IRELAND - The Irish government should reconsider the funding standards for pension funds and the requirements to purchase annuities as part of its framework for reform, the OECD has suggested.
At a conference to mark the end of the consultation period on the Green Paper on Pensions Sebastian Barnes, an economist from the OECD, also claimed the "current system of tax incentives is expensive and poorly targeted".
In his presentation, Barnes highlighted findings from the organisation's economic survey of the Irish Republic, which revealed the reserves in the National Pension Reserve Fund (NPRF), would only meet around a third of the expected increase in pension costs.
He told the audience at the ‘Green Paper on Pensions: Learning from International Experience' conference although Ireland has "substantial" pension fund assets, and 62% pension coverage for 30-65 year olds, there are still pension "gaps" for women and low income workers, in particular, as well as for those who do not have access to an employer's scheme.
The OECD said employer schemes are the "key to private pensions", but warned government policy should encourage employers to provide good schemes, because although there is a "rising share" of defined contribution (DC) plans the contribution rates from employers still "appear relatively high".
Hybrid DB/DC schemes are "developing" in Ireland, as they are attractive propositions because they share the risk and reduce costs, but Barnes warned the existing termination or wind-up funding standard in Ireland "may be restrictive", and suggested it needs to be "reconsidered" in the forthcoming pension reforms.
In addition, his presentation highlighted inconsistency in the current pension system, as the requirement to purchase annuities only applies to certain schemes, and suggested to "improve private pensions" the policy should be reviewed.
The OECD also concluded the Irish government should replace the existing "poorly targeted" tax breaks with capped matching contributions - which have a lower level of support but are targeted better, and introduce "soft compulsion" into pension schemes.
At the same conference, Brian Duncan, chief executive of the Irish Pensions Trust, told delegates the pensions system must retain certain flexibility to allow for an unpredictable future.
He claimed the best method is a combination of a flat rate state pension and a mandatory earnings related money purchase scheme through the Pay-Related Social Insurance (PRSI) system - but with some degree of opt-out for individuals with "adequate cover".
Duncan revealed his solution would be to raise the basic state pension to 40% of average income - funded through higher PRSI contributions, a rise in the state pension age and "limited curtailment of private sector tax relief" - while the qualifying conditions would be simplified but extended to include credits for carers.
In addition, he recommended the introduction of a mandatory DC scheme for individuals over the age of 25, which would be operated through the PRSI system with a minimum contribution rate of 4% of earnings from both employers and employees up to a salary of €50,000.
The investment strategy would be determined by the Irish government and there would be a "one-off" opportunity to opt out of the mandatory scheme, although Duncan claimed with 4% contributions from both parties the scheme could provide a 50% pension for a male aged 25 on a salary of €45,000.
Duncan also suggested the pension framework - scheduled to be unveiled by the government by the end of 2008 - should introduce "State guaranteed annuities up to a specified limit" which are related to the level of contribution under mandatory scheme - as this would provide better value than market annuities.
He also recommended in conjunction with the state annuity limit, the government should restrict the availability of lump sum payouts at retirement, and as well as the possible use of Alternative Retirement Funds (ARFs).
However, Dr Orlaigh Quinn, principal at the Pensions Policy Unit at the department of social and family affairs, revealed of the 250 submissions received by the government so far there had been "no consensus on the overall pension model".
She pointed out the submissions had included criticism of the security of private pensions and a strong emphasis on the role of the state, but said opinions on the overall pension model ranged from support for either a public or private mandatory system; auto-enrolment with access to funds; a higher state pension with higher PRSI contributions to claims that the current system "works well".
As a result, Quinn confirmed the government intends to analyse the issues highlighted in the submissions, and will publish a consultation report later in the year, while a framework for reform will be developed by the end of 2008.