Dr. Micheál Collins:

It might have been the national recovery plan 2009. In effect that plan was all about adjustments or finding money. It indicated that €750 million would be taken out of the overall tax supports that were going into the pension sector. However, it indicated the Government and the subsequent Government were open to finding alternative routes to do that. The history of that is interesting in itself. Instead of the tax rates being standardised, a levy was put on pension funds. In effect existing pension savers and those who were already retired paid for it, rather than changing the flow of funds and the tax relief from it into pensions. That was subsequently phased out. It remains a very large area of tax expenditure. It is quite skewed when one considers the relief. The overall cost would be about €2.4 billion to the State. Within that one could identify about €1.2 billion that could easily be changed. Technically everything could be changed, but certainly it has easily changeable elements, including the rate of tax relief which would be the largest part of that.

That issue remains in play. The research that Gerry Hughes and I have done indicated that the middle beneficiary is in the ninth decile, with 50% above that and 50% below that, which is quite stark. I am really not aware of any public policy measures that allocate resources in that way. That study also showed that the amounts of contributions people were putting into their pensions were quite small, which throws up effectiveness questions. We are encouraging people to save and have quite expensive mechanisms in place to assist them to save, but actually the vast majority of people are saving very little and therefore it will not significantly boost their income in retirement. That throws up interesting issues. It certainly plays into the current set of reforms about auto-enrolment and the reform of the pension system.

The current structure of that reform is a bit awkward, in that the Department of Employment Affairs and Social Protection is designing the new auto-enrolment scheme, but not really talking about costs, which I believe are a key area because that is really the remit of the Departments of Finance and Public Expenditure and Reform. The Department of Finance recently completed a consultation on the reform of the tax rates on pensions. I was one of a number of people who contributed to that. When one stands back from this, if the auto-enrolment scheme proceeds as planned, the State will incur large additional costs associated with that. The plan is for the State to top up contributions in effect by one third. For every €3 a person puts in the State will put in an extra €1. It is something of that nature and has not been finalised yet.

Clearly doing that will cost the State a lot of money in direct expenditure. I estimate the cost at €400 million or €500 million per annum. If the State is going to do that, unless we change the tax expenditure side of it, that is a large amount of additional resources the State will need to find on a recurring annual basis. That would also increase as the population ages if we assume the auto-enrolment system operates successfully. I do not believe that is sustainable. Therefore I expect that over the next year and a bit, we will have to engage with the reform of that tax break for pension contributions. Of course, that is provided at the marginal rate of tax. A lower-income earner gets it at 20% and a higher-income earner gets it at 40%. That in itself is an inequity. As Gerry Hughes and I have shown, there is not much saving in merging them to a midway rate. In order to save money for the State which might be used in some other way in that sector, we should move to standardising it.