Oireachtas Joint and Select Committees
Wednesday, 5 March 2014
Joint Oireachtas Committee on Education and Social Protection
Pensions Reform: Discussion
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. If they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or an entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I advise that opening statements will be published on the committee's website. Members and delegates are requested to ensure mobile phones are switched off completely as they interfere with the broadcasting equipment, even when left in silent mode.
This meeting is about pensions reform and the implications of the EU White Paper on pensions issued in 2012 which proposes wide reform of pensions to deal with, among other matters, the creation of better opportunities for older workers, the development of complementary private retirement schemes and enhancing the safety of supplementary pension schemes to facilitate mobility. The White Paper also proposes encouraging member states to promote longer working lives, monitoring the adequacy and sustainability of pensions and supporting pension reforms in member states. It has significant implications for Ireland with regard to financial and labour market issues, as well as older workers' issues. Members will recall that when the committee recently considered a specific issue related to pensions, it heard presentations on the implications of the increase in the age at which the State pension was to be paid.
I welcome from the Department of Social Protection Dr. Orlaigh Quinn, Mr. Tim Duggan, Mr. Finbarr Hickey and Mr. Darragh Doherty; from ICTU Mr. Fergus Whelan; and from the Irish Brokers Association Mr. Frank Lahiffe, Mr. Ciarán Phelan and Mr. Aidan McLoughlin. I invite Dr. Quinn to make a presentation on behalf of the Department of Social Protection.
Dr. Orlaigh Quinn:
I thank the joint committee for the invitation to discuss the issue of pensions reform, including the implications of the EU White Paper on pensions. In the past few years pension provision, in all its forms, in Ireland has experienced considerable challenges and changes. The sustainability of the wider system is a particular concern because of the demographic issues Ireland faces and the associated increases in pension and other age-related costs. These issues have been exacerbated owing to investment losses and the deterioration in the public finances since the recession. Currently, there are 5.3 people of working age for every pensioner and this ratio is expected to decrease to approximately 2.1:1 by 2060.
Life expectancy is also increasing. In the mid-1990s life expectancy for males was 73 years and 78.5 for females. For those aged 65 years today, life expectancy for males is 82 years and 85 for women. By 2030 these will have risen to 84.1 years and 87.4, respectively. This is very welcome news, but it brings with it a number of significant challenges in funding pensions into the future. Key drivers of reform have included the need to achieve sustainability of our systems in the longer term, while also striving for adequacy in these systems. This has included reforms to the State pension and public sector pensions and efforts to increase supplementary pension coverage, while working to ensure the continued viability of defined benefit pension schemes.
Ireland has undertaken considerable research on pension issues, commencing with the Green Paper in 2007. This included comprehensive consultation involving submissions from some 370 organisations and individuals, as well as a number of national and regional meetings involving some 500 people, and resulted in the national pensions framework in 2010. A number of reforms have since been implemented.
A number of reforms of the State pension have been implemented. Significant reforms have been introduced recently and more will be implemented in the years ahead. In order to provide for sustainable pensions and facilitate a longer working life, legislation was introduced to increase the State pension age. This was discussed at the previous meeting. In January 2014 the State pension age was standardised at 66 years, with the abolition of the State pension transition payment. Pension age will increase to 67 years in 2021 and 68 in 2028.
The changes to pension age also include consideration of measures to encourage longer working by older workers. With effect from April 2012, the number of paid contributions required to qualify for a State pension increased from 260 paid contributions to 520. From September 2012 new rate bands were introduced. These additional contribution requirements and payment rate band changes more accurately reflect the social insurance history of a person and ensure those who contribute more during a working life benefit more in retirement. It is also planned to introduce a total contributions approach. This will align the pension payment with the number of years a person has contributed to the social insurance fund. Arrangements will also apply to cover periods outside the workforce. This will more accurately award contributions made over a working life. It will remove the current anomaly whereby some people qualify for higher pension payments, even though they have fewer contributions but a higher average than others who do not qualify or qualify for a lower pension owing to the average contributions test. The proposed date of introduction for this reform is under review.
Several regulatory measures have been introduced in recent years to support the sustainability of defined benefit schemes. Legislation brought forward in 2009 removed the priority given to post-retirement increases for pensioners to ensure a more equitable distribution of assets in the event of the wind-up of a defined benefit scheme. The introduction of the sovereign annuity initiative in 2012 gave scheme trustees an option to reduce scheme liabilities and better match their assets with their liabilities. The introduction of the risk reserve in 2012 sought to improve the future sustainability of defined benefit schemes and incentivise schemes to improve their exposure to risk. In 2013 there was a widening of the types of asset that could be used to reduce the reserve requirements of the funding standard.
Also in 2013, regulatory powers were strengthened to provide the Pensions Board with the power to wind up a pension scheme. This power can only be exercised where a scheme is underfunded and the trustees and the employer are not in a position to adopt a funding proposal, or where the trustees of a scheme fail to comply with a direction from the Pensions Board to restructure scheme benefits. Legislation was also introduced in 2013 to provide for governance changes to the Pensions Board and amalgamate the Pensions Ombudsman and the Financial Services Ombudsman. These changes are aimed at strengthening regulation and ensuring greater consumer involvement. The Social Welfare and Pensions (No.2) Act 2013 which was signed into law in December 2013 provides for a fairer and more equitable distribution of scheme assets in the event of the wind-up of an underfunded scheme. It also facilitates a greater sharing of the risk between all of the beneficiaries when a scheme is underfunded, while still providing for priority protection of pension benefits. A non-legislative initiative has involved the development of a pensions tracing system for the private sector to support those nearing retirement to identify previous pension benefits and enable the pensions industry to contact former contributors to schemes.
In February 2012 the European Commission published a White Paper on how to create adequate, safe and sustainable pension systems in the European Union. The White Paper contains a range of initiatives intended to help to create conditions that will enable a balance between time spent working and time in retirement, ensure those who move to another country can keep their pension rights and help people to obtain adequate pensions when they retire. The White Paper describes the ageing of the European population which reflects the situation in Ireland as the main challenge for the future of the European Union's pensions system. Other challenges it identifies include financial sustainability, maintaining the adequacy of pension benefits and raising the labour market participation level of women and older workers.
