Irish
Irish Association of Pension Funds says Mandatory Pensions won't work; UK Pensions Commission chair Lord Turner says purely voluntary system will not work
By Finfacts Team
Feb 23, 2007, 12:44

According to the World Bank, the expenditure level for public pensions in most Western European countries is well above that of other highly industrial and postindustrial countries at a similar income level. The average of public pension expenditures as a percentage of gross domestic product (GDP) for the 15 EU countries in 2000 amounted to 10.4 percent (this is a low estimate because it includes only the expenditure under the projection exercise of the Economic Policy Committee 2001). The Organisation for Economic Co-operation and Development (OECD) estimate is about 1.3 percentage points higher (OECD 2002). The average for the non-European and affluent OECD countries—Australia, Canada, Japan, New Zealand, the Republic of Korea, and the United States—in 2000 was about 5.3 percent: that is, roughly half. In the EU, only Ireland (4.6 percent) and the United Kingdom (5.5 percent) have similar levels. This difference is also shared by the accession countries in Central and Eastern Europe. Except Romania (5.1 percent), all others have expenditure shares close to the EU average (and in Croatia, Poland, and Slovenia, well above) and hence much higher than non-European OECD countries, despite an income level of one-quarter and less. Poland’s public pension expenditures, at close to 15 percent of GDP, rival that of Austria and Italy for the world championship.

March 05, 2007 Update: Minister says fact that only 50% of the Irish workforce of 2m have Personal Pensions starkly underlines need for action; Occupation breakdown of Irish pensions coverage

The introduction of mandatory pensions could be counter productive and even damage the quality of overall pensions provision in Ireland. This was stated by Joe Byrne, chairman of the Irish Association of Pension Funds, at the organisation’s annual dinner in Dublin Thursday night.

Byrne told over 1,000 attendees, including guest of honour Brian Cowen TD, Minister for Finance, that the current voluntary system could be enhanced to support the existing mandatory state pension scheme. He said that the success of SSIAs demonstrated the Government’s ability to make long term savings attractive.

Byrne said that the introduction of mandatory pensions could be resented by many people who may at different stages in their lives have different and competing demands such as new mortgages, child care, business and education costs. Mandatory pensions may also scare multinationals who may not appreciate the additional cost and reduced flexibility.

“Pension schemes work best when employers want to set them up. A pension scheme that an employer has to set up is likely to be modest. Worse still, employers may take any minimum compulsory contributions as the norm resulting in poorer adequacy for the vast majority of workers than that currently enjoyed,” said the IAPF chairman.  

Byrne said that increasing pension coverage was a major priority for everyone. There were many ways of increasing coverage and making pensions more attractive.

He urged the introduction of tax relief at the higher rate for all low earners. “To borrow from the simplicity of the SSIA success, this could be as simple as €2 invested for every net after tax €1 saved."

He added, “We need to be innovative and, for example, permit greater flexibility by allowing the withdrawal of a percentage of funds for special events such as first time house purchase.” He also called for more flexibility as to when the contributory old age pension is drawn as people may want to work beyond 65. “In addition, the ‘holy cow’ of increasing the state retirement age is something we will all need to face up to in the near future.”

Byrne, who will shortly complete his voluntary two year term of office as IAPF chairman, said that far from promoting adequate pension provision, certain Government legislation discriminated against valuable schemes and good employers. 

“Defined Benefit plans, as in all other parts of the world, are under pressure with about 40% of plans now closed to new entrants. This is expected to rise to 60% within three years if current trends continue.”

He said that the size of Irish pensions funds is now in excess of €90bn. Yet despite achieving returns of over 14.7% per annum over the past three years, many schemes still failed to meet to the onerous requirements of the Pensions Board Minimum Funding Standard or the ‘dreaded’ accounting FRS 17.

“Our members have told us quite forcefully that the Funding Standard remains a threat to the continuation of defined benefit schemes. Its ‘one size fits all’ approach needs to be comprehensively reviewed. They question the relevance of the standard as they, due to their size, could not secure annuities to cover their liabilities nor in their view would it make financial sense to do so.”

The IAPF chairman added that the average contribution to defined contribution schemes was too low. “In all the concern over coverage we must not lose sight of adequacy. The best available survey information shows average employer and employee contributions of approximately 5% of salary on both sides. Clearly these rates will need to improve.”

Byrne also urged the introduction of a State annuity fund as current annuities are too expensive and poor value.

“If the National Pensions Reserve Fund makes sense then surely it makes sense to explore any mechanism where risks can be pooled and the spirit of mutuality applies?”

In addition, he said it was inequitable that a member of a defined contribution  scheme was forced to buy an unattractive annuity while the holder of a PRSA did not.  “At one level occupational DC scheme members are expected to take all the investment risk in the period up to retirement and then suddenly are deemed incapable of handling any risk for the twenty plus years that they will be drawing retirement income. Worse still, they are locked into the financial conditions that prevail at the time they retire.

“If funds want to earn reasonable returns on their assets then they need to take some risks. Pensioners are not excluded from this view either now that they are living longer.”

He called on the Minister for Finance to allow a level playing field.

Lord Adair Turner

Lord Adair Turner said in Dublin last October 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 where it was falsely claimed that private sector workers were enjoying higher earnings in comparable jobs that their public counterparts, the pension advantage was ignored - as if there was no value in it.

The majority of Irish private sector workers do not have an occupational pension - 900,000 according to a Pensions Board report.

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Comment: Irish Pensions - It's time to take action to end the scandal of low workforce coverage