Willie O'Dea (Limerick City, Fianna Fail)
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The pension time bomb has never ticked more loudly. A recent unpublished report commissioned by the Government indicates that the gap between future social welfare liabilities, of which pensions are a large part, and the revenue to fund them stands at a staggering €324 billion. The time was never less appropriate for people to make provision for themselves. We are living through the worst economic turbulence in the history of the State. Hundreds of thousands of people are living from day to day and cannot even imagine putting money aside for their future but, even if they did, where would they put it, in view of the number of privately run pension schemes which are technically insolvent? Approximately 772,000 people are enrolled in pension schemes in this country, half of whom are in the public sector. A further 200,000 self-employed people also have pensions. Given that there are 2 million people in the workforce, these are extremely worrying figures. It is even more worrying that more than 80% of private defined benefit pension schemes, or four out of every five, are technically insolvent. The response of the Government to this problem was to turn the screw even more, thereby forcing many household names to contemplate winding up their schemes. I refer to AIB, Arnotts, Independent News and Media and even IBEC. This decision will leave those who are yet to retire with far less than they expected, and many will be left with nothing.

Temporary relief was provided by deferring the deadline for trustees and employers to submit recovery plans and by section 50 of the Pensions Act 2009, which allows distressed schemes to reduce member benefits. These measures had as much impact on the pension problem as they had on the temperature in Timbuktu. More than 80% of schemes remain technically insolvent.

The problem is not confined to the asset side, because asset values have generally recovered from the low point reached in March 2009. Arguably, the main problem is now on the liability side. The biggest problem for Irish defined pension schemes is that the minimum funding standard requires them to have sufficient assets to purchase annuities even though they do not have to do so in practice. The annuity rates of so-called safer countries have fallen to very low levels in the past three years, thereby driving up the cost to pension schemes of buying out pensioners. It now costs approximately €210,000 to secure an annual pension of €10,000 for a man aged 65, compared to €140,000 a few years ago. The only concession offered by the Government is to give the trustees the option of buying sovereign annuities for their pensioners, assuming they would purchase such annuities in the event of a wind-up. This approach has been widely criticised because of the substantial risk element involved. Sovereign annuities have a role to play but they are clearly unfit for widespread use. Earlier this year the Government introduced legislation which required defined benefit pension schemes to build up an additional risk reserve of 15% over the next 11 years. Surely this is the worst possible time for such a measure when most schemes cannot even address their current liabilities.

The main selling point for private pensions is tax relief on contributions. A survey published last week by Irish Life, which is Ireland's largest private pension provider, found that four out of ten of its customers would stop funding their pensions or sharply cut back on their contributions if the Government lowered tax relief in the budget. This is extremely serious, especially when further survey evidence indicates that 100,000 of those already in schemes can no longer afford to make payments and that the number of private pension scheme members has decreased by 38,000 since 2010.

I raise this issue because it is a cause of concern for a large number of people and companies. I ask whether the Government has developed any plan to begin the process of remedying the problems that have arisen.

Leo Varadkar (Dublin West, Fine Gael)
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I am taking this topical issue on behalf of my colleague, the Minister for Social Protection, who is currently travelling overseas.

It is acknowledged that the fundamental problem facing occupational pension schemes is that pensions are significantly more expensive due to increasing life expectancy and lower than expected investment returns, which are reflected in increased annuity rates. The pensions regulator suspended the funding standard four years ago, following the downturn in the financial market, to give trustees and employers an opportunity to assess the impact on pension funds and allow time to develop responses to the challenge. The re-introduction of the funding standard was delayed on a number of occasions pending changes to legislation which were designed to help trustees respond to the funding challenges facing pension schemes. The Government also introduced the following measures to ease the funding pressures on defined benefit schemes while the funding standard was in abeyance: the removal of 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 establishment of the pensions insolvency payments scheme to reduce the cost of purchasing pensions for trustees where the employer has become insolvent; and the introduction of the sovereign annuity initiative.