In the light of these challenges, the White Paper makes a number of proposals for EU-level initiatives to support member states' efforts to reform their pension systems. These include creating better opportunities for older workers by calling on the social partners to adapt workplace and labour market practices and using the European Social Fund to assist older workers into work. Another proposal is to develop complementary private retirement schemes by encouraging social partners to develop such schemes and encouraging member states to optimise tax and other incentives. There is a proposal to enhance the safety of supplementary pension schemes, including through a revision of the directive on institutions for occupational retirement provision, IORP, and the provision of better information for consumers. The White Paper proposes to make supplementary pensions compatible with mobility through legislation protecting the pension rights of mobile workers and promoting the establishment of pension tracking services across the European Union. Member states are to be encouraged to promote longer working lives by linking retirement age with life expectancy, restricting access to early retirement and closing the pension gap between men and women. The White Paper also recommends continued monitoring of the adequacy, sustainability and safety of pensions.
The White Paper does not contain country-specific recommendations for Ireland owing to the memorandum of understanding which was in place at the time of its publication. However, the challenges identified in the White Paper are the same ones Ireland has been seeking to address in recent years, challenges which are relevant to most member states. Ireland plays a full role in EU developments and is a strong contributor in the various Councils dealing with pensions. During the recent Irish Presidency we were successful in obtaining agreement on a portability directive. This proposal aims to remove obstacles which hinder citizens' capacity to choose, with confidence, to live and work anywhere in the European Union without fear of losing their pension entitlements. It allows EU workers who move to a different EU country to safeguard their supplementary pension rights.
In April 2013 the OECD published its review of Ireland's pension system, encompassing the totality of pension provision in Ireland - State, private, occupational and public sector. The issues of sustainability, adequacy, modernity and equity were central to this review. The good news is that Ireland was found to be in a relatively favourable position compared with most OECD countries, both in regard to pension spending and the adequacy of retirement income provision. Most importantly, the economic position of pensioners in Ireland is comparatively good, relative to other age groups in the population and international comparisons.
In terms of the adequacy of pensions, it should be noted that older people do not experience the levels of poverty experienced in the past. For instance, the at-risk of poverty rate for persons aged 65 years and over fell from 27.1% in 2004 to 9.7% in 2011, compared with 16% for the population as a whole. Over the same period, the consistent poverty rate for older persons also declined from 3.9% to 1.9%, compared with 6.9% for the population as a whole. The OECD review shows that recent decisions in this area are in line with the roadmap needed for pension reform. However, the report also raises question marks about aspects of the Irish pensions system. The key recommendation made in the report is to improve the adequacy of pensions by increasing coverage in the funded part of the pensions system through a universal mandatory or quasi-mandatory employment-based pensions system. This is in accordance with the recommendations made in the EU White Paper and a key issue to be addressed in the context of future pension reforms.
While the State pension has been successful in lifting older people out of poverty, the financial challenges of our changing demographics and ageing population mean we need to improve occupational and private pension coverage.
Dr. Orlaigh Quinn:
Of course, Chairman. What is of critical importance in terms of the future of the pensions system is whether the Government decides to focus on an auto-enrolment or a mandatory system. There are very useful lessons to be learned from other countries in this regard and the Government will be making a decision in due course. Any new reform must take into account the pension charges report published in 2012 and address the key challenges outlined therein.
Mr. Fergus Whelan:
I thank the joint committee for the invitation to make a presentation on pensions reform. The Irish Congress of Trade Unions is concerned that this term has become a euphemism to cover policy and regulation failure, the transfer of pension risk from employers to workers, and neoliberal attacks on social security provision for the elderly. I propose to focus on three main issues, namely, the crisis that has unfolded in recent years with regard to defined benefit occupational schemes and, specifically, the failure of the regulatory system in this regard; the fact that defined contribution schemes have not proved to be value for money or performed any better than defined benefit schemes; and the implications of the EU White Paper on pensions.
Before the economic crisis in 2008, defined benefit schemes in Ireland were already under significant pressure. In 2005 congress published a document entitled, Pensions Problems and Solutions, which highlighted the fall in equities in the previous three years and signalled problems ahead for defined benefit schemes. Throughout the pensions crisis which began long before the financial crisis the State and pensions regulatory system have failed pension scheme members. At times, in fact, they both appeared to be actively working against the best interests of scheme members. In 2008 the regulator suspended the minimum funding standard, a move that was welcomed by all stakeholders. It seemed that a breathing space was being given to allow steps to be taken which could ease the pressure on sustainable schemes. Gradually, however, it became apparent that officialdom had no intention of dealing with the systemic problems; rather, it adopted a position that these problems were a matter for individual schemes and their trustees. As trustees grappled with mounting problems, they were left in the dark for nearly five years as to what rules would be applied into the future.
Congress gradually developed a consensus among the main stakeholders, including the Irish Business and Employers Confederation, the Irish Association of Pension Funds and the Society of Actuaries in Ireland, seeking changes that would help schemes to survive. Most of our suggestions were ignored or dismissed out of hand by officialdom which either did not accept the extent of the crisis or, if it did, took the view it was not its concern. Throughout the crisis officialdom has appeared indifferent to the views and interests of the workers who own the pension funds. Recent changes to the priority order are most welcome but will serve only to bring some equity in the closure of distressed schemes. The Waterford Crystal workers made a major breakthrough by puncturing the notion that pension funds in difficulty were no concern of the Government.
However, this victory has not had much of an effect on the attitude of public officials.
The Government and the regulator clung resolutely to a funding standard that artificially overvalued liabilities and further increased uncertainty by announcing that defined benefit schemes would be required to hold significant risk reserves. Meanwhile the Government raised a levy on all schemes, including those in trouble. One consequence of this was to promote an attitude among employers that pension schemes were far more trouble than they were worth. When it was introduced initially as a funding mechanism for job creation, the pension levy of 0.6% of fund assets was to apply for the four years to 2014. The cost of the levy has generally been passed on to members whose benefits have been reduced by 2.4% over the period. Despite reassurances to the contrary, the levy did not cease in 2014 and has been extended for at least a further year at a new rate of 0.15% but with a combined charge. It remains to be seen how schemes will manage these extra costs and whether members will experience an apparently never-ending series of cuts to their benefits as a result of this State confiscation of pension savings.
