Mr. Robert Nicholson:

The Chairman asked for information on how we compared internationally in terms of occupational and supplementary pensions. Ireland is one of only two OECD countries that does not have a mandatory or quasi-mandatory earnings related pillar, the other country being New Zealand which has in place a fairly significant system anyway. However, one needs to look at the nature of the individual systems because they are not always comparable between the various pillars. The first pillar is the State pension, the second is the occupational pension and the third is the personal pensions. There are differences between the systems. As a broad indicator, the OECD average of post-retirement income, compared to pre-retirement income, is 54% of pre-retirement wages. In Ireland, only 35% of the population in the private sector have occupational or supplementary pensions. The remainder are reliant on the State pension, which is 35% of the average industrial wage, such that there is a crude retirement savings gap in Ireland in comparison with our OECD colleagues in terms of overall adequacy. Again, there are all sorts of caveats around that because this is a notoriously difficult area in that one needs to take account of housing, taxation, differences in consumption between different types of people and tertiary benefits such as free travel, household benefits and so on. This retirement savings gap has prompted the idea of a universal retirement savings system, whereby the State removes the voluntary nature of the system and adds an element of compulsion. Decisions have not yet been made on the appropriate model in this regard, although two models have been put forward. The preferred model of the interdepartmental committee that looked at this issue was a defined contribution earnings related second pillar system, which narrows the frame of reference significantly in terms of the proposed solution.

As part of that process, we talked to approximately 36 groups, including trade unions, employers, pensions industry officials and officials from the voluntary and community sectors. There is absolute consensus around the need for improved retirement savings although there is little consensus and disparate views on the manner of the response to that. For example, a defined contribution, DC, earnings related pillar could take many forms. It could take the form of a State-operated system in the context of increased PRSI contributions or a nominal account for an individual that is personalised and moves beyond the redistributive State pension system. It could equally be one large State pension scheme, similar to NEST in the UK or a hybrid of both models which could involve the private sector bidding for work in that area for a large number of funds, or it could be an extension of the current system with employers and employees being compelled to enrol in a pension scheme. The operational framework will be extremely important. As I said earlier, all the evidence suggests that the design of such a system will be crucial. Also crucial is political consensus. Generally speaking, internationally, there has been cross-party political support to allow any proposed reform to move beyond the term of, in this instance, this Dáil. As mentioned by Senator Alice-Mary Higgins, consumer trust and buy-in by the various individuals involved will also be crucial.

Leaving aside the operational characteristics of the scheme, fundamental questions such as who should be included, why they should be included, the policy objective of the system, the financial incentives, how much a person should contribute, whether a person should be allowed access to some of his or her savings and so on need to be addressed. In terms of the gender issue, it is fair to say that any system that relies on earnings and contributions from earnings can naturally result in worse or lesser outcomes for particular groups in comparison with others. I am speaking in this regard about the gender pensions gap. It is a difficult area in the context of an earnings related system because the triple whammy of fewer hours worked, less time spent in the labour market and more part-time work and lesser earnings generally results in lesser pots at the end for those groups, who, typically speaking, and to a large extent, are women. What is put in reflects what goes out. A particular challenge will be how such a system will meet the needs of carers and other groups, which leads on to the issue of financial incentives and any contribution the State may make for particular groups. This is a matter on which a decision will have to be taken before any system could be launched. Typically speaking, internationally, those issues rather than being addressed through an employment related system are addressed through the distributive first pillar system. One way or the other the issues have to be considered and a position taken on them. I agree that this is a key issue.

On the question about people who are naturally outside the labour market, there are international systems that allow opt-ins, with financial incentives and so on. There is nothing preventing any DC employment-related system being opened up to people outside of the labour market. On the question regarding trust, fundamentally what is required is the trust of the consumer, particularly in the case of an opt-out system. Again, this will be a matter around design of the system. Typically, default investment structures with very tight parameters would be put in place. All of the evidence we have suggests that we should move away from the current system which comprises 160,000 with significant charges because they do not achieve economies of scale and, on occasion, there are problems with governance because there are 200,000 trustees across the country making decisions about people's retirement income in the future. It would be generally accepted that what we need to do is to strive towards having a small number of large schemes that can achieve economies of scale, result in better outcomes for members, can be more easily governed and have legislative underpinning in terms of how they operate. All of this work is work that still needs to be done, although we have devised initial ideas around it.