Michael McGrath (Cork South Central, Fianna Fail)

I am pleased to have an opportunity to contribute to the Second Stage debate on the Finance (No. 2) Bill 2011, which gives effect to the taxation measures announced in the jobs initiative two weeks ago. The Government has decided to target its stimulus measures towards the tourism sector. It hopes this approach will attract additional visitors to Ireland and lead to job creation. As I said in the Dáil the day after the jobs initiative was announced, I hope this stimulus works, helps to attract more visitors to our country and ultimately leads to the creation of jobs. I agree with the Minister that the events of the past week will have assisted us considerably to meet that goal. I compliment the work of everyone involved in the organisation of the two State visits.

On the overall financial numbers in the booklet published when the jobs initiative was announced, the additional cost of the measures planned by the Government is €1.765 billion, comprising €315 million for the abolition of the air travel tax, €880 million for the reduction in the rate of VAT, €500 million for the reduction in employers' PRSI, €41 million in activation measures and €29 million in capital expenditure that is additional to that provided for through the reallocation of moneys under certain subheads. The Government plans to raise €1.88 billion by the end of 2014 through the levy on the pension fund. It expects to raise €115 million more than it intends to spend on employment initiatives. Perhaps the Minister can clarify the rationale for this later in the debate. He may have built some headroom into his numbers. I remind Deputies that many positive things could be done with €115 million. I am sure the Minister would like to comment on that. Fianna Fáil's spokesman on transport and tourism, Deputy Dooley, will speak about the travel tax and other tourism sector issues, such as the impact this initiative is expected to have on tourism.

I look forward to discussing the detail of this brief Bill on Committee Stage. I will focus most of my contribution to today's debate on the planned levy on private sector pension funds. I welcome the enhanced flexibility in the accounting for research and development tax credit on an "above the line" basis. This will help to further enhance Ireland's attractiveness as a hub for research and development activity. The Minister acknowledged that some tax practitioners have expressed disappointment that this Bill does not introduce the key measures proposed in the programme for Government. I refer particularly to the extension of credit or the facilitation of access to credit by small and medium sized enterprises. We can discuss this issue in more detail on Committee Stage. It was expected that the Government would take the opportunity to introduce further measures to make the research and development tax credit regime more accessible to small and medium sized enterprises. Cash flow is a big issue for such enterprises. The acceleration of the refund period from three years to one year would have been a welcome boost for them. The move to a volume-based approach for small and medium sized enterprises would also have been welcome. We can tease out this issue in greater detail on Committee Stage.

The proposed levy on private sector pension funds is deeply unfair. To the best of my knowledge, it represents the first time the State has targeted the savings of private citizens. Some Ministers have compared the levy to DIRT tax, but there is a fundamental difference between the two. DIRT is a tax on interest, whereas this levy is a tax on savings. The more people have saved in their pension funds, the greater the levies they will pay. People are asking whether the Government intends to go after their bank or post office savings, or any investments they may hold. The Minister alluded to this concern in his speech. I welcome his clarification that the Government has no such intentions. We know that a 0.6% annual levy on pension schemes could result in a 21% fall in the value of a private pension fund if it were continued over the lifetime of the fund. In such circumstances, this proposal would mean in concrete terms that someone who was expecting to live on €50,000 a year would have to live on €40,000 per annum.

Although the sunset clause in the Bill will bring an end to the levy in 2014, in four years' time the Government will be tempted to extend the life of the levy or to make it permanent. I expect that our public finances will still be under pressure in 2014. People with savings in pension funds want an absolute commitment that this levy will not be extended beyond 2014 and will not become permanent. It is important for the Government to be clear on this point because those who are in a position to do so would like to plan their contributions for the next few years. We should state honestly that Governments are always reluctant to relinquish revenue streams after they have become embedded in the system. This revenue stream will have become embedded by 2014. I accept that the Bill provides that it will come to an end in that year.

Although every private pension will take the same hit in percentage terms, defined benefit schemes, which promise members a guaranteed pay-out on retirement, are most vulnerable under the levy. Already, 75% of defined benefit pensions are underfunded, meaning they do not have enough money to meet their expected liabilities. Without additional contributions from members or the employers who sponsor them, such schemes will be forced to either reduce benefits or wind up. Defined benefit schemes are already being restructured as employers throughout the country negotiate with employees about making changes to them, which generally involves either additional contributions or benefit reductions. What are the options open to defined benefit pension schemes whose financial position will now be worsened? They are to reduce further employee benefits, increase employer contributions - many employers are not in a financial position to contribute more - or raise employee contributions. While it would be great if the cost could be absorbed by a reduction in pension fund charges, such a scenario is unlikely to say the least.