Unions, employers, trustees and pension professionals tackled the problems which arose with great creativity and in a spirit of problem solving rather than adversity. Many imaginative and inventive solutions were agreed to that saved schemes which otherwise would have gone under. However, nearly all of the solutions arrived at led to significant losses for members and deferred members. Coupled with the financial losses was the collapse of confidence in pensions generally. The funding standard was re-imposed in 2013 without anything significantly helpful having been done in the five year hiatus. Owing to the successful strategy of officialdom in decentralising the problem to the level of individual schemes, it is difficult to know how deep the crisis has become. We do know that there has been acceleration in scheme wind-ups, with 25% of schemes expected to wind up by the end of last year; most defined benefit schemes are closed to new members; a growing number of defined benefit schemes are closed to future service accrual; many schemes do not meet the minimum funding standard - some have been, and more will be, saved by section 50 applications, but this will involve major losses of pension benefits that workers have earned and paid for and it will also add to the crisis of confidence to which I have referred. Nearly all solutions involve no further increases to pensions in payment; people will slowly descend into poverty from the moment they retire and if high inflation returns, the fall into poverty will be rapid. In addition, the Labour Court and the Labour Relations Commission are dealing with an array of pension disputes. If these disputes are settled, it is likely that many will be resolved on the basis that no further contributions will be made to the defined benefit schemes and there will be massive losses of accrued entitlements for the workers affected.
Unions have developed great expertise in influencing and constructing section 50 applications which seek to defend accrued and future core benefits. It is a remarkable achievement to convince active members to stay with a scheme, continue to make substantial contributions and accept lower benefits in a climate of declining confidence. Few well-informed workers believe their pension funds savings are safe.
There is nothing to suggest the losses in defined contribution schemes have been any less severe than those incurred by members of defined benefit schemes. Trustees of such schemes have been forced to crystallize. The losses in defined contribution schemes are masked until a worker retires. All that has happened in the move from defined benefits to defined contributions is that the risk has been transferred from capital to labour. There is nothing to suggest the current regulatory regime can better protect defined contribution scheme members. Nobody has monitored the underperformance of defined contribution schemes, the very low level of employer contributions to these schemes, the loss in defined contribution values during the financial crisis or the traditional over exposure of defined contribution schemes to equities. Many thousands of workers took the rational decision and stopped paying into pension funds which were not safe, ineffectively regulated and subject to State confiscation. Neither has there been a review of the failure of orthodox assumptions of what constitutes high, medium, low or even appropriate levels of risk.
There is little new in the European White Paper and it could be summarised in a few bullet points. According to its authors, we are living longer, have to stay in work longer and save more for retirement and need safe sustainable complementary savings systems. In addition, they describe the move from defined benefits to defined contributions as a "structural reform", whereas congress sees it as transferring the risk on a pension scheme from the employer to the employee and as a major deterioration in workers' pension conditions. The authors indicate that the crisis clearly demonstrates that the ability of pre-funded pension schemes to mitigate risks and absorb shocks needs to be improved. Unfortunately, they do not inform us about how this is to be done. The White Paper does state the acceptance of reforms depends on whether such reforms are perceived to be fair. All I can say is "Amen to that." The authors of the White Paper are also of the view that genuine dialogue involving governments, social partners and other stakeholders is necessary to build a consensus on policies to create opportunities for people working longer. I addressed the committee on that matter previously and as far as congress is concerned, there has been no social dialogue on it to date.
Congress regards complementary savings systems, whether defined benefits or defined contributions, as far from safe and the pension regulation system has utterly failed to protect the funds or the interest of scheme members. How can complementary savings systems be safe as long as we have a defective regulatory system and a Government that reserves the right to confiscate accrued funds as it sees fit? With the race towards defined contribution schemes, the risk will not be mitigated and the shock will be absorbed by the workers alone. Our reforms to date have been grossly unfair and inequitable and there has been no attempt to involve the social partners.
The recent pension changes in the priority order are late but welcome. They at least bring an element of certainty in place of the confusion which reigned supreme for the past five years. Stakeholders now know that they will get no further help from the Government or the regulator. The only area of doubt remaining is whether the Government can kick the habit of raiding workers' pension savings for opportunistic purposes. Nonetheless, stakeholders can make reasonable informed decisions about the future. Unfortunately, many more schemes will move towards wind-up and this will involve huge losses for the workers concerned. Those who are responsible for directing public policy on pensions and getting us into this mess - successive Governments, highly paid doyens of risk management and public officials - got it utterly wrong, yet they suffer no consequences and have kept their Rolls Royce pensions. The burden of their failure is borne by workers and former workers. Most workers who have lost out have so far borne it stoically. Perhaps this is because they feel no immediate pain. A decade hence, when workers who contributed huge amounts of income to their pension are sunk in poverty, the pensions time bomb may finally detonate.
The White Paper has nothing to offer except perhaps the suggestion that reform should be fair and involve dialogue with the social partners. Experience to date in respect of pension age and pension policy suggests there is no intention to ensure the reforms will be fair. Pension reform in Ireland involves taking as much as possible from the vulnerable, while ensuring the elites are cosseted. Making "social dialogue" dirty words means that unfair reform can be imposed on citizens without ever having to consider the hardship that results for individuals.
Mr. Ciarán Phelan:
Like Deputies and Senators, our members are at the forefront in dealing with the financial problems experienced by citizens. I refer to flood damage, mortgage arrears and the impact of the pension crisis. Our members advise on 90% of private pensions in Ireland which, we believe, allows us to speak with some authority on the current state of private sector pension provision.