The purchase of a sovereign annuity is an option that the trustees of a scheme can exercise in order to reduce scheme liabilities. The sovereign annuity market is still in its early stages and demand for sovereign annuities remains to be seen. However, last August the National Treasury Management Agency announced details of the sale of just over €1 billion of Irish amortising bonds with durations of between 15 and 35 years. It is anticipated that the NTMA will be in a position to issue additional bonds as pension fund trustees complete their funding plans in line with the funding standard. The funding standard provides a benchmark against which the health of a scheme can be tested. The existence of the standard is not the central issue in whether a scheme is properly funded because the responsibility rests with the employer and trustees for ensuring that a scheme is properly funded and managed. However, the funding standard provides the regulatory mechanism for ensuring that a scheme can live up to the promised level of pension benefits.

The requirement for a risk reserve is also being introduced from 2016 to provide a level of protection for scheme members against future volatility in financial markets. It is accepted that the requirement for a risk reserve presents an added challenge for schemes but guidance issued by the regulator identifies options that schemes can consider in meeting this requirement by 2023. This guidance is being kept under review. Overall, the changes made to defined benefit schemes are intended to bring increased stability to pension promises in the future and reduce schemes' exposure to risks.

Willie O'Dea (Limerick City, Fianna Fail)
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Despite the changes the Minister has outlined, which are welcome as far as they go, the problem remains that at least four out of every five defined benefit pension schemes are technically insolvent and a number are in imminent danger of closing down. I do not understand why he stated "The existence of the standard is not the central issue in whether a scheme is properly funded because the responsibility rests with the employer and trustees for ensuring that a scheme is properly funded and managed." Surely the ability of an employer or trustee to afford to fund a scheme in these difficult times depends on the funding standards he or she is required to meet.

Does the Minister accept that independent economic experts have criticised the sovereign annuity system because of the level of risk and for other reasons? Does he agree that the results of the Irish Life survey show that approximately half of those who are currently contributing to defined benefit pension schemes would either cease their contributions or sharply reduce them if the tax regime is changed?

Can the Minister give us any assurance in that regard, in view of the fact this has been mentioned as a potential target in the forthcoming budget?

Leo Varadkar (Dublin West, Fine Gael)
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It is important to point out that the pensions regulator is independent and that we have an independent regulatory system for pensions. In Ireland, we are all suffering the consequences of the bad financial regulation of the banks, when the Financial Regulator did not require the banks to make proper provision for losses. I suppose what the pensions regulator is trying to do is to ensure that does not happen in the case of pensions and that they are properly funded. When many of these pension funds were established, it was not thought that people would live so long. Thankfully, now they do. Also, the contributions being made by employers and employees were inadequate over the years. This of course has had to change.

With regard to the issue of the funding standard, the reply given to me by the Department means that even if there was not a funding standard, it would still be the responsibility of the trustees and employers to make sure the scheme was properly funded. With regard to the NTMA bonds, this is something new, but it has the potential to work well. The NTMA offers a good interest rate on those bonds.

I cannot make any comment on the budget. As the Deputy knows, last month we had the highest consumer confidence recorded in five years, albeit lower by historical standards. Within a month that had fallen by ten points, probably due to Ministers and others talking about child benefit cuts, property taxes and all sorts of things.

Willie O'Dea (Limerick City, Fianna Fail)
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I could not agree more.

Leo Varadkar (Dublin West, Fine Gael)
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Therefore, I will be my better self and not engage in that sort of speculation on what is in the budget. I take the Deputy's point with regard to the impact a reduction in the tax relief might have on people's behaviour.

Tom Hayes (Tipperary South, Fine Gael)
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As we have no other Deputy present, we will move on the next business.

Leo Varadkar (Dublin West, Fine Gael)
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Deputy Pádraig Mac Lochlainn was to be next.

Tom Hayes (Tipperary South, Fine Gael)
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We are not taking it if he is not here.