Mr. Tim Duggan:

I thank the Chairman and other members of the joint committee for the invitation to discuss the issue of pensioners. I also thank the Chairman for introducing my colleagues.

As members of the committee will know, pensions policy is a large and complex area and it will not be possible to treat all the relevant matters in an opening statement. The areas covered under pensions policy in the Department include the State pension contributory, the State pension non-contributory, both the contributory and non-contributory widow's pension, and a range of secondary benefits, including fuel allowance, the household benefits package and free travel. We also cover private and occupational pensions, European law relating to pensions, such as the institutions for occupational retirement provision, IORP, directive, and pensions reform such as the development of a new universal retirement savings scheme.

State pensions cost approximately €7 billion each year and this figure is rising rather rapidly. There are three main factors driving this: greater longevity; increased PRSI coverage in the population; and increases in pension rates paid. The biggest factor, happily, both in Ireland and across the world, is greater longevity. In the 2006 census, the number of people aged 65 or over was nearly 468,000. By the time of the 2011 census, this had risen to over 535,000 - an increase of about 14.5% in only five years. This is consistent with the longer-term trends that have emerged. In effect, there is an increase in the number of people turning pension age each year, but the numbers who die each year is, thankfully, reducing as a result of a range of factors. This places a higher burden upon those who are still of working age. The ratio between those of working age and pensioners was over five to one at the time of the most recent census. Even with the increases planned for in pension age, this is projected to fall to about half that by 2050 and will then hopefully stabilise thereafter.

Expansion of PRSI coverage has increased the number of pensioners who now qualify for a full pension. Most notable of these was the creation of class S for the self-employed in 1988. This brought most self-employed people into the system, including farmers. PRSI-related benefits are good value for workers. This is especially the case for the self-employed who gain access to a pension that is worth approximately €300,000, or closer to €500,000 if they claim an increase for a qualified adult on it, based on deductions of just 4% each week. Unlike employees, this is not supplemented by a significant additional payment by their employers, as they have none.

The third factor involves increases. Over the decades, the rate of the State pensions has steadily increased, from what was a very low base at the time of its introduction, to a much higher level now. Therefore, today's workers and their employers are funding a pension that is about a third higher than the one originally introduced, relative to their ability to fund it. The current rate is approximately one third of gross average weekly earnings - at €233.30 - and this is set to rise by €5 in March 2017.

Increases in pensions have had a positive impact upon pensioner poverty rates.

Between 2004 and 2014, the at risk of poverty rate for those over 65 years of age had more than halved to 10.3% and the consistent poverty rate for that group had almost halved to 2.1%. This compares very favourably with the general population, where the risk of poverty rate is 16.3% and the consistent poverty rate is at 8%, or nearly four times the pensioner rate.

The State pension age has gone through a number of revisions, up and down, over the years. When the old age contributory pension was introduced in Ireland in 1961 for 70 year olds, life expectancy at birth was 68 years for men and 72 years for women. During the 1970s, the age for both old age pensions was gradually reduced from 70 to 66. As pointed out earlier, the earlier trends in life expectancy have continued, and this is not just the case in Ireland. All countries across the world are, at the very least, planning to increase state pension age and in most cases they have already started this process. In Ireland, it commenced with the abolition of the State pension transition from January 2014. The same Act which made this change also increased the future State pension age to 67 years from January 2021 and to 68 years from January 2028.

The State pension transition costs approximately €140 million each year, but it was always understood that the net saving would be lower as significant numbers of people would claim alternative working age payments instead, such as jobseeker's benefit and invalidity pensions. Currently, the figures indicate that the annual saving is approximately €80 million. In time, if more people have the opportunity to work longer, this saving will increase. The Department of Public Expenditure and Reform recently chaired an interdepartmental group on this matter and I understand that colleagues in other Departments are looking at the means for encouraging this to a greater extent. While our Department participated fully with the work of this group, the policy areas lie outside our remit.

Another reform which was introduced at that time was the restructuring of the yearly average bands of the State pension contributory, SPC. These have been restructured a number of times over the years. When savings were required in 2011, the Government decided that a restructuring of the bands would be preferable to a general decrease in rates, which would hit all pensioners including those of limited means. Under the new bands, which apply to claims from September 2012, people with lower yearly averages still attract a better return on their PRSI than others. A yearly average of 20 contributions now will attract a contributory pension of 85%. However, in many cases, the person will instead claim a non-contributory pension at a higher rate. This is up to 95% of the maximum rate of the contributory pension, and over 70% are paid at the full rate, after the means test. Those who are not, and are on reduced rate SPC of 85% or less, will generally have their own income, such as a private pension or rental income on a property, over and above that payment. If there is very significant household income, it may instead be more advantageous to claim an increase for a qualified adult, at a rate of 90%, as this is based on the means of the qualified adult and income and capital in their spouse’s name are not considered in that means test.