It is not an exaggeration to say pension schemes in Ireland are in crisis. We are all aware that we face a significant challenge as our demographics change and the population ages. Given current and expected Exchequer returns, it is obvious that pillar 1 social protection pension payments are unsustainable at current levels and will inevitably reduce as a percentage of pre-retirement income. In the light of this reality, it is imperative that private funding of pillar 2 and 3 pensions be increased in order to cover the deficit and provide a sustainable, as opposed to subsistence, income for citizens in retirement. The latter, in the light of increases in longevity, could last 25 years or more, which is half a working life. Government policy to date has been inadequate in addressing current and future crises. Defined benefit schemes are terminal and employees are faced with the stark reality that promises made as part of their employment contracts and in lieu of salary will not be realised. Government action on caps and levies has also had the impact of scaring people away from making sufficient contributions to pension schemes to ensure adequate provision when they reach retirement age.
The self-employed have been completely ignored in the pension debate to date. The costs regularly mentioned in Dáil Éireann attaching to pension reliefs are grossly exaggerated and, in our opinion, have led to flawed decision making. Tax reliefs do not cost this State €2.9 billion.
We have had the NPPI report in the 1990s, the Green Paper on Pensions in the 2000s and the OECD report last year. The IBA would suggest we have ample reports and that serious action that encourages and makes pension contributions affordable is needed. The OECD report recommends mandatory or soft mandatory pension contributions which we would agree will address the coverage rates in Ireland, moving the private sector from approximately 40% to close to 100%. However, it will not address the adequacy issue - an important element overlooked in most debates on an Irish solution to pension provisioning.
The average pension fund in Ireland in the private sector is €120,000. On current annuity rates, it provides a pension of around €6,000 per annum, which when coupled with the State pension will provide an income on reaching the age of 68 of €18,000. A public servant on €50,000 per annum at retirement will retire on a pension of €25,000, excluding the ex gratiapayment of €75,000. In the private sector this would require a fund of more than €500,000. The Government needs to start educating citizens regarding the funding levels required to deliver a sustainable pension and to provide sufficient encouragement by way of incentives for people to make affordable reasonable contributions.
However, to date Government has cut reliefs, capped contributions, capped pension pots and imposed a discriminatory levy that only applies to funded pension schemes and hits the more prudent hardest. Over the course of the levy, in excess of €2 billion will be taken from the pension savings of the citizens of Ireland, and I hasten to add that if a similar amount was taken from people's deposit savings, there would be considerable anarchy. While we readily acknowledge the difficult economic circumstances in which the country found itself, and the work of the Government to right the situation, it should acknowledge the contribution made by individuals pension funds to the recovery, and allowance should be made by way of tax credit on maturity of these funds to bring equality back into the system.
As an association that represents the majority of advisers in the pensions industry, we want to make a positive contribution to the solution of the impending crisis. My colleague, Mr. Aidan McLoughlin, will discuss some plausible and possible solutions to encourage greater pension savings.
Mr. Aidan McLoughlin:
I will summarise my paper, the text of which, hopefully, the members will have seen. I would make a few general points. There is a crisis in the pension system. As the OECD report confirmed, over the course of the next few decades we will face a €324 billion hole in our social welfare system if further changes are not made, and some of the changes already outlined are factored into that. Therefore, something needs to be done. Put simply, the benefits cannot be paid at the same level unless we adjust something. Auto-enrolment is a positive measure, as Mr. Ciarán Phelan said, but it does not fix that problem; it would only fix it if the benefits in auto-enrolment were used instead of some of the social welfare benefits that are being paid to date. It is important to realise that it will only work if we were to cut social welfare benefits. Kicking the can down the road is not an option as that would cause more difficulties in the future.
The point has been made, and it has been reflected in the OECD report, that pensioner poverty in Ireland is currently low based on historical numbers. However, in the paper I outline a number of steps that have been taken in the recent past that will substantially increase pensioner poverty. As Mr. Fergus Whelan has outlined, those chickens will come home to roost in the future. We must recognise that basing it on historical numbers does not give us a real appreciation of the degree to which changes made in the recent past will cut benefits available to pensioners and significantly increase pensioner poverty in the future.
In the White Paper three adjectives are used in terms of benefits, namely, "safe, adequate and sustainable". Focusing on each of those in turn, we have a number of suggestions to make. In terms of safe pensions, we think that the biggest threat to pensions in Ireland at present is the State itself. People will not feel safe about their benefits unless that is addressed. Our suggestion is that it needs constitutional protection. Something should be written into the Constitution to give people the comfort to save over a 40-year period knowing that the benefit will not be subject to some form of confiscation, taxation or other imposition as they near retirement, as we have seen happen in the recent past.
Second, the scale of the problems here is such that we need a long-term plan. This is not a plan that can be delivered in the lifetime of any government, we need a 50-year plan to be able to deal with the issues. Pensions are an extremely long-term issue. One saves for 40 years and one could draw benefits for another 30 years. Therefore, a long-term plan is needed. We need somebody to be in charge of that plan, a pensions Minister. Each time we look to a foreign jurisdiction for guidance, be it Australia or the United Kingdom, we note that they have had pension ministers in charge. It helps drive through the process. There are too many Departments involved and sometimes the good work of one Department can be undone by the activity in another.
In terms of adequacy of pensions, auto-enrolment will help. We recognise there has been delayed implementation of it due to the current economic environment. We think the Government should put forward when it will be implemented and what it will consist of in order that people can start planning now even if it is a number of years before it takes off. We think the contribution rate needs to be significant to be of benefit and, by that, we mean double digit contribution levels combined between employer, employee and the State. The system must also include the self-employed. While it is quite comprehensive in all it does, everything is presupposed around the employees. As we saw in recent times, much of the employment is coming from the self-employed. They are a significant part of the economy and they are equally entitled to be pensioned. As Mr. Ciarán Phelan has said, our tax reliefs system needs to be managed better to encourage that.
In terms of sustainability, the key features here are both our social welfare system and public sector pensions, both of which have been subjected to some change. However, as the OECD pointed out, it has not been sufficient to fix the problem and further work needs to be done. Simply put, we have made promises - we have written cheques as a State that we cannot cash. The combined exposures in this respect are €129 billion currently in the public sector and €324 billion for social welfare. They dwarf the national debt about which we spend so much time worrying. The problem is that these numbers are not regularly tracked, checked and dealt with. We believe a pensions Minister with responsibility for showing improvement in those over a long period is the way forward.
