Under the terms of the social partnership agreement, Towards 2016, which was effectively a national pay deal agreed during the autumn of 2006, a group comprised of social partners and officials from relevant government departments have been established to undertake a Partnership Pensions Review, in the context of the government's formulation of a comprehensive approach to future pensions policy.

 

Partnership Pensions Review

The government has agreed to engage with employers and trade unions, in a process to be supported by appropriate expertise and taking account of the reports of the Pensions Board and of the operation of the annuity market, in the context of its formulation of a comprehensive approach to future pensions policy.

The Departments of Finance, Social and Family Affairs and Enterprise, Trade and Employment will participate in the review, which will be facilitated by the Department of the Taoiseach, including as regards the framing of a social partner contribution to the formulation of the government's Green Paper discussed below.

The Pensions Board will be asked to research benefit design options in the occupational pensions area and will examine current design issues in both defined benefit (DB) and defined contribution (DC) arrangements with a view to producing guidance as to designs which encompass the positive elements of each arrangement while adjusting the costs and risks to the parties involved.

 

Green Paper on national Pension Policy

The government is committed to publishing a Green Paper on Pensions Policy outlining the major policy choices and challenges in this area. It will take account of the views of the social partners. The government is committed to responding to the consultations within 12 months of the ratification of this agreement by developing a framework for comprehensively addressing the pensions agenda over the longer-term.

The Green Paper is expected to be published in March/April this year. Because only half of the working population are covered by pension arrangements, increasing pension coverage is a key priority.

The adequacy of benefits for those already covered would be considered reasonable if one participates in a DB scheme but have room for improvement if one is in the DC arena.

The best available survey information shows average employer and employee contributions of around 5% of salary on both sides.

Clearly these rates will need to be improved over time. DB plans as in all other parts of the world are under pressure with about 40% of plans now closed to new entrants. This is expected to rise to 60% within three years if current trends continue.

There are many pensions disputes currently in the public arena as employers try to (i) reduce the benefits promised for new entrants (ii) move to hybrid arrangements, or (iii) move entirely to DC.

The government has taken a protectionist stance on this issue in order to support the position of the workers with even the Taoiseach (Prime Minister)expressing strong views on the matter. Indeed the National Implementation Body (NIB) has been established as an industrial relations mechanism to help resolve pension disputes.

The Green Paper will help to determine the long-term shape of the overall pension system. Much debate has taken place on the issue of mandatory pensions, particularly after the publication of the National Pensions Review Report and Special Savings for Retirement (or Mandatory) Report.

The key issues with mandatory pensions are:

❏ Who is going to pay?

❏ What level of state support will be provided from both a financial, administrative and risk sharing point of view?

❏ Will the employers and the multi nationals who inwardly invest in Ireland appreciate additional costs and less flexibility?

❏ Will the mandatory proposal damage irrevocably the well developed voluntary system?

❏ Will the public appreciate being asked to save for retirement in a certain way when they may prefer to run their own businesses, invest abroad, or buy property, etc.?

The Irish Association of Pension Funds (IAPF) has expressed doubt about the introduction of mandatory pensions. While we are fully supportive of finding means of increasing coverage, we are not yet convinced that mandatory is the best way of achieving this. We feel that it is premature to talk of this when the current voluntary system has not been developed sufficiently to attract lower income earners. Once mandatory pensions are introduced there would, in our view, be great difficulty in unravelling it.

The IAPF would like to see more support given to simplifying the voluntary system to make it more flexible, more attractive and more forward looking. Some of our key initiatives are as follows:

❏ Introduce tax relief at the higher rate for all low earners (this could be as simple as €2 invested for every €1 subscribed);

❏ Scrap the requirement to purchase annuities at the point of retirement
and allow all DC members to avail of the draw down option called Approved Retirement Funds (ARF). The IAPF argues that annuities are now expensive, poor value and do not offer the flexibility required to give workers scope around how and when to retire on full or partial pensions;

❏ Introduce more flexibility in the deemed distribution tax applied to the ARF to help those working part-time whilst in retirement;

❏ Introduce a state annuity fund on a self financing basis so that the state can facilitate risk sharing on longevity and promote greater economies of scale in the Irish annuity market;

❏ Relax the minimum funding standard for DB plans by moving to an ongoing standard related to the cost of providing pensions benchmarked against long bond yields as opposed to benchmarking against a limited annuity market which has only four to five providers, offers little choice, poor value for money and very limited capacity;

❏ Other simplification measures might help such as improved transferability between occupational schemes and PRSAs (Personal Retirement Savings Accounts) and perhaps the latitude to withdraw funds from DC plans on special events such as first house purchase, etc;

❏ Promote industry-wide schemes - which are properly structured, managed and supported by the social partners in order to increase coverage.

This year should be a very interesting one for the pensions landscape in Ireland.

The IAPF will continue to work actively on behalf of our members and seek to influence the direction of pension policy.

Joe Byrne is chairman of the Irish Association of Pension Funds and deputy managing director/group actuary of the Coyle Hamilton Willis Group in Dublin

 

Topics