IRELAND - The Irish Association of Pension Funds (IAPF) has warned introducingcompulsion to Irish pension schemes would "cause havoc".

In its submission to the government's Green Paper on Pensions, which closed on May 31 2008, the IAPF argued instead of a mandatory or "soft" mandatory approach, the solution is "simple and proven incentives".

The organisation claimed the suggestion outlined in the green paper, to make pension saving compulsory, could potentially "undermine the existing system and cause havoc for private sector workers".

Patrick Burke, chairman of the IAPF, said: "Consumers are already obliged to make mandatory contributions under the state pension scheme. The big danger is that an additional mandatory system would set a benchmark below current levels in terms of contributions and benefits."

The IAPF said it is concerned that in order to ensure an agreement between partners on introducing a mandatory scheme, employer contributions would be below existing levels, and this would then become the norm.

Similar concerns have been raised about the problem of "levelling down" by organisations ahead of the introduction of auto-enrolment into the UK's personal accounts in 2012, which will have a minimum level of 4% employee contributions, 3% from employers and 1% in tax relief.

Instead, the IAPF recommends the government's tax incentives "should be applied as a direct contribution from the government", in a similar way to the Special Savings Investment Accounts (SSIA) rather than though the system of tax relief, as research has demonstrated consumers do not understand how tax relief works.

Burke said: "We believe the best approach is to increase the number of people with good pensions using simple and proven incentives while ensuring that the Social Welfare Pension is sustainable and delivers a basic standard of living to all."

However, to combat the common fear of locking money away in a pension for long periods, Burke revealed the IAPF supports the potential for members to "draw down" part of their pension before retirement for "priority needs" such as buying a house.

This type of savings product is already available in the in the form of a 401K plan.

Burke pointed out: "People have a real fear of locking money away for long periods and this is one of the biggest disincentives to pensions," but he claimed allowing an advance drawdown could be made tax neutral by reducing the tax free element at retirement.

In addition, the IAPF response suggested there is a need for "greater flexibility" in the national retirement age, as well as the need to encourage people to "move away from the concept of retirement as a point in time event and view retirement as something to which individuals can gradually transition".

The response, also suggests contributions to the National Pensions Reserve Fund (NPRF) should be increased as public sector pension liabilities are now valued at €75bn, while the value of the NPRF is currently at around €19.3bn.

The IAPF also argued the same rules should apply across all defined contribution (DC) schemes in relation to tax relief, maximum contributions, benefits and most particularly annuities.

It argued some DC members are forced to buy inefficient annuities which die with the member. On the other hand, holders of Personal Retirement Savings Accounts (PRSA), the self-employed and proprietary directors, who own 5% of their firm, can buy a more flexible Approved Retirement Fund (ARF) which can be transferred to beneficiaries on death.

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