Ireland’s presidency of the European Council is an opportunity for the country to showcase the progress it has made in repairing its finances and its economy since the bailout at the end of 2010.
But the pensions world cannot look forward without some degree of apprehension. The punitive pensions levy will be coming to an end next year, but there are clear misgivings about the funding standard.
And there is still plenty of work to be done in repairing the pension system as the government awaits OCED’s report on the country’s pension regime.
Repairing the system means hard choices and policy makers will have to weigh up some important long-term issues.
While pension funding needs to be secured, and it is clear that recovery periods must be shorter, politicians and the wider public will still be anxious where possible to avoid channelling too much corporate cash away from productive investment.
Ireland enjoys a strong tradition of DB pensions and a commitment to them. Yet this commitment is not open-ended. Overly stringent recovery plans will encourage scheme wind-ups and even push some employers into insolvency.
This scenario would penalise current members under current rules. The existing system is weighted heavily in favour of current pensioners, whose rights must be met in full before the entitlements of other members can be considered. Politicians must therefore look to the interests of active and deferred members on pension fund wind-up.
Flexibility in the DB contract is advisable in this regard, but Ireland should be wary of creating a protection fund along the lines of the UK model. This would bring unwanted moral hazard issues, as well as the perennial issue of the long-term funding status of such a protection fund.
The gradual transition away from DB pensions also brings with it unique challenges, and there is, rightly, interest in how auto-enrolment will work in the UK.
Ireland needs a good DC system but instead of creating a single provider like the UK’s NEST, the government should consider the creation of two or three large scale trust vehicles, some of which could be sponsored by social partners.
Politicians should also avoid the temptation to allow individuals early access to their pension savings to pay down debt. Undermining the trust of the pensions system is something no country can afford and, as it recovers, Ireland must simultaneously look to its future. Long-term pension saving is a necessity and not a luxury.
Given its successful track-record of DB pensions, Ireland should have the ambition to make itself a leading DC pension country in the coming years and decades, learning from the policy successes and failures of others.