I thank everybody for their submissions. We are not being told anything that is not already in the public domain but the witnesses made their presentations well and succinctly. I note what Mr. Whelan said about defined contribution schemes, and I agree with him. I have long suspected that the defined contribution schemes are not a panacea. I also agree with him that the way liabilities are calculated in defined benefit pension schemes is insane. If Mr. Whelan's organisation has alternative models I would be like to see them.
The European White Paper refers to complementary systems, etc., to support the State system and that if we have to have complementary systems, the need for tax incentives and so on but what we appear to have here are disincentives. One of the gentlemen from the broker association made an interesting point about the actual cost of the tax relief on pensions but as we know the tax relief on savings for pension purposes has been severely curtailed. In addition, we have a direct levy on pension funds, which is transferred directly to the members. It is akin to what the Government of Cyprus did in taking money directly from people's savings.
A number of interesting suggestions are contained in the submission, including constitutional protection, a long-term plan, a pensions Minister, etc. All of us would welcome those. I would appreciate it if Mr. McLoughlin would elaborate on his figures on the amount of exposure to which we are potentially liable. I believe he referred to €329 billion or-----
Mr. Aidan McLoughlin:
The €324 billion is over the period to 2050. The €129 billion was a current capitalised cost in 2009 on the basis of the liability that would be incurred if there was a fund for public sector benefits.
While I understand there may be an exercise being undertaken at present to update the number, that currently is the best available.
I apologise for not being present for the entire presentation given by the witnesses, as I was discussing a community employment scheme with the Minister in the Chamber. I am interested in some of the points made by the Irish Brokers Association and I will take up an offer it has made to meet to discuss further the points its representatives have made here and at other times regarding the issue of pensions. One point made was the cost to the State of the tax relief for pensions does not amount to €2.9 billion. What is the cost, as calculated by the Irish Brokers Association? A number of factors have been listed as disincentives for pension funds remaining in Ireland and seven changes that have occurred in recent years were outlined. One point that has been made on an ongoing basis in this committee concerns the disincentive, to those who have been contributing to their pension funds, of the cost of administration, that is, what comes out of the money they put in. The point is that in Ireland, the pension industry takes a far greater lump out of what is invested. I ask the Irish Brokers Association to elaborate on this point and whether the comparison is wrong, as that would be useful.
I am unsure whether the departmental officials referred to the European Union's discussion paper indicating the Union's future direction. At a previous meeting on pensions that pertained to defined contribution and defined benefit schemes in particular, I made the point that if one is in work but one's job closes and moves somewhere else within the European Union, the European Globalisation Adjustment fund is available. I asked whether such a fund or its equivalent could be created in the case of a company that closed and moved out of Ireland but which still existed or in the case of a global company that had other outputs or branches in the rest of Europe. Such a fund would enable one to make a charge on that company for some type of compensation for its withdrawal from Ireland on behalf in particular of deferred members and pensioners. Members dealt with this issue when discussing the changes to the defined benefits scheme in the most recent legislation earlier last year.
While working back from the previous speaker, I have a couple of points to raise. Mr. Phelan referred to a discriminatory levy and was challenging of Government decisions in that regard. As for the intention of such levies at the time they were implemented, I seem to recall it was that some portion of these levies would come out of the funds themselves rather than being passed on to individual pension members. To what degree has the burden of these levies been shared between the funds and their members? Has the entire burden been passed on to members or did the funds themselves absorb much of it? In a similar question to that asked by Deputy Ó Snodaigh concerning the association's charge that €2.9 billion is not the figure, I would be interested in learning what, according to its calculations, is the actual figure.
The next question is addressed to Mr. Fergus Whelan of the Irish Congress of Trade Unions. What would ICTU ask be done now to address the issues Mr. Whelan has described as being currently in crisis mode? It has been stated that there has been an acceleration in the winding up of schemes. Does that accord with the sense by the Department of Social Protection of what is going on or to what would it ascribe it? Do the representatives from the Department agree with that comment? I seek to establish what is the Department's understanding regarding the 1.5% levy that has been extended for one further year. Is there any guarantee the levy will come to an end after this one further year and what is the Department's expectation in that regard? As for the White Paper that is the subject for today's discussion, it has been suggested that the only additional feature to be introduced is some mention of fairness. In the Department's view, what new elements will it contain that will pose a challenge in the Irish situation?
I will be brief and thank the witnesses for their attendance. As Deputy O'Dea observed, this issue has been in the public domain for ages and all members are well aware that pensions are in great difficulty. One point on which I picked up, which may have been made by Mr. McLoughlin, is that prior to 2008, pensions already were in trouble. This was at a time when tax relief was available in respect of pensions. Consequently, if they already were in trouble when tax reliefs were available, bringing them back will not solve the problem. As Mr. McLoughlin mentioned constitutional protection, did the association make a submission on this issue to the Constitutional Convention when it was sitting and if so, what was its feedback thereon? The association's suggestion that benefits should be cut is worrying. They are low enough and the Government is trying to keep them intact. Many people do not have a private pension and will rely solely on a social welfare pension. As for even the thought of cutting such benefits, I certainly will not make any such recommendation out of this committee. I also note Mr. Phelan's comment that the Irish Brokers Association's members advised on 90% of the private pensions in Ireland. What advice were its members giving them if this train crash was rolling down the tracks? If they were responsible for advising on 90% of the pensions in Ireland, what were they saying to them? What advice were the association's members giving to them?
I apologise for my late arrival and wish to raise the aspect of this question that pertains to the self-employed. I was delighted to hear Mr. Phelan's observation that the self-employed were completely ignored in respect of pensions. I come from a self-employed background and spent 24 years in the shoe business. One good measure implemented by the present Government was that current statements now at least are being produced each year. For 24 years, I paid into a pension administered by one of the biggest pension companies in the State but never received a statement. One might telephone or seek such a statement and it might take five or six months for it to be produced. Two years ago, for the first time, I received a statement telling me what was in the aforementioned pension. However, when my business wound up, I found out to my detriment what it contained. This was after 24 years of contributing approximately £150 at the outset, rising to €220 per month, which worked out at approximately €43,200. However, I will not reveal the final sum contained in the pension, because it would frighten one.
