IAPF favours SSIA over mandatory approach
IRELAND - The Irish Association of Pension Funds (IAPF) has warned the government adopting a mandatory approach to pensions would "exacerbate" the current problem of low contribution levels, and argued a type of special savings incentive account (SSIA) should be introduced instead.
Patrick Burke, chairman of the IAPF, said in 2007 the number of employees in defined contribution (DC) exceeded the number of members of defined benefits (DB) schemes for the first time, while DC assets are expected to represent around 20% of total pension fund assets at the end of 2007 from almost a "standing start" 15 years ago.
That said, although research from earlier IAPF pension trend surveys show there has been a continuing increase in contribution rates in many DC schemes, Burke warned "contribution levels in the majority of cases are substantially below the levels required to secure an adequate income in retirement".
For example, he claimed if a 25-year-old were to start saving the average combined employer and employee contribution of 10% of salary a month now, they would have to work until the age of 75 to secure a pension worth 50% of their salary.
Burke added: "In the DC world, the risk of pension adequacy lies at the door of each individual member. We must ensure members are aware of this shift, understand the consequences of inadequate planning and have the facility to plan for their retirement in a targeted and informed way."
He warned "far from fixing the adequacy problems", the introduction of a mandatory system of second pillar pension provision, as outlined by the government in its Green Paper on Pensions in October, would "exacerbate" the situation.
"IAPF is convinced that a universal approach of mandatory or soft-mandatory pensions would undermine current adequacy levels, as minimum statutory contribution levels would become the norm, and would further weaken the fragile linkage which exists between private and public sector pensions," he claimed.
Instead, the IAPF said the success of pension reforms would depend on the involvement of the average member of the public, and suggested this would be best achieved with simple and attractive structures rather than "coercion".
As a result, it suggested the next step should be to introduce incentives similar to the five-year SSIA issued between 2001-02, alongside enhanced drawdown flexibility across all DC platforms.
The organisation claimed this approach is supported by its research of service sectors with very low pension coverage, where 60% of respondents had little or no knowledge of how current tax incentives work but over 85% of those without a pension would start one under an SSIA type structure.
Burke said: "We need to simplify and enhance flexibility. We believe that adopting this approach will deliver increased coverage on a voluntary basis which, in tandem with improvements in the State pension, will meet the Green Paper objectives.
"In terms of building for the future, our proposed approach would also deliver the most suitable platform for further development should mandatory or soft-mandatory strategies ever need to be reconsidered," he added.
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