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News : Irish Economy Last Updated: Nov 25, 2010 - 5:47:02 AM

Four-Year Budget Plan: Government to propose Irish pension fund measures to cut reliance on foreign bondholders
By Finfacts Team
Nov 24, 2010 - 2:01:11 PM

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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 are:

  • 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 altogether."

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 to recover.

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 Option Schemes.

Mercer says these proposals will:-

  • 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 work; and  

  • give rise to significant employee relations issues as employees look to their employers to be compensated.

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.”

SEE : Four-Year Budget Plan: Irish fiscal austerity plan claimed to be “blueprint for return to sustainable growth”

Finfacts Budget 2011 Page

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