Removing Risk from Irish Pensions:
Towards a New Pensions Model
by
Sinéad Pentony
Presentation Structure
• Context
• Recent developments in Government
Policy
• Overview of TASC/TCD Pension Model
Context (1)
• Pension policy combines public and private provision.
• Most people rely on the State pension for an income in
retirement.
• State pension cost €4.4bn in 2010. Increases in the State
pension reduced the level of pensioner poverty over the
last decade.
• Despite the gains during the boom, Ireland does not
compare well with other OECD countries (2011):
– Ireland has one of the lowest rates of replacement income in the
OECD (bottom 4).
– Ireland has the highest level of pensioner income poverty in OECD
(<50% median income).
Context (2)
• Tax reliefs are used to incentivise uptake in private pensions
(€3bn in 2008).
– Value of tax reliefs will have fallen as unemployment increases.
– 80% of tax reliefs accrues to the top 20% of earners.
– Pension tax reliefs:
• costly
• inefficient
• fail to deliver adequate pension coverage
• contribute to income inequality in retirement.
• Blanket pension coverage in the public sector.
Context (3)
• 49% of all private-sector workers don’t have a private
pension.
• Pension coverage is falling (56% in 2005 – 51% in 2009).
• 75% of Irish workers are worried about not having enough
money to retire on.
• Poor performance of private pensions. Ireland worst
performer in OECD in 2008 – lost 38% of value.
• Private pension schemes:
– Offer no security: 75% of all Defined Benefit schemes in deficit
(2009).
– Risky behaviour (Pensions Board).
– High cost of fees and lack of transparency on charges.
Government Policy
• National Pensions Framework
– Importance of State Pension and commitment to sustain the
value of state pension at 35 per cent of average earnings.
– Move to total contributions (increases contributions required
and includes credits for home duties).
– No move to universality (disadvantages pensioners on non-
contributory means-tested pensions – mainly women).
– Increasing the retirement age from 65 to 68 (could create
poverty traps for older workers unable to work but don’t yet
qualify for a pension).
Government Policy
• National Pensions Framework (contd.)
– Recognises the need for supplementary pension.
– Identifies PRSI system as “low cost, easy to understand &
secure.”
– Contributions (8 per cent) collected through PRSI system. Too
low.
– Auto-enrolment and managed by private pension providers.
No public option.
– No Government guarantees on investment returns. No
security of income in retirement.
Recent Developments
• Programme for Government (p.56)
“We will reform the pension system to progressively achieve
universal coverage, with particular focus on lower-paid
workers, to achieve better risk sharing, and to provide for
greater flexibility for those who wish to retire on a phased
basis”
• Roll-out of auto-enrollment pension scheme has been put
delayed by 4 years (2014 to 2018).
• No plans to standard rate tax reliefs but this is included in the
National Recovery Plan. Changes to thresholds.
• Levy of 0.5% on pension funds expected to be announced
tomorrow to finance Government ‘Jobs Initiative’.
TASC/TCD Pension Model
• Universal
• Equitable
• Affordable
• Secure
TASC/TCD Pension Model – Main
Elements
• 1st Tier – Increase and Universalise State pension to
provide a guaranteed income for all pensioners.
• 2nd Tier – Establish a new Social Insurance (Retirement)
Fund to provide a supplementary earnings-related
pension.
• Rebalancing from private to public provision through re-
distribution of tax reliefs on private pensions.
• Address problems faced by current members of
occupational pension schemes that are in deficit.
State Pension – 1st Tier
• Increase and universalise State pension to 40 per cent
of gross average industrial earnings over a 5 year
period.
• Eliminate pensioner poverty and provide guaranteed
income for all long term residents of Ireland.
Earnings-related Social Insurance (Retirement)
Fund – 2nd Tier
• State-led supplementary earnings-related pension scheme
through social insurance fund.
• Combined with State pension to provide 50 per cent of final
salary up to a specified maximum.
• Mandatory and defined benefit.
• Includes credits for home duties (caring responsibilities).
Earnings-related Social Insurance
(Retirement) Fund – 2nd Tier
• Benefits of social insurance approach:
– Low cost (efficiencies through economies of scale).
– Flexible (self-employed/ employees/ working in the home).
– Secure (pooling longevity and investment risk; no solvency
risk).
• TASC has called for Government to conduct and publish a
feasibility study to assess viability of providing a supplementary
pension through the social insurance system.
• State-led pension funds could be used
for strategic investment purposes.
Re-balancing Pensions from Private to
Public Provision
• Use tax relief to fund reform and equitably re-distribute
Exchequer spending on pensions.
• Standard-rating all pension tax reliefs at 20 per cent.
• Reduce to €75,000 the ceiling on earnings which may be
taken into account for tax relief purposes from €115,000.
Address Problems Faced by Members
of Existing Occupational Schemes
• Introduce pension protection schemes for Defined
Benefit and Defined Contribution schemes.
• Amend Companies Act – move pension fund members
to the top of the list of creditors ahead of banks and
shareholders.
• Strengthen regulation – more stringent requirements on
private pension providers in relation to managing risk,
charges and fees.
Removing Risk from Irish Pensions:
Towards a New Pensions Model
by
Sinéad Pentony