Those doubting the veracity of the phrase ‘the luck of the Irish’ should have their faith restored by considering the pensions situation. From its separation from the UK in the 1920s until the 1970s Ireland followed the British model of pension provision, but from then, whether by accident or design, fortune has tended to smile more on the western than the eastern side of the Irish Sea.
One major advantage is that, unlike the UK and much of the rest of Europe, Ireland’s baby bulge came in the 1960-70s not the 1940s. The result is that it has a younger population than most of the continent, and it’s rising – it recently went over 4m for the first time since the potato famine in the mid-19th century.
“We have a time bomb here as does all Europe, but our one is not going to go off quite as soon as the European one given our demographic profile,” says Pat Leahy of the Sunday Business Post newspaper. “It’s not so long ago that half the population was under 25. And given that we spotted the problem reasonably early we have a longer period of time to deal with it.”
Another advantage, as Anne Maher, chief executive of the Irish Pensions Board, points out, is that “our pension system is more straightforward, we had fewer resources and so we were less likely to take on the complexities adopted in the UK.”
In fact perhaps it is foresight rather than good fortune that has contributed to Ireland’s advantageous situation, and it had its Turner report-like soul searching in the 1990s. Following a consultation exercise on pensions a national pension policy initiative (NPPI) headed by the Irish Pensions Board submitted a report mapping out options to the government in 1998 and after discussion involving employers, trade unions, the pensions industry and government agencies many of its proposals were put in place though legislation.
One of the major elements was the National Pensions Reserve Fund (NPRF), which was pushed through by former finance minister and new European commissioner for the internal market Charlie McCreevy. The NPRF is financed by the injection of 1% of GNP each year. But since its inception there have been suggestions that the money could be better spent elsewhere.
Joan Burton, finance spokesperson for the opposition Irish Labour Party, points out that Ireland has an infrastructure deficit and while the government is paying into the NPRF, it is also borrowing on the international capital market to fund infrastructural development. “The NPRF is spending money right around the world and isn’t investing in any Irish projects even through there is the possibility to invest in major infrastructural projects that would carry an identifiable rate of return in this country,” she says.
In the election campaign of two years ago former Labour Party leader Ruairí Quinn suggested that the level of investment in the fund might be lowered for a period and the freed-up resources diverted to infrastructural investment in major projects like public transport, Burton notes. But the idea failed to ignite the electorate and Quinn resigned after leading his party to defeat.
But the departure earlier this year of the forceful McCreevy revived questions about the NPRF’s security. “McCreevy did everything he could to make the fund invulnerable to political attack,” recalls Fergus Wheelan, pensions specialist with the Irish Congress of Trade Unions and a member of the Irish Pensions Board. “He set it up in such a way that it would be difficult for any government to raid it. And while parliament can always change its mind, the legislation was written so that it would be difficult to back off from the commitments without a very public about-face.”
However, the government was recently reshuffled “and people are holding their breath to see how new minister of finance Brian Cowen is gong to jump on a number of issues,” says Leahy.
Cowen moved over from foreign affairs where he was semi detached from economic policy. Before that he was minister for health, an experience he evidently found bruising as he left the post at his own request having gone on record as describing the department as ‘Angola because there were so many landmines’, a phrase that has entered the Irish political, if not politically correct, lexicon.
“Within government he is generally expected to be on the McCreevyite wing of things but he is a more political animal than McCreevy,” says Leahy. “There hasn’t been any indication that the NPRF is going to be interfered with. One of the things that contributed to the government’s last election victory was its reputation as a sensible economic manager and to start fooling around with the pension fund would endanger that.”
Maher agrees. “The NPRF didn’t have the easiest start-up because its investment strategy was intended to be 80% equities and 20% bonds and its launch coincided with a very bad time in the equity market”, she notes. “But a rebound in the economy and positive projections for growth have blunted any challenges to the fund, and any change would need to go through both houses of parliament.”
But what about a switch to investing in Ireland? “Globally, public pension funds don’t have a good track record as they tend to be raided or aimed in a particular direction in bad times,” says Maher. “So the NPRF’s investment mandate was written into the legislation. And it’s a very strong mandate: to get the best possible return subject to acceptable risk – the only thing that it cannot invest in is Irish government bonds – and the only bit invested in Ireland has been the Irish share of the global equity market. But there has been a widening of the investment type in the last year, with some of the new money going into assets like public-private partnerships, property, small-cap equities. And the public-private partnerships particularly could facilitate use of the money for other purposes that would have other benefits.”
But if the NPRF is safe, there are questions over some other offshoots of the NPPI process. “One of the objectives of the policy initiative was to increase private pension coverage both in terms of coverage and adequacy,” says Maher. “People working for large employers and better-paid people tended to be in pension schemes but the lower-income group had the biggest coverage shortfall.”
The result was the personal retirement savings accounts (PRSAs) which offers a standard, off-the-shelf product that can be bought without an advice requirement, has a limit on charges and a balanced investment portfolio. There are about 10 providers – insurance companies, banks, building societies and other financial institutions – with 56 products on the market.
“The idea was to encourage people on low incomes into pensions and we went along with the idea because there was nothing else on the horizon,” says Wheelan. “But we knew that unless employers were prepared to put something into it there would be very little to attract lower-paid workers. There is a tax attraction, but the relief is at the top rate of tax and as most lower-paid workers don’t pay significant amounts of tax that doesn’t work.”
Maher is more optimistic. “We’re now up to an overall coverage of 52-53% of the workforce and in the case of the over-30s, who are our primary focus, the coverage is 59% and the target is 70%. We are considering additional incentives to recommend to the government: one would be to attract lower-paid people with tax credits.”
Another would be to offer incentives to those who took up the special savings incentive accounts (SSIAs), another McCreevy initiative which mature after five years in 2006, to convert some of the payout into pensions.
“The last thing the government wants is a huge injection of money into the economy,” says Wheelan. “And the employers would probably go along with that because they’d prefer it to compulsion”.
And compulsion remains an option. “In September 2003 it became mandatory for an employer who does not have an occupational pension scheme to make access to a PRSA available to his employees, to sign up with a provider, to inform his employees of this and give the provider access to them to explain the arrangement” says Maher. “Some 50,000 employers have occupational pension schemes and at the last count a further 63,000 had signed up with PRSA providers. The Pensions Board recently wrote to 64,000 employers who had neither requiring them to reply by the end of September and we are now processing those returns and will be pursuing any employers who haven’t done what they’re obliged to do under the legislation.”
In 2006 the Pensions Board is required to report to parliament on whether it is achieving its objectives on both coverage and the adequacy of coverage, and if not what further steps should be taken. “The board recommendation would be that if we are not getting the required coverage and adequacy on a voluntary basis we should consider mandatory options,” says Maher. “But clearly we would have to view those against the economic, employment and employer competitiveness situations of the time.”
Wheelan is more emphatic. “The clear implication of that is that if it doesn’t work, and it hasn’t, the question of compulsion will be on the agenda. There is overwhelming support for compulsion from the trade union side but there will be huge resistance from the employers. And this is why they will back the SSIA development because it will just cost the state money, not them.”