Ireland: At a crossroads
Jerry Moriarty, director of policy at the Irish Association of Pension Funds, assesses the country's pension challenges
Pension provision in Ireland is at a crossroads. Unfortunately it has been approaching the crossroads for quite some time and despite much consideration of the next turn to take it is still unclear in which direction we will be heading.
Ireland faces the same challenge as all other developed countries in dealing with an ageing population. While our population is younger than most of our European neighbours, it is one that will change rapidly in a relatively short time. The demographic ‘time-bomb' that Ireland is facing is that the population aged 65 and over is set to grow by 59% in the next 12 years and by a further 142% by 2061. This represents a rise from the present 470,000 people over 65 to 1.8m.
A large number of reports have been completed on the issues facing the Irish Pensions System but we are still awaiting the response to the government's Green Paper on Pensions which was published in 2007. The extensive consultation period on this ended in mid 2008 and it was intended that the response would be published by the end of 2008. The response, which has been promised for publication "shortly", will now be a National Pensions Framework.
One of the problems with the delay is that the world has changed enormously since the Green Paper's publication. For example: GNP growth was at 5.7% in 2007 - it is now at -8%; employment growth was at 4.4% - it is now at -7.8%; and unemployment was at 4.6% - it is now at some 12%.
All this means that decisions will now have to be taken in a very different context.
A number of changes have already taken place in order to deal with some of the fall-out from the economic crisis. In late 2008 the government announced that members retiring from DC schemes could access tax-free cash but would have a two-year window in which to buy an annuity. In April 2009 the government introduced some measures designed to provide more balanced and greater security for members whose schemes wind up due to employer insolvency and make restructuring schemes easier.
These changes involved changing the priority order on wind-up so that, while pensioners still get preference, any future increases now rank after active and deferred members' benefits. Where a scheme winds up in deficit and the employer is insolvent, the trustees will be able to transfer the pensioners to the state a price that is likely to be less than that offered by a commercial annuity provider. This will be known as the Pension Insolvency Payment Scheme (PIPS). The trustees of a scheme can also apply to the regulator, the Pensions Board, to reduce accrued benefits as part of a restructuring exercise to make a scheme sustainable.
As the PIPS scheme is not yet in place and the reductions of benefits have yet to happen, it is difficult to say how practical these will be. Clearly they will help, although there is some serious debate about the reduction of benefits following guidance issued by the Pensions Board on the measures that should be in place to accompany reductions.
There has been intense speculation this year about the future of tax relief on employee contributions. As with most other countries, the Irish system operates on an EET basis, with employee contributions receiving relief at the marginal rate of tax. Many commentators deem this relief to be inequitable, but they usually ignore the issue of tax paid on pensions in payment. This came under scrutiny in the supplemental Budget in April last year, a report by the Commission on Taxation in September 2009 and the 2010 Budget which took place in December. The current system survived on each occasion.
The Commission did recommend a ‘hybrid' rate where contributors get a €1 contribution from the state for every €1.60 they pay in. This was subsequently ‘translated' by the government to a 33% rate of relief for all contributors. The government has not indicated how this would operate in practice, or what the rate of tax on pensions in payment would be. There does seem to be an understanding that this will reduce the take-home pay of many hard-pressed workers on relatively low incomes and will have a detrimental impact on pension savings. It has been earmarked for consideration in the Framework and is therefore unlikely to be implemented for some time.
Public sector pensions have come under much scrutiny in the past year. A number of reports looked at this area, the most significant being the comptroller and auditor general's special report on public service pensions which was published in August 2008. This estimated accrued public sector pension liabilities at €108bn, a huge increase from the last official estimate of €75bn.
Earlier in 2008 the government introduced a pensions levy on public sector workers. This levy is not applied to the first €15,000 of earnings but is 5% on earnings between €15,000 and €20,000, 10% between €20,000 and €60,000 and 10.5% on earnings above €60,000. While the government has indicated that the purpose of the levy is to highlight the benefits of a public sector scheme to members, in reality it is a means of reducing public sector pay. As the scheme continues to operate on a pay-as-you-go basis the levy is used for general government spending.
The recent Budget also set out the basis for a scheme for new entrants to the public service after 2010 when benefits will accrue on a career-average earnings, rather than a final salary basis. The government also indicated that it is likely to remove the pay-parity arrangement where pensioners get increases in line with salary rises.
It is clear that there are big decisions ahead for pensions and the long-awaited Framework document should provide a sense of direction that has been lacking for some time now.
Jerry Moriarty is director of policy at the Irish Association of Pension Funds