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Minister for Finance Brian Lenihan and Taoiseach Brian Cowen, at the launch of the National Pensions Framework policy document, on March 03, 2010.
Irish middle income earners in defined contribution (DC) pension schemes - - ie. with no guaranteed payout - - need to save about 15-20% of their salary, an Irish Association of Pension Funds (IAPF) conference was told in Dublin today.
Marie Collins, Chairman of the IAPF said that as defined contribution membership grew it was critical that a solid foundation was now laid for DC schemes. “Scheme design, both in relation to contribution structure and investment strategy, must be fit to meet the needs of even the most non-interested DC member.”
The conference heard that, while losses were being clawed back following the market collapse in 2008, this has emphasised the need for DC members to maintain awareness of how they have invested their retirement funds. If DC members have a shortfall they need to be looking at how they can bridge the gap, or lower their pension expectation in retirement. The IAPF expressed concern that the introduction of the State’s auto-enrolment scheme could damage better pensions schemes and encourage lower savings.
“Our research suggests that average employer contributions to DC schemes are currently 6%. The danger is that the mandatory employer contribution of 2% could become the norm. The total contribution (State, member and employer) of 8% as set out in the National Framework Document will send the wrong message to DC savers who will need larger contributions to secure an adequate income in retirement,” commented Collins.
She added that the Government’s target of 2014 to introduce an auto-enrolment scheme could be overly ambitious. Experience in the UK suggests that a much longer lead in time will be required as there are many complex issues to address at the planning stage.
David Harney, chief executive corporate business, Irish Life, said that DC schemes worked well for lower or stable income workers but there was an increasing pensions gap for middle and higher income earners which many failed to recognise.
“A person earning €60,000 a year would need to build a fund of approximately €450,000 to earn a pension of €30,000 a year with a lump sum of €90,000, which would be equivalent to a public sector pension,” he said.
He recommended that DC schemes should include a default mechanism which, subject to agreement, would increase employee and employer contributions if an individual’s scheme was performing behind target.
“Just because they make regular contributions, too many people have a false sense of security, complacency or lack of awareness on the actual value of their pension scheme and what it will buy in reality on retirement,” said Harney.
The Minister for Social Protection, Éamon Ó Cuív said at the conference: “The National Pensions Framework is the Government’s plan for future pension reform and it encompasses all aspects of pensions, from social welfare to private occupational pensions and public sector pension reform. I am very aware of the difficulties faced by many pension schemes, both defined benefit and defined contribution, and their members, in recent times.”
He added: “Since 2008, in particular, the Government has introduced a range of measures to assist pension schemes. In relation to defined contribution (DC) occupational schemes, the Government introduced measures in December 2008 to enable members of such schemes to defer the purchase of a retirement annuity with their pension funds for a specified period of two years. This measure, which is of benefit to people retiring from these schemes between 4 December 2008 and 31 December 2010 was introduced to allow time for funds to recover from recent losses before people must purchase an annuity.”
The National Pensions Framework provides for a number of changes to current arrangements, for example, the streamlining of arrangements to allow all DC arrangements access to similar options on retirement, changes to tax relief on pension contributions, simplification of existing pension arrangements and the information provided to scheme members. These changes are designed to encourage, support and to make pension provision more flexible and transparent. This will make it easier for people to understand their pension arrangements and the options open to them so that they can make informed choices.
Minister Ó Cuív concluded by outlining how the National Pensions Framework will be implemented. An implementation group, chaired by the Department of Social Protection, has been established to develop the legislative, regulatory and administrative infrastructure required and this will happen over a number of years.
The majority of Irish private sector workers have no occupational pensions.