Four-Year Budget Plan: The plan published today by the Government says almost 85% of Irish bonds
are held by overseas investors and the Government plans a number of measures which will lead to a greater investment in Irish
Government bonds by domestic investors.
Today's plan says Irish pension funds have significant assets
under management but hold relatively little Irish debt. Proposals have been made
to the Government by bodies representing the pensions industry to make certain
changes in the legal framework which would encourage pension funds to invest in
Irish Government bonds. This will benefit both current and future pensioners as
a result of the improvement in the position of their pension funds.
Donal O’Mahony, global strategist at Davy Capital Markets said in a
note issued on Nov 15, that Ireland should arrange a "bail-in" to enable
domestic pension funds reallocate savings to support the economy.
He said that Irish domestic pension fund and insurance companies own a scant
€6bn in Irish government bonds from a fixed income pool of €65bn. The discount
curve references German bunds and not only would an immediate switch to a
“sovereign annuity” concept based on government bonds unleash a potent
domestic demand for Irish bonds, but it would also slash the funding deficits of
Irish pension funds that are being exacerbated by record low German yields.
Gerry Hassett, chief executive of Irish Life [Retail] said today:
“Increasing private pension provision is itself a priority for this country so
while we absolutely understand the need for the pensions industry to play its
part in tackling our national financial situation, we will be seeking to engage
with the Government to examine alternative means of raising the proposed €700m
so as not to discourage private pension provision.”
Today's plan says the Government will implement pension-related tax changes
to yield €700m.
The main measures contained in
the Government's National Recovery Plan that affect private-sector pension plans
Pension contributions made from
2011 onwards will no longer receive relief from PRSI and the Health Levy.
For most employees, this reduces relief by 5%-8% of contributions made.
The maximum rate of income tax
relief on pension contributions is to be reduced from 41% to 34% in 2012, to
27% in 2013 and 20% in 2014.
The maximum earnings on which
employee/personal pension contributions can be based for tax relief purposes
is to reduce by almost 25% from €150,000 to €115,000 from 2011 onwards.
The maximum tax-free lump sum
payable to retirees will be limited to €200,000.
The Standard Fund Threshold (SFT)
applicable to high earners is also to be reduced (not yet specified).
When fully implemented, these
measures are expected to save the Exchequer €700m annually.
According to pension and investment consultants Mercer, some of these measures
lack balance; "The proposal to reduce tax relief on pension contributions
from 41% to 20% over the years 2012-2014 will discourage pension savings,"
said Michael Madden, a partner in the firm. "If a higher-rate taxpayer only
receives tax relief at 20% on contributions and ultimately pays tax at 41% on
the pension proceeds at the far end, it is essentially a form of double
taxation. That person may be better off stopping pension contributions
Mercer also point out that many pension schemes are experiencing funding
difficulties and are looking to increased pension contributions from employees
to help eradicate deficits. Likewise, most individuals saving for retirement in
defined contribution schemes or personal pensions have seen their funds eroded
as a result of the financial crisis. Reducing tax relief acts as a deterrent to
increasing contributions and further hampers the ability of such pension schemes
Serious Implications for Employee Share Schemes
Stated Government policy has always been to encourage employee share ownership.
This has been evidenced by the fact that employee share awards have to date
remained outside the scope of PRSI (and the income levy in the case of Revenue
Approved Share Schemes). Based on this Government policy, many employers have
incorporated employee share ownership into their remuneration policies. Mercer
is therefore disappointed at today’s announcement to apply PRSI, the health levy
and the income levy to employee share schemes and to abolish Approved Share
Mercer says these
increase employment costs in the
form of employer’s PRSI;
act as a disincentive to
employees to invest in the success of their organisation for which they
give rise to significant
employee relations issues as employees look to their employers to be
Seán Quill, Senior Consultant
with Mercer commented: “We would ask the Government to
reconsider this proposal as the potential overall yield from these measures is
low compared with the serious implications for employees and employers.”
Four-Year Budget Plan: Irish fiscal austerity plan claimed to be “blueprint for
return to sustainable growth”
Finfacts Budget 2011 Page