Martin Delaney finds Ireland moving to relieve the burden created by an ageing working population and a faltering economy
Like many countries, Ireland has moved to act on the demographic imbalance that has seen an ageing working population left unsupported either by an increasing birth rate - or the economic firepower of previous years. As a result, the state pension age is set to increase to 66 in 2014, to 67 in 2021 and then to 68 by 2028.
Supported by the pay-related social insurance (PRSI) system, the government aims to keep the state pension steady at a rate of 35% of average weekly earnings.
According to Jerry Moriarty, director of policy at the Irish Association of Pension Funds, from 2020 the total contributions approach will mean that those who have made 10 years of paid contributions will receive a third of the overall pension, while 30 years will be enough to provide for a full pension. Those who have been involved in homemaking and caring roles will gain 10 years of credits so as to be on a more equal footing with ordinary workers.
There will be an automatic enrolment scheme in place, with every employee over the age of 22 automatically included - unless they are already in a better employer's pension plan or have a defined benefit scheme. They can, however, always choose to opt out after three months.
Contributions from the employer and the state will be matched, Moriarty says, with the state contribution equalling 33% tax relief (although how that will be delivered has yet to be decided).
Anyone who remains in the scheme for more than five years with no gap in their contributions will also receive a one-off bonus payment. However, after six months within the scheme, it will not be possible to make any withdrawals.
The private sector will step in to offer a range of investment options - and they must include lifestyling. For those not keen to make their own investment choices, a default low-risk fund will be on offer - with the additional possibility of being able to transfer in smaller defined contribution (DC) funds.
The whole scheme will be administered by a new central processing agency to be set up by the government that will manage the process with the aim to have the system implemented by 2014 - depending on favourable economic conditions at the time.
For those schemes currently on offer, there are plans to include the same matching contribution equal to 33% tax relief - although, again, it is yet to be decided how this will be delivered. It is likely that the current age-related and overall earnings limit will remain, but in what form has also yet to be determined.
Tax relief on employer contributions or on investment income is expected to remain unchanged, and by 2011, all defined contribution scheme members will be able to access the approved retirement funds (ARFs). Moriarty notes that individuals will probably need an income of €18,000 - of which €12,000 would be the state pension - to be able to access the ARF. This option will not, however, apply to DB members.
What will happen with regard to the taxation of lump sums at retirement of over €200,000 has yet to be determined, and is likely to be decided once the scheme is up and running.
However, more regulations are likely - particularly with regard to ensuring the transparency of pension charges. The Pension Board's regulatory power will be subject to scrutiny with an eye to ceding it additional powers also to cover investments.
In addition, a new DB model has been proposed, on the understanding that schemes may wish to include it at some point in the future. According to Moriarty, the new model includes: fixed member and employer contributions; flexible benefits in the event of investment losses or other adverse experiences; and benefit design to accommodate increases in life expectancy.
To ensure full coverage - and to include deferred pensions - the government is looking to establish a tracing service dedicated to tracking down the pension rights of former employees and scheme trustees. There is also talk of a new state-managed fund that will encompass any untraceable accounts.
With the technical work likely to take three to five years to complete, a new implementation group chaired by the DFSA has been established and is likely to conduct extensive consultation before presenting its findings to the government.