Oireachtas Joint and Select Committees
Wednesday, 2 October 2013
Joint Oireachtas Committee on Public Service Oversight and Petitions
Revised Eligibility Criteria for State Pension (Contributory): Discussion with Minister for Social Protection
I remind all of those present - including members, the media and those in the public Gallery - that mobile phones and BlackBerrys must be switched off completely because, even in silent mode, they interfere with the sound recording system. I am pleased to welcome the Minister for Social Protection, Deputy Burton, and her officials, Ms Patricia Murphy, principal officer, and Ms Vera McGrath, assistant principal officer, from the pensions policy section, the purpose of which is to consider policy issues relating the revised eligibility criteria for the contributory State pension, including averaging the number of PRSI contributions over the years. The committee's invitation to the Minister to attend these proceedings followed on from its consideration of a number of petitions. The committee particularly wishes to discuss the steps that were taken by the Department to ensure that there was sufficient time lag prior to the introduction of the new criteria in order that people would be afforded the opportunity to put their affairs in order and would not be caught out in the context of the old and new requirements. I invite the Minister to make her opening statement.
I thank the committee for the opportunity afforded to me to discuss policy issues in respect of the revised eligibility criteria relating to the contributory State pension, including averaging the number of PRSI contributions over the years. As requested, my opening statement will be brief.
The State pension is a key social welfare payment. It is the fundamental basis for the pension system and is a very valuable benefit. There have been a number of changes introduced to the State pension in recent years, including those relating to the State pension age, the abolition of State pension transition, an increase in the number of payment rate bands and an increase in the total number of paid PRSI contributions required to qualify for a State pension. There is a strong policy basis to these changes. They are underpinned by demographic changes and subsequent issues around the sustainability of pensions. Happily, more people are living to pension age. When they do so, they live for much longer. In that context, I wish to inform the committee that the ratio of the working age population to pensioners will decrease from 5.3 at present to 2.3 by 2050 and that the number of older people will increase from 12% of the population over 65 in 2012 to an estimated 23% in 2050. In addition, in the mid-1990s - which all of those present will remember - life expectancy for males was 73 and for females 78.5. Now, for those aged 65 life expectancy is approximately 82 years for men and 85 for women. Happily, people are living for an extra ten to 12 years and we are making payments for this extended period. By 2030, which is not that distant, the figures for life expectancy for men and women will have risen to 84.1 and 87.4, respectively.
The State must ensure that it can continue to sustain pension payments in the future. This means that people will be obliged to participate in the workforce for longer and that they will need to contribute more towards their pensions. This rationale forms much of the basis for the changes outlined.
The committee has indicated it wishes to discuss the averaging contribution test for the State pension. Entitlement to a State pension is based on having a minimum number of paid contributions and an average number of contributions from the time of entry into employment. The paid contributions requirement is ten years, that is 520 contributions. This changed from five years or 260 contributions in 2012 but this change was legislated for in 1997. The average yearly test of calculating contributions was introduced in 1961. It was designed to ensure that people could qualify for a pension from the outset rather than having a long lead-in time before pensions started to be paid. This was at a time when the social insurance system that was less than comprehensive.
Following a number of reports which examined these issues, it is planned to move in the future to a total contributions approach whereby payment made can be linked to contributions over a working life. This is because the social insurance system is now more comprehensive. We have the existence of voluntary contributions, the homemaker's scheme and the facility for awarding credited contributions to employees in times of unemployment or illness. These all mean that unless a person goes abroad or operates in the informal economy she or he will have the potential to achieve a 100% insurance record. It should be possible to achieve a contribution record of anything from 40 to 50 years, while the age at which one starts work would have a bearing on that. This change to using a total rather than an average contributions test to determine entitlement to a State pension was also endorsed by the OECD in its recent report.
