Mary Upton (Dublin South Central, Labour)
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Question 6: To ask the Minister for Social and Family Affairs her plans to establish a State annuity scheme; and if this proposal will be contained in her pension reform proposals. [9286/09]

Mary Hanafin (Dún Laoghaire, Fianna Fail)
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An annuity is a contract sold by an insurance company that provides guaranteed payments at specified intervals for the duration of the purchaser's lifetime in exchange for an upfront cash lump sum. Annuity contracts are a well-established feature of the pensions landscape and are likely to remain so. They provide a secure means of converting pension savings into pension income and avoid the danger that pensioners could exhaust their pension savings in their lifetime.

Notwithstanding their advantages, there has been considerable discussion as to whether the market for annuities is operating efficiently and effectively. While the cost of annuities has risen sharply in recent years because of falling interest rates and improving longevity, there is a perception that costs are excessive and that the State could provide such products at a cheaper rate. Other factors, including the operation of the funding standard for defined benefit schemes, which is linked to the cost of annuities, have also led to proposals that the State should play a more active role in this area.

It should be noted that the State is already heavily involved in annuities through its regulatory role and through the tax concessions afforded to individuals in accumulating their retirement savings. The State has also facilitated the development of alternative approaches to annuity provision, such as approved retirement funds for certain pension schemes. In this regard, calls have been made to extend the availability of such alternatives to all defined contribution pensions schemes that are currently required to purchase an annuity.

In keeping with the Government's aim of encouraging people to plan properly for their retirement, it is important that the annuity market serves its customers as effectively and efficiently as possible. As part of its formulation of a comprehensive approach to future pensions policy and the Green Paper on pensions, an independent study of the Irish annuity market was commissioned to evaluate its efficiency and effectiveness. This study examined the arguments for the State to become directly involved in the provision of annuities and the broader implications of any intervention by the State in this area. The results of this study have informed the development of future policy.

Any decision, however, on the introduction of a State annuity scheme such as that suggested by the Deputy will be considered in consultation with all relevant Departments and proposals thereafter will be reflected in the national pensions framework, which the Government is currently finalising.

Róisín Shortall (Dublin North West, Labour)
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We are talking about yet another study to examine something that is a very good idea for cutting out the middleman. The middleman in the pensions industry is very expensive so there are many advantages to a State annuity scheme. Overall, the problem is that there is no current policy in this area. There are options in respect of the State annuity scheme. There are very attractive options for nationalising some or all of the pension schemes and for what could be done with the funds and the benefits that would accrue to pensioners. Some 500,000 people have defined benefit schemes and they are concerned about their futures. Their pension schemes are under-funded to the tune of €30 million. Action must be taken and the Minister must indicate her thinking on this. What will she do about this massive shortfall in funding of pensions? What is her thinking with regard to the role of the State in this regard and when can we expect action?

Mary Hanafin (Dún Laoghaire, Fianna Fail)
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Regarding annuities, this is not just another report. It was carried out on behalf of the Department of the Taoiseach and its findings on the cost of annuities were upheld by other professional bodies. The report by Indecon, entitled Life Strategies, helped to guide our thinking on this matter. It highlights that some savings could be made, particularly on commission. It refers to the cost of capital being 6% and how, if the State took it over, there would be a more conservative mortality estimate. I do not know why it is believed the State would take a more conservative estimate about longevity than anyone else but this would amount to 5%, with profit at 3%. Commission would account for another 3%. Indecon suggested that, if the State were to take over the purchases of the annuities, there could be a saving of 18%. The Irish Association of Pension Funds estimated this figure to be 15%. These issues must be examined.

In effect, the annuity for a €10,000 per year pension costs €222,000 and any saving, whether 10% or 18%, would go back to the pension. These are the issues we are examining. The national pension framework is being considered by the Government and we are examining various issues. The State is not in a position to take on a potential liability of €30 billion for all pension funds. That figure is the liability if all funds were to close tomorrow. There is no indication this will happen. Many people who are worried about their pension funds will have time, over their working lives, to allow the pension fund to pick up again.

