the German parent company over a five-year period.

Around 420 active pension scheme members and some 200 deferred scheme members (that is, former workers who have not yet reached retirement age) are involved. However, only existing ‘active’ members are entitled to vote (that is, current employees who are paying into the pension fund). They are represented by three different trade unions: Unite, the Technical Engineering and Electrical Union (TEEU), and the Services Industrial Professional and Technical Union (SIPTU). The workers concerned have also been represented in talks by their European Works Council.

German owners ‘not for turning’

The proposed plan was drawn up with the assistance of Sean O’Driscoll, a human resources consultant, who was appointed as the chairman of a joint management-union pensions task force. The European Works Council told Mr O’Driscoll that, while it would have preferred to continue with the current defined benefits arrangement, it understood that this position was unrealistic because the German owners were ‘not for turning’.

The specialist weekly journal Industrial Relations News (IRN) reported that a large proportion of Lufthansa employees have been with the company for over 20 years, which makes the assurances about their defined benefit pension pots a particularly important factor in ‘selling’ the new arrangement to them.

All avenues exhausted

Mr O’Driscoll told the parties in early February 2013 that actuaries to the pension fund had told him that an annual contribution of 38% of pensionable salary would be required for the next 11 years to enable the defined benefits scheme to be continued. He said he was presenting his final report, reflecting all agreed changes, ‘after three years of very sustained efforts by all parties’. He added that he believed that all reasonable avenues had now been exhausted.

Mr O’Driscoll said that transfer to a new defined contribution scheme offers the most realistic option to preserve existing member benefits, and will allow a reasonable prospect of a good pension scheme. He added:

Unfortunately the initial preferred option of maintaining the old defined benefits scheme was found to be practically impossible and would have placed unsustainable financial burdens on all parties.

Accrued benefits

From a date to be confirmed, there will be no future service in the defined benefits plan, which is to be wound up at a time agreed with the company. This will happen as soon as is practicable and no later than six months after the proposals have been accepted. This may provide an opportunity for the deficit to decrease in the short term if interest rates rise, which is the company’s preference.

When the defined benefits plan is wound up, the transfer of values available for active and deferred benefit members will reflect the existing minimum funding standard coverage. However, the funding to cover the deficit is designed to increase these transfers to 100% of minimum funding standard coverage.

New scheme

Future pension provision will be provided in a new, defined contribution, scheme. Employees can contribute at the existing rate of 6.5% of pensionable salary (their salary less one-and-a-half times the state pension) or at a rate which rounds up to the nearest 0.5% of basic salary, and Lufthansa will match these contributions with an additional 1% of basic salary.

If an employee does not round up their contribution to the nearest 0.5%, the company will still contribute as if the member had chosen to do so. Employees can further increase their contribution up to a maximum of 5% of their salary. If a member works beyond their 65th birthday they will continue in the defined contribution scheme with contributions payable from themselves and the company until state retirement age (expected to be 68 by 2028).

Death-in-service benefit

If a member of the scheme dies while still an employee, there is a payment of three times the employee’s annual salary plus the member’s accumulated defined contribution assets, including any outstanding instalments with regard to deficit funding due from the company.

The company and member representatives have also agreed that a review of the new pension arrangement will take place either on elimination of the deficit, or no later than after three years of operation of the new defined contribution scheme.

Brian Sheehan, IRN Publishing

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