The policy changes I have outlined were flagged and agreed by previous governments in previous policy documents. The Green Paper in 2007, which was published during a boom period in the Irish economy, and the National Pensions Framework in March 2010 outlined the need to increase the pension age and the need for a stronger link between social insurance contributions paid and pension received. Given that the then Government accepted the recommendations of those papers, they were broadly incorporated into the documents agreed with the IMF when its officials came to Ireland in November 2010, as the members might expect. The OECD undertook an independent and objective Review of the Irish Pensions System, which was published in April this year. In it, the OECD make a number of key comments. It notes the significant challenge of funding additional pension spending as a result of population ageing, a point to which I will return. It also makes a number of favourable comments; the economic situation of pensioners in Ireland is comparatively good, both with respect to other age groups in the population and in international comparison. Finally, it states that Ireland also faces considerable short-term challenges due to the continuing impact, as we know, of the financial and economic crisis.
With regard to the timing of these changes, I want to put pension spending into a budgetary context. The biggest single block of expenditure in the Department of Social Protection is expenditure on pensions, whichwill amount to €6.5 billion, or 32% of overall expenditure, as provided for in the Estimate for this year. The reality of the demographic change is happening now. It is increasing the Department's spending on older people year on year, in 2013, in earlier years and next year. I want to make it clear that without as it were getting any compensation for this I had to find an extra €190 million approximately each year for the increase in the number of pensioners and their happy extra longevity. It is important to understand that the Department of Social Protection has done all of that within the Estimate without getting any extra specific money as a consequence. When people talk about savings we have to make and so on, this is also a cost we happily carry.
The Department has been expected to play its part in achieving the overall goal of Government to put Government finances on a sustainable footing for the years ahead. We have also had to adhere to troika commitments, which hopefully we will be exiting towards the end of this year but then we will be subject to the two-pack and the six-pack regulations, Commissioner Rehn's overall financial surveillance.
Achieving reductions in welfare expenditure has been and continues to be a considerable challenge. Reducing overall expenditure while protecting the most vulnerable people in society is extremely difficult. The State pension continues to protect those with the lowest incomes. I have been speaking about the contributory pension but we also have the fallback position, which is important in Ireland, of the non-contributory pension for people who lack means or who for a variety of reasons might never have been contributors. That is a strong feature. We have been able to maintain and continue that. It is a tribute to all the political parties in Ireland and to those on the Independent benches that, collectively, we have all prioritised the contributory and the non-contributory core pension.
The Actuarial Review of the Social Insurance Fund, which was published in September last year and given at the beginning of that month to the social affairs committee, shows that social insurance offers excellent value of money for those on the lower part of the income distribution, those with shorter contributions histories, and particularly the self-employed. One would find it very difficult to get a good pension on the commercial market compared to a social welfare pension for 4% for what used to be initially three years, then became five years and is going up to ten years. It is the best value around. The social solidarity principle which underlies the fund is reflected in the fact that for those at the higher end of the income distribution, the fund is redistributive and they generally get back less than they pay in. Notwithstanding the recent changes over the last number of years, those with lower earnings, those with shorter contribution histories and the self-employed will continue to obtain the best value for money from the fund.
I have sought to maintain the basic rate of State pension at 34% of the average weekly earnings. There have been significant improvements with regard to the level of pensioner poverty in Ireland in recent years. This is mainly attributable to substantial increases in the rates of State pensions over the period. In 2004, which was not a bad year in that the Celtic tiger was growing, the at-risk of poverty rate for people aged 65 or over was 27.1% higher than for other age groups and higher than the rate for the total population which then was 19.4%. By 2011, the at-risk of poverty rate for those aged 65 or over had dropped because of increases in pension payments to 9.7% while the rate for the population as a whole was at 16%. In 2011, the consistent poverty rate for those over the age of 65 was 1.9% compared to 6.9% for the population as a whole. This compares to 3.9% in 2004 when the rate for the population as a whole stood at 6.6%. That is a tribute to all the political parties and Members of the Oireachtas past and present, and the fact we have been able to continue to prioritise this particularly significant area of expenditure.
While expectations have changed as a result of the changes, it should be noted that all the short-term social welfare schemes are payable to the age of 66. I hope that this overview, particularly of the demographics and the fact that we are spending approximately €190 million a year extra due to the way the population figures are changing, has been helpful to the members.
