Brian Cowen (Laois-Offaly, Fianna Fail)

The Green Paper has begun a debate on the options we should take in regard to a whole range of pension-related issues. We should avoid deciding what to do in a piecemeal fashion. It would be better to do this in an integrated and planned way. That is what the Government, in conjunction with the social partners, wants to do. The Deputy raised some important but complex issues which need to be fully thought out. The decisions will have far-reaching effects and impacts on pensioners' lives for a long time to come. There are many ways in which to look at this issue.

During the Committee Stage debate Deputy Bruton's concern related primarily to the equity or fairness of a system that allowed some pensioners to invest in an approved retirement fund while others were obliged to purchase annuities with the attendant danger that should the member die early in his or her retirement, the annuity would die with him or her. What also came through in the earlier debate was the perception that annuities currently represent poor value for money. These two issues — a perceived lack of value in annuities at present and the equitable treatment of pensioners — have been the primary arguments put forward for the extension of the approved retirement fund option for pensioners across the board in recent years.

Annuity contracts are a well established feature of the pensions landscape and are probably likely to remain so. There is a wide range of annuity contracts. They may be fixed or escalating with a fixed rate of increase or index linked. They may cover a single or a joint life. In addition, a guaranteed period may be purchased, for example, an annuity may be guaranteed payable for a minimum period whether the annuitant survives the minimum period or not. The longevity and investment risks for those purchasing annuities are pooled. In essence, this means that people who live longer can expect to receive more than the capital used to purchase the annuity while the capital of those who die shortly after purchasing an annuity effectively enhances the returns of those who live longer.

As pointed out in the Green Paper on Pensions, for each argument in favour of extending the approved retirement fund option, as suggested by the Deputy, there are some counter arguments against such an extension. The fact is that for a person to retain the value of his or her pension as a lump sum in an approved retirement fund may be to overlook the many advantages for the individual that a guaranteed stream of income can provide over time. An annuity ensures an income regardless of how long the purchaser lives. An approved retirement fund on the other hand may involve the adoption of complex investment and withdrawal strategies taking account of matters such as life expectancy. Over time this could become very onerous particularly as a pensioner increases in age. There is also the clear possibility of outliving one's pension assets. Pensioners may also find their income falls, for example, if the investment performance of their fund has been poor.

Other factors include the perception of life expectancy which can tend to be underestimated by individuals and returns from approved retirement funds which may be overestimated. The approved retirement fund option may indeed be particularly unsuited to holders of relatively small pension funds, which I suspect is the category of pensioner about which the Deputy is most concerned, in view of their likely inability to cope with fluctuations in income and capital deriving from investment performance.

I put forward these alternative arguments simply to point out that annuities provide a secure means of converting pension savings into pension income. This would avoid the danger that pensioners could exhaust their pension savings during their lifetime. The level of comfort, simplicity and security of income they can provide should not be dismissed lightly.

I am not trying to pre-empt, one way or the other, the outcome of the debate on the Green Paper on the degree to which the approved retirement fund option should be extended, if at all, to other categories of pensioners or for that matter how and to what extent the market for annuities can be encouraged to diversify and become more competitive. The Deputy raises an important issue which must be addressed in the context of how it will mesh with whatever reforms we draw up. We need to proceed in a planned and integrated way because many could be affected.

According to figures in the pensions screening paper, it is estimated that over 52,000 are currently in receipt of annuity-based pensions. Approximately 239,000 people are in defined contribution occupational pension schemes that lead to the purchase of annuity contracts. In addition, some 311,000 who have either personal pensions or PRSAs may also choose to purchase annuities. In a report commissioned in the context of the national pensions review it was noted that total of annuity premia amounted to some €230 million in 2004.

While it is not possible to say with certainty, there are reasons to believe annuities will continue to play a role in the pensions market. An ageing population with an interest in the maintenance of pre-retirement living standards in retirement can be expected to present a strong incentive for the financial services industry to meet that demand with competitively priced products suited to consumers' needs. One of the factors likely to support such growth is the projected large increase in the number reaching retirement. The number reaching 65 years is projected to increase by approximately 100% in the next 20 years. As a result, there will be an increase in the proportion of those reaching retirement who will have individual pension funds. Another factor will be the steady growth in the number of older pensioners. Annuities may be seen as relatively attractive to such individuals. A third factor will be the decline in the proportion of persons reaching 65 years with only defined benefits.

The position is continually evolving, a matter we must address in attempting to reach decisions. There are complex issues involved.

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