Ireland's economic woes have led the government to introduce a tax on pension fund assets. But the planned €450m pensions levy brings with it a significant impact on an already ailing industry, finds Jonathan Williams
"I am a believer that the one thing you need to provide for a successful voluntary pension system is certainty," says Anne Maher, an independent trustee, and former chief executive of Ireland's Pensions Board. But recent measures by the government have served to undermine this certainty, she claims.
As a raid on pension assets and as an attack on the retirement benefits of old people - those are but two of the ways in which the Irish government's pension levy has been attacked by opponents.
Introduced following last year's election, which saw Brian Cowen replaced as Taoiseach by Enda Kenny, the levy was strongly resisted by the Irish Association of Pension Funds (IAPF) from the outset.
Chairman Marie Collins said in a letter to the department of finance that schemes would not be able to sustain a reduction in their assets and that in light of government's attitude towards safeguarding bank deposits, a similar view of pension savings should be pursued.
In the same letter to minister for finance Michael Noonan, Collins said that pension savers had already suffered cuts to their benefits and implied that this would only be exacerbated by the four year, 0.6% charge on assets under management intended for job creation measures.
In October last year, the IAPF reported benefit cuts of up to 10% as a result of the levy, with the organisation stidently lobbying for recognition of the industry's significant contributions towards deficit reduction through the €450m levy, as well as several hundred million more through lower tax relief rates.
The problem of benefit cuts is a real one, although Maher notes that the levy is being targeted at job creation - a matter close to the industry's heart as it sees rising unemployment reduce its contribution levels.
She adds that many trustees have yet to reach the decision if such a cut should be implemented, leading to uncertainty.
Jim Foley, group pensions director at Eircom echoes Maher, saying no decision had yet been reached. "Trustees have advised members that it may be required it the future and will review it after the next triennial valuation," he says.
However, at a time when schemes are underfunded, the levy is leading to other problems. "In a situation where more money was needed to be put into pension funds, it has discouraged employers from putting money in when they did not feel a sense of certainty it wouldn't be taken out as some sort of stamp duty or tax," says Maher.
She says that in "almost all" cases, sponsors proved unwilling to provide the capital. In fact, a survey by Aon Hewitt last year found that only one-third of employers would cover the levy's cost on behalf of the fund.
"That is leaving trustees with the decision on how they pick it up - if they have a deficit, in most cases they will have to pick it up from the members and how do they apportion that," she adds.
The same Aon Hewitt survey found that almost 50% of those failing the minimum funding standard - reinstated at the end of last year with a revised version due to be unveiled imminently - would reduce benefits, indicating that while trustees were resigned to the inevitable, many were hoping to postpone the decision, as with Eircom.
Rachel Ingle, joint managing director of Aon Hewitt in Dublin, notes that the division between sponsors and trustees comes at an inconvenient time for all. "Discussions and negotiations on this issue between employers and trustees have strained relationships at a time when co-operation between both parties is the only way to ensure a sustainable pension future for employees."
Since the levy's introduction in May, the industry has shifted from fighting to accepting, albeit trying to wring as much meaning from the tax as possible. To this end, many noted Noonan's acknowledgement in the 2012 Budget that pension funds had made a "sizeable" contribution to the country's recovery - echoing the IAPF's earlier stance - and welcomed it.
"The industry are trying to come up with ways which they believe would be more appropriate ways to raise money, rather than the sledgehammer approach of taking 0.6% of the assets each year," says Maher.
One such approach, put forward by Irish unions, was to offer an exemption - now changed to a rebate - to pension funds willing to invest 5% of assets in infrastructure development.
"We are trying to deal with the levy in a way that would contribute to economic and social progress," says Jack O'Connor, general president of SIPTU.
However, resistance to the levy continues within the opposition party, as well as some government ministers expressing concern about benefit reductions.
Joan Burton, minister for social protection, responsible for the reinstatement of the funding standard, highlighted the importance of a trusted pension industry at the IAPF's benefit conference, saying: "We must also aim to protect the individual pension rights of members who have paid into schemes with an expectation that a reasonable return will be made to support them in their older years."
This is, of course, not possible as the legislation surrounding the pensions levy specifically allows for the cuts of benefits in payment.
Michael McGrath of Fianna Fáil claimed that instead of being used as intended to fund the jobs initiative, revenue was simply improving the country's balance sheet, while Éamon Ó Cuív, the opposition party's deputy leader, claimed in October that the payments should be considered as assets removed under "false pretenses".
The way forward and way to survive the "raid" on pension funds, as Maher deems it, may already have been found - with the introduction of sovereign annuities. These allow pension funds to better their financial situation through buy-ins.
However, even this proposition introduces uncertainty, with trustees left struggling with the additional risk they are burdening members. Under guidelines published by the Pensions Board, even insuring benefits this way is not a permanent solution.
As sovereign annuities, launched in the absence of long-dated Irish bonds, replicate all euro-zone government debt, members are left facing losses if one of the countries contributing towards their retirement income agrees to a haircut or goes bankrupt - a few years ago unlikely, but now a possibility in the wake of an EU deal to cut Greece's debt burden.
For now, the industry is hoping that the pensions levy will remain a four-year issue. Although, the time limit is hardwired into the legislation, many initially expressed doubts that the treasury would be deterred by such a technicality if Ireland's economy had not sufficiently recovered by 2014.
With the reinstatement of the funding standard and stricter capital buffers expected as a result of the new system, the industry looks to 2014 as the end of one strict regime and the beginning of a new one.