I thank the Minister for that very useful overview. Those figures are encouraging. We do not often consider poverty rates in that way and think of them as having improved despite the difficulties elsewhere.
A petition that came before us related to recognising the importance of work in the home, an issue about which the Minister has spoken previously.
The changes were introduced over a very short period of time without providing any mechanism for people to make up the shortfall in the required contributions. The committee would like to know whether steps would be taken to ensure there would be a sufficient time lag before the introduction of the new criteria in order to protect people from being caught between the old and the new requirements. Will the Minister comment on that in the first instance? The nature of the work of this committee is to try to deal with issues that are of interest across a wide spectrum, not just an individual's story, even though quite clearly in the case of this petitioner, it is her individual story.
From September 2012, new rate bands for State pension were introduced. These additional payment rate bands more accurately reflect the social insurance history of a person and ensure that those who contribute more during a working life, all other things being equal, benefit more in retirement than those with fewer contributions. That is the reason my comment on the non-contributory pension is important. Sometimes people might not have the contributory contributions but the Department by and large, as members know, always allows people the most favourable option, whether they are dependants or the principal retirement payment holder. Those with expectations affected by the changes in the rate bands are as follows; those with an average of 30 to 38 contributions, the difference in the rate is €18. For those with average contributions of between 20 to 29, the difference is €28.80 per week. For those with average contributions of 15 to 19, the difference is €22.70 per week. For those with average contributions of ten to 14, the difference is €23 per week. The principle is that the level of pension should reflect the PRSI contributions paid over a working life. It has to be adhered to if we are to be able to fund pensions into the future and take account of the large extra number of pensioners who are also living longer.
Long-term pension policy - this was indicated in the earlier pensions framework in 2010 and the Green Paper of 2007 - is moving towards a total contributions approach to pension, that pensions paid will be linked directly to contributions paid over a working life. It will remove the current system, which is based on the average number of contributions made. That also had severe disadvantages for certain categories of people, particularly if they started working very young, had an interrupted history and did not have credits. There is an element that some people may benefit and others may be on the losing side but overall it is probably a better system.
It was suggested the change in rate bands is targeted at those on lower incomes as they may have incomplete records. That is not quite true. It is not clear why contribution records are incomplete. If we knew the answer to this we would know a lot. We can guess. One is talking about a long period. It is the Department's policy to follow up on periods of unpaid contributions.
People raised the issue of insufficient lead in time and their expectations of the rate of pension they would receive in the future not being met. While expectations may have to be adjusted to the change, a rate of pension will still be payable. The critical factor is the need to be able to fund the totality of pensions, given the extra €190 million a year that we must pay.
Go raibh míle maith agat. I thank the Minister for addressing the questions. The actuarial review conducted by KPMG and published last year assessed the impact of the changes for the year 2020. It appears from our analysis that more pensioners will be brought into the net as people live well into their 80s, according to the statistics. However, the net value of the pension to each person will be lower. In effect, there will be more pensioners but each will be entitled to less money. The review demonstrates that following the changes, just 60% of individuals retiring in 2020 will receive a State pension of more than 80% of the full rate and 40% will receive less than that. That is a change of 20 percentage points from the proportion of people entitled to 80% or more who retire prior to the changes taking full effect. Does the Minister agree on the potential danger of creating a poverty trap in the future in that more pensioners will receive a pension but when the payment is compared with the average industrial wage, the percentage people will get into their hand will be lower in real terms?. That has the potential to create a poverty trap.
Governments have spent billions on tax reliefs on private pensions. Does the Minister agree that this policy needs to be readdressed?
Perhaps she will comment on the approach that the Government intends to take on tax reliefs for private pensions.