The pensions industry fears that multinational corporations with bases here will re-evaluate the location of their Irish employees' pension schemes and their commitment to future investment. It has been pointed out that multinationals have to consider whether to maintain pension schemes here or move them abroad, for example, to the United Kingdom or Malta. The levy is also a major disincentive to companies considering moving a corporate headquarters or employees to Ireland. Moreover, other centres competing with Ireland for financial services business will be able to use the levy in their marketing and hold it up as a negative on Ireland's scorecard.

Will the Minister clarify whether the Pensions Board was consulted on the levy and, if so, will he advise us what opinion was expressed by the board on the application of the levy? My party leader, Deputy Martin, asked the Taoiseach on Leaders' Questions about an impact assessment. Has an assessment been done on the impact the levy will have on pension schemes? The Minister stated in recent weeks that the pensions industry has exaggerated the impact of the levy. How can he make such a statement in the absence of an impact assessment? He must disclose the facts in that regard. What level of background research was conducted on the proposal and what impact will it have on the pensions industry? More important, what impact will it have on the final payout from pension funds, in other words, on the level of pensions?

I have heard a number of Ministers describe the proposed levy as a modest tax on pension funds which were built up on the back of very generous tax reliefs provided over many years. While a person who pays into a pension fund receives tax relief on his or her contribution, he or she must pay tax at the exit point. As with other forms of income pensions are fully subject to the income tax provisions when they are drawn down.

The key points are that the levy on pension funds introduces an impediment for those who wish to act prudently by providing for their retirement, penalises those who wish to reduce their financial dependence on the State during retirement, acts as a disincentive to saving for retirement and runs completely contrary to the longstanding State policy of encouraging people to invest in a private pension. In its report last week on the funding facility extended to Ireland, the International Monetary Fund touched on this point when it noted that staff "had reservations about the quality of this measure, including potential behavioural responses, but the authorities consider that the temporary nature of the levy mitigates these concerns."

The proposed levy applies to pension funds irrespective of whether the fund in question is performing strongly or poorly or is insolvent. It is not related to the financial circumstances of the pension saver and does not take into account whether he or she is unemployed, has recently been made redundant or is close to retirement. Those hardest hit will be older people who have spent decades building up their pension fund and will lose one fortieth of its value through the levy. People at or close to retirement will not have time to plug the hole left by the levy whereas its impact on people in the early stages of their working lives will be less onerous. To rub salt into the wound, many wealthy people who are holding their retirement savings in an approved retirement fund, ARF, will escape the levy since an ARF is a type of investment fund into which individuals may transfer their pension pot on retirement rather than buying an annuity which pays a regular annual pension.

The Bill provides for reducing the value of pensions by allowing pension scheme trustees or administrators the option of adjusting the benefits payable under a pension scheme. In many cases, the outcome of this provision will be that the levy will be passed onto pensioners by way of a reduced pension payment.

The Minister referred to the reduction of tax relief on pension contributions and indicated it will be considered as part of the comprehensive expenditure review. This matter must be clarified as soon as possible. It has been longstanding practice to encourage people to save for their pensions through the provision of tax reliefs. The EU-IMF deal provides for a reduction in the tax relief on pension contributions on a phased basis and the issue is subject to review. People who are planning their financial affairs and pension arrangements will want to know what tax reliefs will apply in the coming years.

Deputy Ross made a valid point in the House recently regarding the charges imposed by the pension industry. The Taoiseach also referred to this matter. In the case of personal retirement savings accounts, for example, some pension managers charge 5% of every contribution plus a 1% management fee. The industry must consider what contribution it can make to mitigate the impact the levy will have on savers, namely, those who rely on an income stream in retirement from the pension fund in which they have invested. It must provide some answers in this regard.

On the VAT proposals, the Government has taken a prudent approach by deciding not to set a specific target for the number of jobs the measures will create. It would be helpful, however, if targets were set for each calendar year. The Minister stated the VAT reduction would be reviewed at the end of 2012 in the context of the budget for 2013 to determine what impact it is having. I presume the review will also assess whether the reductions have been passed on to end consumers, as I hope they will be. The ultimate goal of the VAT measure is to create additional employment in the relevant sectors by creating additional buoyancy and a stimulus. The Government has decided not to apply a VAT reduction to construction and building work, the most labour intensive of all services. It should have provided some targeted support in this area. Not only would this have stimulated additional activity in a sector than is on its knees but it may also have encouraged some of those engaged in the thriving black economy to move into the normal economy, thus providing VAT returns and benefits to the Exchequer. While the Government had choices, it decided to target the tourism sector. Its measures in this area have the potential to create additional employment and improve Exchequer receipts by way of additional VAT, income tax returns and so forth but other areas could also have been targeted in a manner that would have had a positive impact on the economy. We can discuss some of the individual proposals in greater detail on Committee Stage.

See this speech in context