People often ask how much it would cost to revert to the structure which was in place prior to 2012. This is difficult to calculate with precision, but we estimate that it would be a minimum of €50 million in 2017 and would rise at a rate of about €10 million per year. In reality, it is likely to be considerably higher when all the calculations are worked out properly. This would not benefit the less well-off pensioners, who are either on a non-contributory pension or a full rate contributory pension if they have the contributions, so any budget which introduced such a change would have to find the resources from somewhere. If it came from money earmarked for pension increases, this would be to the detriment of the poorest pensioners.

Since 1961, when contributory pensions were introduced in the State, the yearly average contributions test has been used to calculate the rate of pension entitlement. Entitlement is banded, with the maximum rate payable to those with a yearly average of 48 to 52 contributions and the minimum rate payable to those with a yearly average in the range of ten to 14 contributions per year. The Department is actively working on the development of a total contributions approach, TCA, to pension qualification which would replace the yearly average contributions test for State pension contributory. The aim of this approach is to make the rate of contributory pension more closely match contributions made by a person. An important factor in the final design of the scheme will be the treatment of homemaking and caring periods. This is a very significant reform with considerable legal, administrative and technical elements in its implementation. There will be further consultations on this, including with this committee.

I will now turn to occupational and personal pensions. The first matter is defined benefit, DB, schemes. The committee is well aware that the funding challenges facing DB schemes are well aired and are reflected in the steady decline in the number of DB schemes over recent years. In 1997, there were over 2,200 funded DB schemes. Latest figures indicate that there are 682 schemes. Membership of DB schemes in Ireland totals approximately 125,000 active, 435,000 deferred and 100,000 pensioner members. The total assets of these schemes were just over €60 billion with liabilities of over €58 billion.

DB schemes have been under increased strain, particularly since the economic collapse of 2008. While our increasing life expectancy is welcome, the fundamental problem facing DB schemes is that the promise they provide has become significantly more expensive to maintain because of increasing life expectancy, lower than expected investment returns and the very significantly increased cost of purchasing pension annuities in a low interest rate environment. According to the latest available returns made to the Pensions Authority, approximately 70% of DB schemes are meeting the regulator funding standard, which is a considerable improvement over recent years. Of the schemes that do not meet the funding standard, almost all have funding proposals in place to address funding shortfalls. Generally, where schemes have encountered funding difficulties, the process has been managed through dialogue between trustees, employers and members, where efforts are made to reach agreement regarding the steps to be taken. To this end, while under Irish law responsibility rests with the employer and the trustees for ensuring DB schemes are properly funded and managed to meet the pensions promise, the Minister has expressed his view that where difficult situations arise employers, unions and trustees should continue to make strenuous efforts to protect the viability of their schemes.

Turning to defined contribution, DC, schemes and personal retirement savings accounts, PRSAs, in Ireland and throughout the world pension provision is gradually migrating from the DB to the DC model. Year-on-year data indicate a continual increase in the number of occupational DC schemes. At the end of 2015, there were 67,000 active DC schemes with 280,000 members, an increase of over 18,000 thousand members compared to 2014. The total assets under management for such schemes is estimated to be over €40 billion. The number of PRSAs, which are individual contract based DC products, increased to almost 240,000 at the end of 2015, up from 227,000 in 2014. The total assets held in PRSAs increased to over €5 billion in 2015. However, notwithstanding these increases, figures indicate that only 47% of workers aged between 20 and 69 years have a supplementary pension. This figure falls to approximately 35% if the private sector is considered in isolation. This relatively low coverage is of significant concern for the Government as it may mean an unwanted reduction in living standards for large numbers of retirees.

To respond to this problem, consideration is being given to the introduction of a new, universal, supplementary workplace retirement saving system. This employment based DC system would be intended to progressively achieve universal coverage. A high level interdepartmental universal retirement savings group, URSG, which included international pension reform experts, was established to develop a roadmap for consideration by the Government. The work of this group concentrated on whether such a system should be a mandatory or an opt-out model and the potential design characteristics of such a system.

The development of a universal system would require a multi-annual programme of work and the Minister has confirmed this area of work as a departmental priority. Data from the Pensions Authority show that with a total of over 160,000 occupational pension schemes, including very many small and single member schemes, Ireland has significantly more schemes than any other European country. As a result, many schemes are not benefiting from the competitive charging structures that would accrue through economies of scale. Given this proliferation of schemes, the Pensions Authority has also raised concerns regarding the potential for inconsistent scheme governance standards and the regulatory capacity to supervise this number of schemes.