I shall comment on another area. The Minister has been judicious in her quotations from the OECD report or her reading of same. She said that the OECD endorsed the policy of the Government. It is more correct to say that the OECD said that it was an improvement on what existed previously and that it made a number of recommendations. One of its recommendations was that the State contributory and non-contributory pensions be rolled into one basic pension, either a universal pension based on residence or a safety net pension based on means. What is the Minister's view of the OECD's recommendation? Has the Department been asked to begin its research into the mechanics of introducing a universal pension, as suggested in the report?
My next comment might be a little off the mark. Last week we had a number of ESB workers in attendance and they brought the crisis in their pension fund to our attention. They said that there is a danger that the active members of the fund would be left with just 3% of their benefit entitlements if the scheme was wound up. They also stated that 80% of the pension scheme's members commenced work pre-1995 so have no entitlement to the State's contributory pension. Is there any action the Minister can take to protect the workers? They will be in an awkward situation having paid into a pension scheme that is going belly up and ineligible for a State pension scheme.
It is critical with pensions, as we said, to have commitment to 34% of average earnings. I shall answer the Senator's question as follows. Let us look into the distance because the following measure would have to be Government policy for a long period. If there is a general social commitment to the retirement pension being at 34% of average earnings, and similar for the non-contributory pension, and earnings increase then so does the State's contributory and non-contributory pensions. It is an automatic equaliser or follower provided that one keeps to the principle of 34%. If one lowers that principle then, relatively speaking, the value of one's pension could fall. I can only speak for the period that I am Government but even though this is an extremely challenging period in the economic history of the country, our commitment is to maintain the ratio as expressed in the core weekly payments, and that is evidenced as wages rise in the future economy. There is no great pressure on wage increases at present. When the economy starts to expand and grow there will be pressure.
With regard to the pension following in line with the percentage to which I have referred, that is key to keeping the excellent outcome that we have regarding pensioners avoiding poverty and poverty traps. In general, provided that the policy is continued, pensioners will be strongly protected and, as a consequence, will avoid poverty. That is why I am saying that it is a feature of an unwritten agreement with pretty much everybody in this House to maintain the success that the country built, admittedly, at the time of the Celtic tiger boom. It is very important to hold as much of those gains as possible. The Senator will be aware of the following. Let us compare the pension that somebody in Donegal receives with what somebody who lives across the Border receives. It shows that we are, as a society, in a better position, notwithstanding arguments about public services. This society should seek to maintain that position.
The second point refer to how the net value is related to the percentage. I hope my words make sense to the Senator. There should not be a poverty trap over somebody's lifetime. Let us remember that the State has moved to a position where anybody in employment, even public servants, are covered by PRSI and anybody self-employed has very generous contribution conditions regarding the contributory old age pension. I do not see the poverty trap issue arising provided that there is a continuity of commitment to pensioners and retired people. That is important. Let us also remember that Ireland provides very generous recognition of credits for people, for instance, for those involved in caring and other work within the home. We also have automatic credits, as I said, for people who have periods of unemployment. They are automatically granted a credit during such periods. That measure helps to maintain the continuity of somebody's contribution record over a long period.
Tax reliefs are a matter for the Minister for Finance. However, I recall the commitment given in the programme for Government that if one puts savings or earnings into a pension pot that will yield an income in retirement of €60,000 per year then the State would taper off, or not continue, to give a tax write-down. For most people a pension of €60,000 per year is a significant pension. The provision does not prevent a person from saving and putting more into a pension pot. It is after that figure that tax relief would be mitigated.
The Minister for Finance gave a commitment in last year's budget to legislate for such a provision for 2014. The legislation is technical but I know from reading parliamentary questions that work is ongoing in that regard. Next year the pension levy of 0.6% falls out. Let us recall that anybody with a pension fund pays a 0.6% levy at present. I know that the Senator's party favours a much higher level of wealth tax. Let me say, as an accountant, that a 1% levy on capital is a very highly effective rate. That is why countries that have a wealth tax charge a very low rate and a rate of 0.6% would be a significant amount. The pension levy of 0.6% falls out next year.
