Drive to increase pensions coverage
If anyone should be purring, it is Anne Maher, of the Pensions Board in Ireland, where she is chief executive. Last month, the new Pensions Act passed through both houses of parliament and was signed by president McAleese.
This was the culmination of five years of work for the Pensions Board and Department of Social Community and Family Affairs, who have been closely involved and pushing forward the development of pensions. In 1996, the consultative process known as the National Pension Policy Initiative (NPPI) was put in place. The initiative was a high-level examination of pensions needs but tackled from a social partnership perspective and NPPI reported in 1998.
“There were three strands to this report,” she says. The first was the aim to increase the basic state pension over time to 34% of national average industrial earnings. “While the government never formally committed to this target, it has increased the pension level over recent budgets and at a faster rate than other state benefits, so that currently it is equal to 31%.” As to what will happen in the future, with a general election some months away, who can tell, she adds.
Another strand from the NPPI report is the successful launch of the National Pension Reserve Fund, designed to fund up to one third of the increased social welfare pensions from 2025. This was formally established in April last year. “On 11 September, the fund was the best invested fund in the world, being totally invested in cash,” says Maher. Since then, the commissioners who run the fund have been appointed and the investment managers chosen.
The government is still committed to contribute 1% of GDP to the e8bn fund. But she points to the fact that some of the opposition political parties are wavering, with one arguing that payments to the fund be reduced on a temporary basis in order to fund a better health programme, while the main opposition party has suggested using the fund to support national infrastructure projects. “Our view is that these pensions will need to be paid from 2025 onwards, so we are committed to the government’s contributions being continued.”
Now the new pensions legislation has introduced the remaining recommendations of the NPPI report – and more.
The new Personal Retirement Savings Account is a defined contribution pensions vehicle to increase pensions coverage. In its ‘standard form’ this must be provided by employers not offering occupational pension schemes. It is like the UK stakeholder approach, but with more generous prescribed charges of a maximum of 5% of contributions paid and 1% per annuity of assets. These are to become available in 2003, she expects.
The pensions board will approve the PRSA products jointly with the revenue, and already she is gearing up staff numbers to be ready to process the flow in the last quarter of this year. She thinks there will be some 15 to 20 providers active in the market, and it is possible that some of these may come from outside Irealnd.
“The role of the PRSA is primarily to increase pension coverage from 50% of the workforce to 70%,” says Maher. But the board suspects that with the recent surge in Irish employment levels, the proportion in pension coverage may be less than the 50 shown by the last national survey. In fact, in order to benchmark the extent of pension provision within the community generally, the board arranged for a number of questions on pensions issues to be included in a recent survey by the Central Statistical Office. These results are expected to be available mid-year.
Maher says that coverage needs to increase among the lower paid, women, employees of SMEs and part-time workers.
“Originally, the NPPI report said the coverage position would need to be reviewed after five years. But in the legislation that had been shortened to three years.” This, she feels, is a measure of the government’s determination to keep the pressure on. “That’s only logical, as already four years have elapsed since the NPPI report.” There is always the big stick in the background, because if the coverage level is not achieved, then the thinking could turn to mandatory coverage.
The PRSAs have all the advantages of existing pensions vehicles, such as personal pensions, additional voluntary contributions products, buy-out bonds and some extra ones as well, which means that ultimately they may supersede all these products. They give enhanced tax advantages by giving national insurance contributions and giving higher relief limits than existing self employed products and also give relief on pay related social insurance and health levy to all employees.
Is there any danger that PRSAs could endanger existing pension plans? Maher believes that the balance of advantages is about right and she hopes that there will not be any serious movement by employers to go the PRSA route instead of their existing provision. “Such a move would be contrary to the objective of increased coverage if it switched people from good occupational schemes.”
A concern of the Irish Association of Pension Funds was that the ability to draw down the accumulated fund as cash under approved plans for the self-employed would spread to occupational schemes. Maher does not see this as an issue at present, pointing out that even under plans with the facility “there has not been a flood of drawdowns so far. It is mainly the wealthy who seem to be using these cash drawdown facilities”.
The board has seen little discussion in Ireland so far about moving existing members from defined benefit to defined contribution as the PRSA is, but obviously it signals a move in that direction as far as future pension funding in new arrangements.
But there are strong disclosure rules in place in terms of a statement of what is coming out when someone is transferring from a defined benefit plan, when a certificate of benefits has to be prepared, she points out. “The revenue also limits the extent to which benefits can be transferred by prohibiting transfers from occupational pension schemes to PRSAs for members who are over 15 years in the scheme.” These rules may be sufficient to “hold the line”, she says. “Clearly, we have looked at the mis-selling scandals in the UK and hope our procedures are sufficient to prevent this.”
The new act will, at the same time, bring more pressure on defined benefit schemes with the long over due reform of the vesting rules, which are now down to two years. Also, funds must now have annual reviews of their funding position and confirm this in their annual report. This previously used to be confirmed every three and a half years, with no duty of disclosure in-between.
Most of what the Pensions Board and others involved in the NPPI report wanted has been translated into action, which is why Maher should be pleased with what has been achieved. Is there anything else on her wish list?
“If we could have achieved all we did and have simplified the pension system at the same time.” Simplification of pensions – a bridge too far surely?