Ireland: Ireland’s pension challenges
The Irish Association of Pension Funds' Jerry Moriarty reviews a year in Irish occupational pensions and charts the way forward in 2011
Approaching the end of 2009, most people in Ireland were glad to see the back of a difficult year and were hoping 2010 couldn't be any worse. Little did they know.
Those of us involved in pensions were starting to think we would never see the national pensions framework (NPF) that had been promised following the publication of a green paper in 2007. It came as a pleasant surprise when the minister for social protection announced at the IAPF annual dinner in February that the NPF would be published the following week, as indeed it was on 3 March. We finally had a document that comprehensively set out Ireland's future pensions policy. However, a mere nine months later, with so much political and economic turmoil, it is already questionable if parts of it will ever happen.
The NPF confirmed that the state pension would form the cornerstone of pension policy. It also stated that the government would seek to maintain this at its current level of 35% of average weekly earnings. This commitment is coming under increasing pressure even if it has been seen, to date, to be politically unacceptable to reduce the nominal amount (currently €230.30 per week). However, pensionable age will be raised to 66 in 2014, 67 in 2021 and 68 in 2028.
The NPF proposes an auto-enrolment scheme, to be in place by 2014, in an attempt to improve pension coverage, subject to prevailing economic conditions. This would automatically enrol people in the workforce, but would also give them the choice to opt out. Total contributions would be 8% on a band of earnings, made up of 4% from the individual and 2% each from the employer and the state.
Clearly, our current economic conditions are not likely to facilitate the introduction and implementation of this scheme, as employers and employees are unlikely to be able to bear the associated costs. The national recovery plan - which sets out Ireland's budgetary requirements up to 2014 - says as much, in that the pace of implementation must have regard to the "economic and budgetary circumstances" now facing Ireland.
The NPF also advocated the introduction of a 33% tax relief rate on employee contributions. One of the reasons given for this was to provide an additional incentive for those on the lower tax rate (20%) to save. The national recovery plan now proposes a 20% rate which does nothing additional for the lower rate taxpayer and removes much of the incentive for the higher rate taxpayer (41%). This measure will only reduce overall savings, and be the cause of significant problems in the future as it will severely reduce take-home pay in retirement. Furthermore, higher earners will have to pay a higher rate of tax upon retirement than the relief which they received on pension contributions. It will therefore undermine the whole pension concept as it may not make financial sense for many workers to save through a pension.
However, the plan does allow some flexibility on this as it signals an intention to engage with the pensions industry to examine alternative methods of making the required savings. This does provide an opportunity to shape policy in a way that recognises the need for retirement savings.
The National Pensions Reserve Fund, which was set up to pay some of the projected increase in the cost of sate and public service pensions from 2025, has now been largely exhausted on recapitalising the banks. Of the €25bn that had been saved, there will only be about €7bn left following the agreement with the EU/IMF. Since it was set up, public sector pension liabilities alone have increased to €116bn, a liability that exceeds the November 2010 EU/IMF bailout of €85bn.
With defined benefit schemes mostly in deficit, members are now faced with the prospect of reduced benefits and higher contributions. The IAPF and the Society of Actuaries in Ireland made a joint proposal to government at the beginning of 2010 to align Irish annuities with Irish bond yields. They are currently aligned to German bond yields, largely due to the nature of bonds available as the Irish government has not been issuing either index-linked or long-dated bonds.
The proposal sought to allow a more equitable sharing among all scheme members of the risk of a wind-up in deficit. Currently, the bulk of risk rests with the active and deferred members, as pensioners have priority on the distribution of the assets in a wind-up. This means that pensioners would have their full pension secured by an annuity whereas 64 year old active members could lose all of their benefits.
In December, the government announced it was making the option of using sovereign annuities/bonds available to schemes. While the continuing rise in Irish bond yields during the year will mean that trustees will need to consider this cautiously, it does offer an option to spread the risk and may mean unpalatable cuts in active member benefits can be avoided. It will be interesting to see how this develops over the coming months.
At the IAPF Annual Benefits Conference in October, the minister for social protection announced that the government was bringing forward plans to develop a new defined benefit model, which was outlined in the NPF. In view of this, the Pensions Board deferred the deadline to submit funding proposals. Most schemes had a deadline of end-October 2010 or end-April 2011. While the minister said the new model would be introduced by July 2011, it is now expected that the legislation will be in place early in 2011.
It is clear that DB schemes do need to become sustainable as it is to no-one's benefit to continue to make promises that are unlikely to be met. The new model may help to achieve this.
Defined contribution schemes have seen, at best, flat investment performance over 10 years and in general contributions are too low to meet member expectations. It is clear that more needs to be done in this area to ensure members' expectations are realistic. Schemes also need to give greater consideration to their investment strategies and ensure they make the right choices available to members in a way that then allows members to make the right choices for themselves.
Among all this, there will also be a general election in Ireland early in 2011 and this will in all likelihood bring a new government, which may or may not herald a change in policy. So 2011 is also likely to be a significant year but hopefully in a much more positive way.
Jerry Moriarty is director of policy at the Irish Association of Pension Funds