The end of pension schemes?
The Irish regulatory authority, the Pensions Board, has begun to examine submissions from providers of Personal Retirement Savings Accounts (PRSAs). PRSAs are a new type of investment vehicle, introduced under the 2002 Finance Act. They are intended to be a cheap, flexible and portable alternative for people who would not otherwise have access to retirement provision.
The first PRSA products should be on the market some time in the first quarter of 2003.
There will be value for money controls on the basic PRSA product, but investors may opt for more complex, customised versions which are likely to cost more. A PRSA can be taken out by anyone, whether in employment or not, and can be transported seamlessly when a person changes jobs. Tax relief is available on contributions to a PRSA on an age-related scale, up to 30% of income for someone aged 50 or over.
A further attraction of PRSAs is that a quarter of the fund can be taken as tax-free cash at retirement. The individual then has the option of taking the balance of the fund as an immediate taxed sum or investing in an Approved Retirement Fund. An Approved Retirement Fund (ARF) is a tax-sheltered investment from which the investor can draw down capital or income at will, subject to paying income tax on the amount drawn. Both the option of taking the whole fund as cash and ARFs are subject to the individual being able to meet certain minimum income or capital requirements.
Employers will be obliged to make available at least one standard PRSA unless all employees (with a minimum of six months service) are eligible to join an occupational pension scheme. The employer will not be obliged to contribute to a PRSA but may do so, subject to the limits on contributions referred to above.
So can we expect employers to move to PRSAs as the mechanism for funding for employees’ retirement? Why not abandon expensive and time-consuming pension schemes, with all their statutory obligations?
There certainly is a strong argument for at least considering this approach. However, before taking the great leap, managers should reflect on some potential risks associated with using PRSAs in this way.
A PRSA is a direct contract between the individual and the providing institution. Once the designated PRSA has been selected, the employer ceases to have any direct involvement and, consequently, cannot control or influence over the quality of service. If the provider fails to perform, in investment reporting or compliance terms, employees will quickly become disgruntled. The employer may have no other option than to offer employees the choice of switching to another PRSA. This could, in a short time, result in a multiplicity of PRSAs, each requiring weekly or monthly remittance of contributions. Trouble-shooting could become enormously time-consuming, exceeding the normal amount of work associated with conventional pension plans.
Another consideration is likely to be that employees may not be willing to accept a contribution to a PRSA as a substitute for membership of a well-managed pension scheme. Whether the possible advantages to the employer of a simple PRSA justify dealing with employee resistance is very doubtful.
PRSAs give people an extra opportunity to make necessary retirement provision. They are designed to complement employer sponsored plans and probably should not be seen as an adequate substitute.
Stephen Lalor is senior pensions consultant with Coyle Hamilton in Dublin, part of EuRaCs