The issue in respect of self-employed people is that accountants were selling pension schemes and many such schemes they were selling to self-employed people basically were gambling on stocks and shares. Although some of it was placed in a pension scheme that was safe, other parts of it were put into a gambling system on stocks and shares, to the detriment of self-employed people. I agree with Mr. McLoughlin's suggestion regarding having a Minister responsible for pensions. However, to revert to the point about allowing accountants to sell pension schemes to the self-employed, it was akin to auctioneers when they became bankers. In addition to selling one the house, they also provided the loan and one got everything under a single roof. When one was advised to pay into a pension, basically it was by telling one its purpose was to stop one from paying a pile of income tax. It should not be put forward in that manner, as pensions are there to make one's life better when one needs money in one's older years.
The Government has taken many steps concerning pensions, including annual statements which have been a big improvement. We need to examine the self-employed sector because, as with social protection, there are no pension provisions. Other countries have pension Ministers, so it would send out the right message to appoint such a person here.
Mr. Aidan McLoughlin:
A number of points were raised and hopefully I will be able to pick up on most of them. As regards tax relief, the alternative to paying somebody a pension is to pay them a salary. Taking that as a base point of calculating tax relief, an employer will get tax relief on it whether it is paid as a contribution or a salary. Therefore, the move to a pension contribution does not increase the tax subsidy from the State one iota.
Similarly, although it gets tax-free growth when it is in the pension fund, when it comes out it is typically taxed fully to income tax on receipt.
Mr. Aidan McLoughlin:
Tax relief on pensions is a misnomer because all benefits are ultimately taxed, bar the tax-free lump sum. The only State subsidy is the tax-free lump sum, the rest is fully taxed. The figures are calculated on the basis that if I promise to give Ciarán €100 at the end of the week, the State is assuming it has a right to take €52 because I have made him the promise, and another €52 when I give him the €100. That is a total tax rate of 104%, so the numbers are false. We have discussed it with the officials involved who said the numbers were being misquoted. However, there is not a €2.9 billion subsidy there, far from it.
A point was also raised about the advice we are given. In view of this, the feedback from our members is that for the first time in their careers many of them with 30 or 40 years' experience are at the point where they are challenged to advise people to get a pension. They are not convinced that it is in their long-term interest to join a pension scheme. That is a frightening thought given all we have discussed here. Simply because of that, they cannot say that the system can be trusted for the next 20 or 30 years that it will do right by them. I cannot tell people that they are not safer with that money in their own pockets. Without the tax relief that is notionally supposed to be there, and all the systems and protections that are supposed to be there, that doubt is in the minds of advisors at this point in time. That is the position we are in.
It is worth noting that the report the Minister commissioned on charges identified that Ireland offers as good or better value for money than is currently available in the UK, despite being a much smaller economic market. Comparing his experience in Canada and the United States, the chief executive of Irish Life recently said that the value for money is there. However, the issue of charges can be improved upon. We believe that some form of measurement system, like total expense ratios to give clarity of charges to people, would be important. It is not the fundamental issue concerning the problem with pensions, however.
As regards the potential for some form of penalty on exiting DB schemes, my fear is that while it is a good notion it is almost too late to implement it. As Mr. Whelan said earlier, we lost 25% of all DB schemes in the last year. Of the schemes that are left, about two thirds of workers in them are in schemes that are exempt from the funding standard anyway. Therefore they are already out from under the funding standard. Only a small fraction of those left in DB schemes are subject to the funding standard. The economic crisis itself is arriving at a solution but, unfortunately, that solution is the termination of all DB schemes that are subject to the funding standard.
A question was asked about whether the levy was paid by others. Certainly from my own experience, there is no overall record to say who is paying the levy. All that Revenue will know is that the levy was paid by somebody. As regards schemes in which we are involved, employers were asked whether they wished to pay the levy. In some instances they did, while in others they did not on the basis that they were not even able to pay what they were supposed to put into the pension contributions in the first place.
The suggestion was made that perhaps the industry itself could pay the levy out of its profits. That did not happen in any instance and it was not a surprise. I would have been party to that, as a trustee of the scheme. It is worth bearing in mind that in terms of inflow, the industry experienced a 60% fall in income from 2007 to 2011. At a time when some of the major players were being supported by the State, it did not seem logical that they would have so much fat there that the levy could be imposed and paid at that time. It was not paid by industry participants and in some instances it would have been paid by employers. In most cases, particularly with DC, it became a cost on the fund and was borne by members of the scheme.
Mr. Aidan McLoughlin:
No, not to my knowledge. I am also making the point that the industry itself, particularly the fund industry, is down 60% and is laying off staff. It is not going to have profits. Some of the major players, or their parent companies, were being supported by the State. The economic existence of the major players in the pension industry was due to State support. It is not a situation where there are excess profits to be voluntarily diverted to anything else.
The self-employed are a discriminated class in much of what happens in pensions. They have no ability to achieve the same level of benefits as anybody else because artificial limits are placed on them. Their pensions do not even count as pensions so the pensions system does not recognise them. They are not covered by the Pensions Board. Only at EU level are they now considering bringing self-employed pensions within the regime.
I was listening to a debate last night about the importance of the self-employed and how they have helped to create employment, which is good. The point was made that 60% of new employment will be created by small businesses getting up and running. However, should we not at least give them an opportunity to enjoy a pension in their final years when they have given the State that benefit? Currently, the system does not allow the self-employed to enjoy that benefit.
We made a submission to the Constitutional Convention suggesting that pensions should be included. There was a general conclusion dealing with social matters but I did not see pensions being specifically mentioned. I am not aware that it has been taken on board.
Dr. Orlaigh Quinn:
I will make a couple of comments and answer the specific questions that have been asked. I would strongly argue that efforts have been made in this area. Members of the Oireachtas will know that pensions legislation has been introduced every year since 2008, all of which has tried to protect defined benefit schemes.