I shall comment on the OECD and a universal supplementary pension. I have said before, and I shall say it again, this country has a contributory and non-contributory retirement pension, which is a good pension. At present a person is not going to get much more than €240 per week plus ancillary benefits and other benefits that one may be entitled to, such as a medical card, if one's sole income is the pension. Many people who earn more should have a supplementary pension. Most countries, such as Australia and the United Kingdom recently, have either a mandatory supplementary pension when a person is working or auto-enrolment, the second option put forward by the OECD. Personally I favour the latter and I have extensively discussed the matter with the Minister for Finance. We had very positive discussions. The individual and the State would have to contribute and, if the individual were in employment, the employer would have to contribute. However, the economy would have to return to a better place.
It would be difficult to ask people in their 30s, who are at the pin of their collars in paying their mortgage, to start accumulating an additional pension. Most countries which have done this have phased it in over a number of years. I strongly support the OECD's recommendation. The auto-enrolment model is possibly the best for Ireland. I am looking closely at the success or otherwise of it in the United Kingdom.
On the ESB workers crisis pension fund, I will first pass on the good news. As I understand it - I will talk in general on the issue - the ESB workers have been working for a number of years to sort out the issue of, as is the case with many defined benefit schemes, deficits on their pension funds. They have done a huge amount of work. They have put their scheme to the pension regulator, which is independent of the Department. Due to the extensive negotiations in the ESB over the course of a number of year and the quality of the management of the pension by the trustees and the workers representatives, their position is relatively-----
It is with the pensions board.
Unlike what I read in the newspapers, the matter does not have anything to do with the Department of Social Protection. There is an issue with the ESB management about the description of the designation of the pension fund as either defined benefit or defined contribution. That is a matter for the workers and the ESB, so I do not want to comment on that.
There are other issues. As the Senator said, the ESB has a significant pension scheme. Huge efforts have been made by the management, the workers, the trustees and the workers representatives in the trade unions to address what was a significant deficit. Up to the end of 2012 - this is the good news, although I do not know how much it affects the ESB - equity investments of DB schemes grew on average by 11%. Members will recall that when the world stock markets crashed, the value of the underlying investments in many DB schemes in Ireland fell dramatically. We then had the bank crash and German bond prices went up because they were considered to be the most secure. That meant that someone coming to retirement who wanted to buy a pension had to buy a very expensive German product.
We have done a lot of work to develop sovereign annuities. The member may wish to put down a question on that. It has been a positive development. Different pension schemes have invested €400 million in Irish sovereign annuities. I will not refer to the ESB position on that because it is a matter of detail I cannot comment on.
I have written down the words "endorsed" and "improvement" but I cannot remember to what those words relate.
No, we asked the OECD to carry out a study of the pensions landscape in Ireland. We are on the fifth anniversary of the infamous bank guarantee that cost us all so much. Shortly after that the pension funding standard was suspended, partly because of the chaos on the equity markets and partly because bond prices for buying annuities became difficult from an Irish point of view. As I have mentioned, we also had green papers and position papers all done in the heat in the Celtic tiger years when the promises that could be made to people were much more significant. Then the financial world as we knew it crashed. That was the situation I inherited when I became the Minister for Social Protection. I asked the OECD to look at where we are now and, bearing in mind the position that we are in, what we can best do to provide the vast majority of people with a decent standard of income in retirement and whether there is a mechanism to have a second supplementary universal pension scheme that would allow people to perhaps double the minimum level of retirement pension. The OECD published its study on that. The World Bank looked at governance in a related study. The report is factual. It said that, relatively speaking, the pension position on contributory and non-contributory pensions meant that pensioners had a good state pension base but it recommended that people should save for an additional pension. The level of pension covered by private schemes is rather small - it is only around 50%. The problem is that atypical workers, young workers and women are often not making additional private pension provision. An auto-enrolment or mandatory scheme would provide for some of that.
I want to return to the ESB issue. The ESB group of unions were in here in the past week or so. They are still very concerned about the situation. Some 80% of pension scheme members commenced work pre-1995. As a result they have no entitlement to the State contributory pension. Can the Minister's Department take any action on that?
