- Proposes SSIA Style Tax Credits for Pension Savings
- Recommends option to draw part of pension before retirement
- Calls for new approach to retirement age
- Urges removal of discrimination against defined contribution members
The Irish Association of Pension Funds (IAPF) says in its response to the Government Green Paper on pensions, that the introduction of mandatory or soft mandatory pensions has the potential to undermine the existing system and “cause havoc” for private sector workers. However, Lord Adair Turner, who headed a UK commission on pensions, has said that a purely voluntary system would not work.
Last week, the Minister for Social and Family Affairs Mary Hanafin told a Pensions Conference in Dublin that almost 50% of workforce and majority of private sector workers in Ireland have no pension.
The more than 1 million private sector workers without occupational pensions contrasts with the exceptional system available for politicians and public sector staff.
Removing barriers rather than imposing compulsion is the best way to address the pensions crisis according to the IAPF.
“We believe the best approach is to increase the number of people with good pensions using simple and proven incentives while ensuring that the Social Welfare Pension is sustainable and delivers a basic standard of living to all,” commented Patrick Burke, chairman, IAPF.
The IAPF says that the introduction of mandatory or soft mandatory pensions has the potential to undermine the existing system and“cause havoc” for private sector workers. “Consumers are already obliged to make mandatory contributions under the State pension scheme,” commented Burke. “The big danger is that an additional mandatory system would set a benchmark below current levels in terms of contributions and benefits.”
Lord Adair Turner said in Dublin in October 2006, that his Commission on Pensions in the UK had recommended a system which would automatically enrol employees in a pension from the time they began working unless they themselves choose to opt out of the scheme. This was necessary, he argued, because “a purely voluntary system was not going to work….employers won’t provide adequate pensions for employees and individuals won’t go out and buy pensions themselves.”
The subject of pensions is viewed by many people as a cure for insomnia.
Irish public service staff and politicians have very generous pensions - estimated to require 28% of salary funding every year for 40 years in the private sector and that is not counting the unique facility where retirees get the same increases as current equivalent grade staff in the public service - but when it came to so-called Benchmarking Mark 1, where it was falsely claimed that private sector workers were enjoying higher earnings in comparable jobs than their public counterparts, the pension advantage was ignored - as if there was no value in it.
The IAPF said on Thursday that it is concerned that in order to ensure agreement amongst the social partners on the introduction of a mandatory scheme, employer contributions would be below existing levels which would then become the norm for all schemes.
Rather, the IAPF argues that the removal of barriers to pensions is the way forward. It recommends that the Government’s tax incentives should be applied as a direct contribution from the Government, in a similar way to the SSIA rather than though the system of tax relief. Research shows that consumers do not understand the benefit of tax relief and a direct contribution would provide greater transparency, according to the IAPF.
There are already generous tax incentives available but lower paid workers in particular are in general unlikely to be incentivised by additional ones. Besides, the SSIA type proposal comes at a time of big public spending cutbacks. Although, the National Pension Reserve Fund of almost €20 billion could be partly used to fund such a scheme or provide for a staged introduction of a mandatory system.
The IAPF also recommends that consumers should be able to draw down part of their pension before retirement for priority needs such as the purchase of a house or at particular ages and life stages.
“Research finds that people have a real fear of locking money away for long periods and this is one of the biggest disincentives to pensions,” commented Patrick Burke. “Many of today’s generation find it hard to grasp the need to plan for something that may be 30 or 40 years away.”
He said that allowing an advance drawdown for the purchase of a home or other priority could be made tax neutral by reducing the tax free element at retirement and in practice is unlikely to be utilised widely.
The IAPF response to the Green Paper also urges greater flexibility in determining retirement age. The report estimates that a 25 year old entering the workforce with average contribution rates could need to continue to work and make contributions on a full time basis until age 75 in order to accumulate a fund sufficient to secure a pension of 50% of salary.
The report states, “There needs to be a change in many of the employment, pension, tax and social welfare rules in order to facilitate a culture of working past the traditional retirement age for those who wish and are able to do so. This would ensure that those people are not disadvantaged in any way. It may be necessary to try and move away from the concept of retirement as a point in time event and view retirement as something to which individuals can gradually transition”.
The IAPF recommendations urge that the same rules should apply to tax relief, maximum contribution, benefits and options at retirement across all types of Defined Contribution (DC) schemes. Some DC members are forced to buy what the IAPF says are inefficient annuities which die with the member. On the other hand, holders of PRSAs, self employed and 5% directors can buy a more flexible Approved Retirement Fund (ARF) which can be transferred to beneficiaries on death.
“We strongly believe that all defined contribution members should have the option to transfer their accumulated funds to an Approved Retirement Fund at retirement,” states the IAPF.
The IAPF report draws attention to the issue of public sector pensions and suggests an increase in contributions to the National Pensions Reserve Fund (NPRF). It points out that the most recent estimate of the accumulated liabilities was €75 billion and calculates that the employer contribution (if one had to be paid) in 2006 as €2.6 billion. In addition, €1.6 billion was paid in pensions to retired public servants in 2006. “This contrasts with an annual contribution of €1.7 billion to the National Pensions Reserve Fund (NPRF) which had a value at 31st March 2008 of €19.3 billion,” states the report.
So how would the additional SSIA-type scheme coupled with additional contributions to the NPRF, be funded?