A specific question was asked about the acceleration of wind-up and whether it was happening. It is happening but DB schemes have been winding up for the last 20 years. Senator Moloney said this is not a new crisis. The defined benefits sector really went into crisis in 2001 with the dot.com crash. It has not recovered since then for a number of reasons. As a model, it is not there to take account of longevity. I cited the figures earlier, so a huge cost has not been factored in. Investment losses have been colossal and far in excess of any other OECD country, so Ireland is an outlier there. For a number of reasons, including those two in particular, defined benefit schemes have been closing. However, they have certainly been closing for 20 years or more. I agree with Deputy Ryan that they have accelerated in recent years.
Some 820 schemes are currently subject to the funding standard, so they are regulated by the Pensions Board, but 190 are not. Those are the correct data on that.
It was said that the regulatory structure is too tough.
If it is too tough why are the schemes underfunded? When the funding standard was suspended, there was no evidence of schemes taking action to resolve their problems. Since the funding standard has come back into play, we have seen a huge number of schemes working with the Pensions Board and, in the main, putting funding plans in place to generate their schemes.
Deputy Aengus Ó Snodaigh asked about a globalisation fund and the equivalent on the pensions side. At EU level, all member states have very different pension schemes. Only three have defined benefit schemes. They are Ireland, the United Kingdom and Holland. Most member states operate either on the basis of state-funded or defined-contribution schemes. Decisions on pensions are taken at member state level and a suggestion such as the one made would have to be subject to discussion and debate. I am not sure, given that pension schemes are so different, that such discussions would be high on the agenda.
Deputy Brendan Ryan asked about the White Paper and what is new in it. There is probably nothing new as such. The issues are ones with which we are very familiar and have been trying to grapple. The paper is very much focused on the aging population. On some issues, Ireland is ahead as we do not have differences between men and women in our State pension whereas other states would have significant gaps to make up. Most countries are grappling with the same issues which include sustainability, adequacy and longer working years. I cannot highlight anything that is really new and of which we would not have been aware previously.
Deputy Ryan asked specifically about the pensions levy. It is a matter for the Minister for Finance who introduced the 0.6% levy in 2010 on the basis that it would terminate in 2014. He announced a 0.15% levy. All of that is connected with the jobs initiative and addressing future or pre-existing State liabilities. The Minister has said the levy will apply in 2014 and 2015. I cannot comment further. It is the Minister's commitment.
Mr. Fergus Whelan:
When I took up my current post 15 years ago, every defined-benefit scheme in the country was in a huge surplus. At that time, the State told us those surpluses had to be reduced. Schemes reacted to that one way or another. They either took contribution holidays or they increased benefits. There was a small handful of scheme closures which involved structural issues in industry not the defined-benefit nature of the schemes. The print industry scheme went because the print industry ceased to be an industry with the invention of computers.
I agree that Ireland performed worse in pensions terms than any other OECD country. That is because we were hugely overexposed to equities, much more than any other country. The regulatory system should have pointed that out. Of our assets, 66% were exposed to equities. The next highest country was the home of ubercapitalism, the United States of America, where the statistic was 44%. In the UK, 25% of funds were exposed to equities. When the regulatory system should have been pointing that out and regulating it, it decided instead to regulate trustee behaviour. That is what it is still doing. Trustee behaviour has nothing to do with the collapse in pensions. The collapse of our pensions system is a failure of the regulatory system. We must recognise that. We must get confidence back into the system, which we will not do by pretending defined-benefit schemes were always going to fold anyway. That is not so.
It is very late in the day for anything to be done. What needed to be done and what could have been done was a softening of the funding standard to buy time. The horse has now bolted to some extent. Workers have lost their money and confidence is gone. We had better start to rebuild confidence. The only way to do that is to examine the regulatory system and admit where we got it wrong.
Mr. Aidan McLoughlin mentioned the self-employed in response to a question from Deputy Ray Butler. The self-employed have a very favourable situation with regard to the State contributory pension. When one looks at all the actuarial calculations, self-employed people make a contribution of almost 5% and get the State contributory pension. The issue of public versus private has come up. Public servants have traditionally not got the State pension. People say it is worth "X" amount, but in fact they are losing out on the State pension. That is never brought into the picture when people make the point about how good public service pensions are. Of course, there has also been the pension levy.
What does auto-enrolment mean and entail? Are any EU member states operating a system which is basically a state pension which covers everybody? Is there one to which everybody contributes and everybody gets a pension? While it is a political decision, is there room for us to move towards a system in which everybody is covered by a State pension with no one having a pension that is too high or too low? I am not saying it has to be exactly the same but there should be a form of equality. Are there any proposals in that regard and would such a model fit in with the White Paper?
Dr. Orlaigh Quinn:
I cannot agree with that figure. It does not make any sense to me.
I will tease through what an auto-enrolment system would look like but deal first with the Chair's last question about a State pension system for everybody. In effect, we have such a system at the €12,000 level. An argument has been made about simply increasing that and using it as the pension. It would mean the State taking on all the investment and longevity risk. It is also the case that we face demographic issues. At the moment there are approximately five workers for every pensioner. As one moves out 20 to 30 years, one moves to a situation where there will be fewer than two workers for every pensioner. It would simply be unaffordable. There will not be sufficient income coming in from workers to facilitate a higher State pension.
Looking at auto-enrolment, the purpose is that the first tier of one's pension would be State guaranteed but on top of that one will have a second tier whereby one contributes oneself and carries some of the investment risk. A mandatory system is one in which everyone goes into the pension scheme and has no choice about it. The contribution is set and they are in it for life. In effect, that is the PRSI system we have. Auto-enrolment would be different in that people would sign up and have their own private pensions in respect of which a contribution rate would be set. While they would be auto-enrolled, which would be the mandatory element, they would have an option to come back out. It might facilitate people who were trying to save for a house or were funding a child's education to come out of it. It is based on inertia. Once a person enters he or she will not tend to leave. It is a bit like the situation whereby people rarely change bank account or mortgage.
How many times do people change their mortgages? They tend to go into the pension system, forget they are in it and then begin to build up their pension pot.
