The big story in Ireland in 2000 is the launch of the National Pension Reserve Fund (NPRF), which aims to fund the future liabilities of the state pay-as-you-go flat rate pension and public sector schemes. (There is no earnings-related state scheme.) The fund is already worth about IR£4bn (e5.1bn) – mainly as a result of the proceeds of the Telecom Eireann flotation – and is expected to grow to IR£5.5bn by the end of the year.
The bill that introduced the NPRF provides a strictly commercial investment mandate for the fund, which will be run by the National Treasury Management Agency. The agency will operate on a manager of managers basis for an initial 10 years.
The prefunding of state pensions was one of the recommendations of the National Pensions Policy Initiative report, which was published in May 1998. Following the progress reported under the National Pensions Policy Initiative (NPPI) programme during 1998/99 (see below), the Irish government announced further increases in social welfare benefits, to take effect from May 2000 and designed to bring social welfare pensions closer to the target recommended by the Pensions Board in the NPPI document, namely 34% of the average industrial wage (about IR£100 a week).
The Pay-Related Social Insurance (PRSI) system covers all employed people over age 16, irrespective of earnings. Membership is compulsory for almost everyone aged between 16 and 66. However, self-employed workers have to earn at least IR£2,500 a year to qualify.
The PRSI contribution for class A employees is 4.5% (employees), 12% (employers). Maximum annual earnings subject to contributions are IR£36,600 (employer) or IR£26,500 (employee).
The statutory retirement age is 66 for both men and women. There is no statutory early retirement provision. Late retirement is possible with the deferral of pension payments, although there is no provision for any increase in the pension due to deferral.
Occupational pension benefits are funded through irrevocable trusts. A few schemes operate on an unfunded basis.
The funded sector is dominated by a relatively small number of large schemes – in particular the commercial semi-state companies, which are valued at over IR£100m. Occupational scheme structures to a large extent mirror the developments in the UK, with the majority still established on a defined benefit (DB) basis but new schemes for smaller employers and for subsidiaries of multinationals almost universally adopting a defined contribution (DC) structure. Insurance contracts – for example, deferred annuity and deposit administration – although popular in the past, are rarely used today.
The new individual plans (personal retirement savings accounts – see below) are expected to become available on a group basis, particularly in the industry-wide sector.
The 1990 Pensions Act established a pensions regulator, the Pensions Board. Among other features it introduced a funding certification for DB schemes, provided for the appointment of member trustees and equal treatment measures required to meet European law. In 2001 the government may establish a pensions ombudsman and a compensation scheme.
In May 1998 the Pensions Board published its recommendations on the National Pensions Policy Initiative which examined ways to ensure adequate pension coverage through state and private sources. Its key recommendations were:
q 70% of those over age 30 should have supplementary pensions;
q The introduction of the personal retirement savings account (PRSA);
q Mandatory access to PRSAs through the workplace where the employer does not have a scheme or already makes a contribution to employees’ PRSAs;
q Greater flexibility for defined contribution schemes, including fair competition between DC vehicles.
Funds for medium to large companies usually employ an investment manager who will invest directly in all asset classes, both Irish and overseas. Smaller funds generally invest through pooled funds.
According to the IAPF 1999 asset allocation survey, there is a clear trend towards greater investment in pooled funds. At the end of 1993, 58% of assets were in segregated funds, 29% in unitised or pooled funds, and 13% in insured funds. By the end of 1999 these figures had changed to 56.4%, 33.2% and 10.4% respectively.
Irish pension liabilities have been denominated in euros since 1 January 1999. ‘Domestic’ previously referred to Irish but now refers to euro asset classes. Given the small and concentrated domestic stock market, funds traditionally have invested widely overseas.
According to William M Mercer in Dublin, “There is a general consensus among investment managers that the level of Irish equity investment will fall from the current level of 25% to somewhere between 15–20%.