Fiona O'Malley (Progressive Democrats)

I move:

That Seanad Éireann commends the Government on its publication of the Green Paper on pensions as a first step towards ensuring that as our society ages there is adequate pension provision, particularly for people on low and middle incomes.

I am delighted to have the opportunity to introduce this motion on the development of an adequate and sustainable pension system to meet the changing demographic circumstances that our country will face in the coming decades, and I welcome the Minister to the House.

Pensions should be a matter of great importance to everybody and how they are to be provided for in the future is an issue that requires full-scale debate. The Green Paper sets out in a clear and comprehensive manner the issues the country is facing and the potential options which are available. There has been some criticism that it does not reach definitive conclusions as to the various options. I believe, however that is somewhat misguided. Any effective solution requires a sustained long-term approach based on a broad consensus and this can come only from an informed national debate. Hence the consultation period. The motion gives Members of the House an opportunity to contribute to this debate.

Ireland is lucky in the sense that because of our recent strong population growth, we have more time than most developed countries to fashion a response before we have to adjust to a decline in the number of workers who will sustain pensions, or resolve how to deal with a situation where we have a much smaller number of people of working age relative to a much larger number over pension age. While this demographic change may be delayed in Ireland, it will happen and in the event will represent a major social change. As the Green Paper points out, the population aged 65 and over will increase by 59% in 2021 and by a further 142% by 2061. As a result, the ratio of people of working age to those over 65 will decline from 5.6:1 in 2006, to 1.8:1 in 2061.

This is largely as a result of people living longer and healthier lives, which undoubtedly is a cause for celebration. All the projections suggest that as a result of economic growth and technological change the standard of living will continue to increase. Good governance is about preparing and planning for this future scenario. It would be reckless in the extreme to ignore the inevitability of our future pension needs and liabilities. Government must act to make the necessary policy adjustments to plan for the future, and prudence would dictate that we act now. Furthermore, given the projected ratio of working people to pensioners, Government must alert, encourage and incentivise people to plan for their future retirement needs.

It is obvious we need to agree on a national strategy in relation to the provision and funding of pensions that will ensure future pensioners have the resources to maintain a reasonable standard of living, and that this is done in a manner that does not place an unsupportable burden on what will be a proportionately smaller labour force. This is the vital issue. We cannot burden workers today or in the future with the pension requirements that are needed further along the way. It cannot be an unsupportable burden and that is why we need prudent planning. Planning for future pension provision will have to be facilitated through successive governments and therefore a political consensus is necessary.

The State pension must, in my view, form the basic pillar of any such system. I am proud of the improvements in the State pension in the past ten years. In 1997 the contributory old age pension was €99.04 per week. It was increased to €147.30 by 2002 and is now €209.30. This represents a significant real increase, over and above the increase in the cost of living of more than 60% since 1997. It has more than kept pace with the increase in earnings, growing from 31% of average earnings in 2006 to 33% in 2007. The Agreed Programme for Government commits to an increase in the basic State pension to at least €300 per week by 2012. This will bring the State pension to around 36% of average earning in 2012. I believe we should see this as a staging post on the way to reaching a target of 40% of average earnings within the lifetime of the next Government. Furthermore, I would like to see a national commitment towards maintaining at least this level into the future.

Nothing has worked to alleviate poverty among older people quite like the pension increases. That is why it is so important that we commit to linking the pension to the average industrial wage, thereby continuing the significant reduction in the poverty rate among older persons, and hopefully eliminating it ultimately. This would provide all who qualify with a guaranteed level of State pension that would provide the basis from which they could plan additional provision. I am aware that the Green Paper raises concerns about the sustainability of the State pension even at existing levels of provision. However, I believe it is essential that we provide for a reasonable level of basic provision linked to average earnings.

If the State pension is to be increased to, say, 40% of average earnings, then serious consideration must be given to reforms that will make this sustainable, including increasing the share of the population in work, and raising the retirement age. With increasing health and longevity, an increasing number of people will in any event want to work longer, and we must put in place measures that encourage and facilitate this trend. In this regard, I urge that the earliest possible implementation of the commitments in the programme for Government to increase the State pension in respect of every year that a person over 66 delays taking it and to extend the amount those in receipt of the State non-contributory pension are allowed to earn without affecting their pension entitlement.

On supplementary provision, there are significant and ample tax incentives available to those on higher incomes to provide for their retirement. In any event, these people usually have sufficient incomes to enable them to make additional provision without undue hardship. I favour the continuation of tax relief for pension contributions but support strongly the measures introduced by the Minister for Finance in the last two Finance Acts to eliminate potential abuse. They should be an incentive for a reasonable level of pension provision, but only for a reasonable level.

I am concerned that the current system of tax incentives does not appear particularly attractive or user-friendly for low and middle income earners. It was for that reason the Progressive Democrats, in its election manifesto, proposed an SSIA-type scheme for those earning up to twice the average industrial wage to encourage them to make personal pension provisions. Under our proposal, instead of offering tax reliefs, the State would add €1 to a pension fund for every €2 contributed by the individual. The rules for contribution limits would be broadly similar to those applying to PRSAs at present.

We witnessed an extraordinary and massive uptake of SSIAs by people of all levels of income and this was for a scheme that offered a return of one additional euro for every €4 contributed. Furthermore, we have seen that people have, to a large extent, continued to save at the same level and not splurged their savings, as some more excitable commentators predicted. Our proposal of offering €1 for every €2 contributed is warranted in the case of pension funds because people are making a longer-term commitment than was the case with SSIAs. It also represents a significant improvement on the relief for those in the standard tax band. This relief is available to those on more modest incomes but it is not encouraging people to provide for their pensions as we would like.

In many instances people on modest incomes are also inhibited from contributing to a pension scheme by the high level of charges levied by the fund managers. As in the case of the SSIA scheme, there should be maximum charges specified for providers of funds. I am pleased that the programme for Government commits the Government to develop, in consultation with the social partners, proposals "to provide an SSIA type scheme in an effort to make supplementary pension provision more attractive to those on low incomes". I recognise that there are many variants to the scheme other than those we in the Progressive Democrats have proposed and I look forward to the Minister's proposals arising from the consultation process. Our scheme would be more attractive to individuals on modest incomes and obviate the need for a mandatory scheme, which could be regarded as a tax and would be fraught with difficulty.

I do not intend to address the broad issue of pension regulation today but one matter in this area raised by constituents should be addressed as a matter of urgency. It arises where people in the workplace have a defined contribution scheme rather than a defined benefit scheme, which is increasingly the case. In the case of defined contribution schemes, the pensioner, upon retirement, can take a lump sum equal to 25% of the value of the fund but must use the rest of the fund to purchase an annuity. Annuity rates have fallen considerably in recent years and many pensioners feel they are getting a very raw deal. They also point out that PRSA holders do not have to take out an annuity but can opt for other arrangements.

I am aware that there are pros and cons in respect of requiring the purchase of an annuity, but I believe people deserve to have a wider range of choices than they have at present. I ask the Minister to give serious consideration to extending such choice to individuals in defined contribution schemes at an early date.

I welcome the Green Paper and congratulate those who prepared it on the comprehensive manner in which it lays out the issues. The challenge we face on pensions is a problem of success in that it results from people living longer and healthier lives. Our recent economic success provides us with the opportunity to address it effectively. We must grasp this opportunity, learn from the experience of others and forge a national strategy that will ensure this and future generations will have the resources to enjoy a secure and productive retirement.