There is a series of tough decisions in terms of protecting people so the vast majority of people in these type of systems tend to go for what they call the default fund. They do not make a choice so it is very important that this default fund is very safe and not very high risk. A series of questions arise. Who comes in first? Does one phase it in? Do employees come in first? Does one extend it to the self-employed? Would one extend it further? They are all operational decisions. Once a decision is made by government, there needs to be a huge implementation plan. It relates to investment decisions, the question of whether it is State-run or run by the private sector and how one guarantees a certain level of benefit. They are the big pieces.
I have raised this issue before and I know people will say I am sounding like a broken record. However, we are still paying a lot of money in pensions to people living in other countries. If someone worked here for five years, they do not even reach the minimum requirement in this country to get a pension. If they work here for five years and then go to work in England, the US or another country with which we have a bilateral agreement and pay all their contributions in those countries, when they reach pension age, Ireland will then calculate a pension based on their work in Ireland and the work they did in other countries. Why can we not pay an amount based on the work they did in this country because it is the other countries to which these people have contributed and we are supplementing their pensions from these countries? Somebody living and working in England will get a British pension and a pro-rata Irish pension. We are paying a lot of money out of the country through this method. I know Dr. Quinn will tell me it relates to European rules, but the US, for example, is not Europe. Why not have a European pension for people that would take what they paid in Ireland, England or France and put it all together in one pension for people working in different countries because each country is paying a pension separately? It does not make sense that we are paying that much money out of the country while people in this country are not getting it.
Mr. Aidan McLoughlin:
Could I clarify the comments made in respect of tax relief because it has caused some confusion? The point I am making is that essentially we do not have tax relief, rather we have tax deferral. If I agree to put €100 into a pension scheme for Mr. Phelan from which he will draw down in ten years' time and it grows to €125 in that period of time, the State gives tax exemption on the way in and tax exempts the €25 that grew there. However, if one ignores the tax-free lump sum, it will then tax in full the €125 when it comes out so it will get all the tax. The only decision made is when the tax will be paid. The only actual tax relief it gives where it does not take tax is on the tax-free lump sum. It says that this is exempt. The rest is all tax deferral. Whatever goes into a pension scheme will come out as taxed unless it comes out as a tax-free lump sum. There is no-----
Mr. Aidan McLoughlin:
One could end up paying more tax. On the other hand, if one is on a very low income, if one put in the contribution when one had a very high income, one might have paid at the top rate and it came out at a lower rate. It is a function of the amount of income one has that the State is giving the relief, not the fact that it is a pension in itself. The tax reliefs attached to the pension schemes are mainly tax deferral. Everything that comes out is taxed unless it comes out of the tax-free lump sum.
Mr. Aidan McLoughlin:
Correct. It is foregone because of the income they are on. I do not think anybody is arguing that one should tax those individuals but it is wrong to think of €2.9 billion floating around, which is the point I am making. The reason it is not claimed is because people are not in the tax net as we have chosen as a State to say certain people should not be in the tax net.
Deputy Ryan raised the issue of the pension fund levy. Did the industry not look for that? What about all the profits that are made? When Mr. McLoughlin refers to pensioners, and most pensioners do not get a huge income out of their pensions, then somewhere along the line someone is making a lot of money.
Mr. Aidan McLoughlin:
The Minister for Finance made the suggestion that the industry might pay it. A certain segment of the industry appears to have had discussions with the Minister but it is important to say that there is a lot of confusion about the industry and certain bodies within it would have been very upset about that, including our own association, which is not in favour of it. Without naming individual companies in the insurance industry, if one looks at the largest ones, they are effectively in groups that have been sustained by State finance because they were broke so there are no large profits there. If one looks at the returns published by the regulator in respect of insurance companies on their premium income, one can see that they fell 60% between 2007 and 2012. If any industry or business is down 60%, it cannot be making the same profits so whatever theory there was about the potential to pay the levy, it will not occur at a time of financial crisis because that is being felt by all the participants in it.
Our members would be as strong as anybody in arguing for value for money. That is what they do all day, every day. The fact that charges are quite competitive in Ireland is to the credit of those members. In terms of how one can get better value for money, in our view, it is about clarity. It relates to people being able to see exactly what it is. We think a total expense ratio, which would be the equivalent of the APR on loans and is a number that allows one to capture what are one's total costs, would allow people to see exactly what they are paying and would help drive that further. Basic competition will help after that.
In respect of the €2.9 billion and the tax relief versus tax deferral, the tax relief is current and there is a financial benefit to the person receiving it when they get it. When one talks about money other than the tax-free lump sum being taxable after retirement, if no tax is paid on it, it is very hard to argue that there is some kind of equivalence when one is getting real benefits and no tax on the amount at the end.
Mr. Aidan McLoughlin:
The €2.9 billion is presented as a subsidy that is primarily benefiting the well-paid. The only people who would get that benefit at the end are by definition lower paid. In terms of the cost to the State, if they were not receiving that benefit and had even lower benefits, the State would be stepping in with some form of subsidy to that income in terms of social welfare. It is being presented as though the State is writing a €2.9 billion cheque that it never sees back. If it does not see it back, it is only because people have insufficient income. Otherwise, it is a tax deferral system and the numbers do not calculate that. It also double-counts numbers in the sense that it argues that when one gets a promise of a benefit of €100, the State was entitled to tax that when the promise was made at 52% and again at 52% when it issued. To me, that is double counting. One promise of €100 was made. That was one benefit, not two.
That is the way the numbers work. I challenge it because the illusion exists that there is some money that could be spent elsewhere. It is not there, €2.9 billion would not flow back into the State's coffers if we abolished pensions in the morning. There would not be an extra €2.9 billion sitting in a bank account somewhere as a result.
Mr. Aidan McLoughlin:
If it was taken out of the system as salary today, the tax would come in more quickly but if it was taken out as salary, instead of putting it into a pension there would be corporation tax relief because salary is deductible for an employer who pays somebody a salary. That would not save the proportion of €2.9 billion that goes on corporation tax because the State would be granting that benefit if it is paid as salary.
Mr. Fergus Whelan:
Unfortunately, whenever one starts to talk about pensions the discussion comes down to technical issues. Behind this there is a huge, real crisis. It is not something that would happen anyway. Thousands of the people I represent have lost large sums of money and will be plunged into poverty. This is a huge personal crisis for many citizens.