I will not comment because the matter, which is being discussed between the scheme members and the company's management, does not fall within my brief. I suspect that both the members and the company are in receipt of senior legal advice.
The company has another issue to consider. As members will know, the ESB is one of the largest state enterprises and employs a significant number of relatively well-paid employees. It is important, given the State's recovery from the crash, that the ESB and other semi-State bodies should, as was traditionally the case for the ESB, be able to borrow on the international lending markets. That is possibly a factor in the management's approach because that possibility means investment and with it all the consequences for the ESB's structures, electricity generation and transmission and so on. However, I do not have the capacity to comment on the specific issues.
My question is about the other petition. There has been preliminary contact with the Minister's office about the petition which has the broad idea of amending the Social Welfare Acts to provide for the exclusion of short periods of PRSI contribution which then affect a person's overall pension. The Minister's Department advised us that there were no plans to amend the legislation and even if it were to be amended, such an exclusion would not be applied retrospectively and therefore the petitioner would not benefit. Even so, the petition is valid. Given that the Minister is here, will she confirm there are no plans and why that is the case? I imagine the answer is straightforward.
The averaging system is a winner for some people and a loser for others. Were we to move to a total contributions system, which is much clearer in the context of current participation in the labour force, that would also benefit some people while others would lose out. Our main requirement is to have sustainable pensions.
The yearly average test has existed since 1961, when contributory pensions were first introduced. However, back in those days many men in particular started work from the age of 16 onwards and in some cases they began work at 14. There were fewer women in the labour force. They started at 16 and often left when they married.
One is almost talking about a different employment landscape. Nowadays, we have much higher rates of participation by women in the labour force. The scheme was designed to ensure that people could qualify for contributory pensions immediately and to suit a system where the social insurance coverage was limited. There were far fewer numbers at work and even in 1961, the model was still largely that of the male breadwinner rather than the double-income family or the variations we have nowadays.
The social insurance system is now very comprehensive and long-established and there are anomalies associated with the averaging system. Somebody who started working at 16 could find that if they retired at 66 and had some gaps which were not the subject of credits, they could have many contributions but end up with less. This is probably one of the more arcane features of the pension system. For that reason, it has been considered for a long period of time that the average yearly test is no longer a suitable arrangement. It has been decided to begin implementing a total contributions approach. This has been highlighted in all those green papers and study papers to which I referred going back to the 2000s and earlier. The pension paid will be proportionate to the number of social insurance contributions made by a person over his or her working life and 30 years contribution will be required to qualify for a maximum pension. The green paper on pensions considered that 40 years would not be an unreasonable target to set for a maximum pension but we have gone for 30 years. In recognition of the fact that gaps in coverage resulting from the early structure of the social insurance system are still evident in the records of people qualifying for a pension, it was decided not to implement the switch to total contributions immediately but to allow a reasonable lead-in time of ten years. That review was in 2010 so the ten-year period will be until 2020. This date is under review and can be reviewed.
The Department has no discretionary legislative provisions that could facilitate the disregard of early periods of employment regardless of the temporary or informal nature of the employment. From a PRSI policy perspective, there are no plans to introduce measures that would disregard periods of early employment. I am not sure members want ministerial discretion on these issues because we want to keep a contributory system that is well-funded where people know the rules rather than feel that they could get a rule entirely for themselves by going to the particular Minister of the day. I am not unsympathetic to people who feel they have lost out but if one has a contributory system, one must have it for people in the country as a whole. With regard to worries about people being impoverished as they grow older, the real fallback is the non-contributory system at the same rate. If they are not people of significant means or they have a spouse of significant means and rely on the State pension for their income, they can fall back on the non-contributory system. That is what really guards against people falling into poverty.
Are members happy with the way the meeting has proceeded? I thank the Minister and her team - Ms Murphy and Ms McGrath. We are very grateful to them for taking the time to meet us today and for their co-operation in dealing with members' questions. I also ask that the two petitioners be sent a transcript of the meeting so they are aware that their concerns have been raised. I thank the Minster for her response.