Róisín Shortall (Dublin North West, Labour)
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The Minister is wrong in her interpretation of the matter. She has failed to take any action on the pensions timebomb. I remind her of the significant judgment of the European Commission in respect of the Robbins case. The ECJ found that member states could be liable for pension shortfalls in the event of manifest and serious disregard of their obligations to ensure minimum levels of protection for employees' pensions. The Minister has admitted a €30 billion shortfall in defined benefit pensions. That is a manifest and serious disregard for her responsibilities, in so far as she has failed to take action and allowed 18 months to lapse since the publication of a Green Paper and she does not seem to accept that she is exposing the State to serious claims from pension funds that are wound up. In Waterford Crystal people have been paying into a pension fund for up to 30 years and there may be no money now to pay their pensions. In that event, a case will be taken against the Minister and the State for failing to ensure adequate protection. When will the Minister take action on the pensions timebomb?

Mary Hanafin (Dún Laoghaire, Fianna Fail)
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A number of actions have been taken on pension schemes, one of which allows people extra time to show proposals on how the funding standard will be met——

Róisín Shortall (Dublin North West, Labour)
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That makes no difference to the funding.

Mary Hanafin (Dún Laoghaire, Fianna Fail)
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——and allows them two years before they need to purchase their annuity, by which time hopefully the markets will have picked up. A number of issues were outlined in my answer to the first question.

Róisín Shortall (Dublin North West, Labour)
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That is nonsense.

Mary Hanafin (Dún Laoghaire, Fianna Fail)
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The judgment in the Robbins case is being considered by the European Commission to determine what, if any, additional obligations this places on member states. We will co-operate with the EU when it starts this investigation.

Róisín Shortall (Dublin North West, Labour)
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When will the Minister set out the policy?

Mary Hanafin (Dún Laoghaire, Fianna Fail)
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Regarding the national pensions framework, a Green Paper was published, followed by consultation and a conference on international best practice and we are now in the process of finalising the recommendations on this. It is currently being considered by Government.

Róisín Shortall (Dublin North West, Labour)
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When will there be a decision and action taken?

Mary Hanafin (Dún Laoghaire, Fianna Fail)
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This includes a number of short-term measures.

Olwyn Enright (Laois-Offaly, Fine Gael)
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The Green Paper was published in a very different environment. Will the changed environment be taken into account? I echo what Deputy Shortall has said. When will we see action? The Minister's initial reply to Deputy Shortall outlined valid reasons for a State annuity scheme, yet we are no clearer on whether this is under consideration by Government. It is very blasé of the Minister to say there is an opportunity for things to improve over the course of people's working lives. One does not have such an opportunity if one is between 61 and 64 years of age. It is very different for those in their 20s or 30s. This must be taken into consideration.

Mary Hanafin (Dún Laoghaire, Fianna Fail)
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I appreciate that people, particularly those close to retirement, find it difficult to watch the state of the pension funds. We have allowed additional measures for funds, giving extra time to formulate funding proposals, greater flexibility for recovery plans and a replacement recovery plan to extend the end date of the original plan.

Róisín Shortall (Dublin North West, Labour)
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There is nothing about funding.

Mary Hanafin (Dún Laoghaire, Fianna Fail)
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The pensions board can take into account voluntary employer guarantees. We also allow people two years before purchasing annuities. These immediate actions were taken in respect of the current situation.

The figure of €30 billion is an estimate of what might be the deficit if those funds were to close in the morning. There is no indication this will happen but because these are private investment funds the markets have had an impact on them.

Róisín Shortall (Dublin North West, Labour)
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What about Waterford Crystal?

Mary Hanafin (Dún Laoghaire, Fianna Fail)
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The Green Paper was published in a different environment but it was always the intention that the national pensions framework would be a long-term framework because it will affect the next generation.

Olwyn Enright (Laois-Offaly, Fine Gael)
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That is why we need action now.