For a number of years the Irish government has outlined clearly its commitment to the partnership between the private pensions sector and the state old age pension scheme. The government has progressively increased the old age pension in recent years to the current level where it is equivalent to approximately 34% of national average earnings.
The government has clearly set out its intention of encouraging, largely though the tax system, a substantial increase in the quantity of pensions coverage from the level 46% of the workforce identified in the ESRI report in 1995 to a long term target level of 60%. When we look at the increase in the workforce from 1.1m in the early 1990s to 1.8m today, this seems a challenging target. It means, in effect, a doubling of pensions coverage.
To help achieve this, the government plans to introduce Personal Retirement Savings Accounts (PRSAs). PRSAs could be described as the government’s ‘special weapon’ in encouraging far higher pension coverage. It is a new portable pension fund to which the employer, as well as the employee, can contribute. People can also continue to contribute to the PRSA during periods of self-employment or unpaid career breaks. It will be similar to the current retirement annuity contracts (pension plans for the self-employed), except that employed PRSA holders can have contributions deducted from their salary.
It is intended that the new PRSA will increase pension coverage among those who currently have made no pension provision. However, it is not expected to be a replacement for occupational pension schemes. There is some concern that PRSAs may be used as an alternative pensions product for those already covered by existing pension plans. Time will tell. PRSAs are included in the pensions bill which has not yet completed its progress though parliament and it is unlikely that we will see PRSAs on the street until early 2003.
The pensions bill will also carry out a review of existing company pension scheme legislation introduced by the 1990 Pensions Act. This will include a reduction in the qualifying period for pension entitlement on leaving service from five to two years, the need for consultation with scheme members on indexation of pensions, and the appointment of a Pension Ombudsman to investigate complaints by members of pension schemes.
In reviewing their pensions strategy, companies will need to ask a number of key questions: Where do employee benefits fit within the total remuneration and HR strategy, and is the current strategy still valid in the light of all these changes? Are pensions regarded as a long-term retirement provision or as a tax-effective income deferment vehicle? How much flexibility should be provided to employees when joining a pension plan selecting benefit levels and determining investment options?
Whichever direction is chosen it will be essential that employers generate maximum value from the pension expense in terms of employee goodwill, motivation and retention. With the increasing level of choice and stronger auditing and regularity supervision the need for independent advice has never been greater.
Kieran Kelly is managing director, Coyle Hamilton Employee Benefits & Investments, part of Asinta network