IBIS Academy 2008 Dublin, Ireland

Green Paper on Pensions

Brendan KennedyThe Pensions Board

IBIS Academy 2008 Dublin, Ireland

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Background• Commitment given in 2006 Partnership talks• Pensions a point of contention during the

negotiations• Part of a package including;

– Production of a Guide to Hybrid Pensions (Produced by the Board)

– Review of the Annuity Market (Life Strategies and Indecon)

– Review of the Social Insurance Fund (Social and Family Affairs)

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Inputs

• Builds on previous work of the Pensions Board including:– The National Pensions Policy Initiative (1998)– The National Pensions Review (2006)– Special Savings for Retirement (2006)

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Scale of the Green Paper

• Approximately 136,412 words• 254 pages• 14 chapters• 8 appendices• 44 questions

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08Current System and overall

philosophy – Chapter 1• Pension System in Ireland has two main

elements1. The State-run Social Welfare System2. Voluntary supplementary pensions system

• Objective is to provide an adequate basic standard of living and to encourage people to make supplementary pension provision

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08Demographic Challenge –

Chapter 2• In 2002-2006 natural increase in Ireland’s

population was 131,000, while the estimated level of net immigration was 186,000

• Immigration forecasts are volatile• In 2061 estimated 1.8 workers for every

pensioner (currently 5.6 workers for every pensioner)

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08Demographic Challenge –

Chapter 2 (contd.)

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08Modern and Sustainable System –

Chapter 3• Over 65s will be 28% of population by 2050

(currently 11%)• Age related expenditure from 5% of GDP to

around 13% of GDP (€12bn);• Financing increasing pension spending will

fall to a diminishing share of the population

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08Modern and Sustainable System –

Chapter 3 (contd.)• Broad options to deal with this include:

– Increasing Exchequer savings;– Easing upward spending pressures;– Raising the retirement age;– Increasing the share of the population at work;– Improving the economy’s productive capacity

and overall competitiveness.

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08Maintaining income adequacy in

retirement – Chapter 4• Average net income for pensioners in 2005 was

€327.55 per week (€776.11 for all households)• 59.9% of the workforce expect to have some level

of supplementary pension income, 20.1% expect the Social Welfare pension to be the main source;

• Risk of income poverty for older people in Ireland is relatively high by international standards, and;

• 30-65 year olds are undersaving for the future.

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08Social Welfare Pension in Ireland

– Chapter 5• This chapter:

– Discusses the main issues which have arisen in relation to the Social Welfare pension system;

– Issues mainly because of the limited coverage of the social insurance system up to the early 90s and societal norms which applied until the early 70s.

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08Social Welfare Pension: Reform

Options – Chapter 6• Reform options discussed are:

– Maintain the current arrangements;– Universal Pensions;– Reforming and backdating the Homemaker’s Scheme;– Replacing the average contribution test with a total

contributions approach;– Approaches to address sustainability (increase social

insurance, defer payments by increasing SW pension age or introduce means-testing for SW pensions).

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08Incentives for Retirement Savings

– Chapter 7• Chapter looks at:

– The principal features of the current pensions tax regime;

– Current rules for Funding Pension Benefits;– The Cost of Tax Relief – approximately €2.9bn in

2006;– Consideration of Equity;– Flexible options – ARFs;

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08Incentives for Retirement Savings

– Chapter 7 (contd.)• Options for change include:

– Matching contribution from the Exchequer for each € paid by way of personal contribution to a PRSA (approx. €400m per annum);

– Increase the level of tax relief to the higher rate for all personal contributions to all forms of supplementary pension provision (approx. €145m per annum);

– Mandatory pension schemes (Soft mandatory approx. €95m per annum, Hybrid mandatory approx €1.4bn)

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08Possible Approaches to Pensions

Development – Chapter 8• Comparison of approaches:

– Current System;– Delivering improved adequacy through enhanced Social

Welfare benefits;– Enhancement in respect of voluntary provision;– Soft mandatory pensions;– Mandatory pensions.

• Coverage, adequacy, cost, competitiveness, continuity, modernisation and redistribution

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08Issues for DB and DC schemes –

Chapter 9• DB issues include:

– Impact of Funding Standard (discussed in Chapter 10)

– Decline of DB schemes;– Integration of DB pensions with Social Welfare

pensions;• Issues for DC:

– Adequacy of pension benefit payable

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08Issues for DB and DC schemes –

Chapter 9 (contd.)

• Issues common to both DB and DC include:– The demand for guarantees– Security for pension scheme members

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08The funding standard –

Chapter 10 • Overview of the current funding standard and the

impact on funding of recent economic/financial developments;

• Possible options for change to the funding standard;

• The Pensions Board plans to submit a report to the Minister on the operation of the funding standard (priority order/protecting pensions inc).

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08Annuities and Related Issues –

Chapter 11• This chapter discusses:

– The role of annuities in the overall provision of a pension;

– Alternatives to annuities;– Annuity purchase;– The future of the annuity market;– The role of the State in relation to annuities

• Annuity Study – ceiling, survey and information

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08The role of regulation (and

charges) – Chapter 12 • The role of pension regulation in:

– Providing confidence and security;– Supervision of pensions

• Structures;• Objectives• Role of the State

– Governance, disclosure and particular needs of different pension scheme designs;

– The provision of information on pensions– The move to risk-based supervision

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08The role of regulation (and

charges) – Chapter 12 (contd.) • Pension charges:

– Types of charges;– Disclosure and viability of charges– Statutory control of charges;– Level of charges;

• Options are outlined in relation to controlling charges for supplementary pension schemes including Pensions Board role

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08Public Service Pensions – Chapter

13 • Chapter considers:

– Public Service Pensions Systems;– Reform process to date– Future outlook– Link between pensions and pay determination

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08Public Service Pensions – Chapter

13 (contd.)• Reform options include:

– Career Average– Slower accrual– Pay parity– Increased contribution– Raised retirement age.

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08Work flexibility in older age –

Chapter 14 • This chapter examines the issues for Government,

individuals and employers in relation to retirement age and work flexibility

• Retirement age options include:– Deferring the Social Welfare pension;– Raising the retirement age for all;– Raising the retirement age for young people

• Retirement age and occupational schemes are also discussed

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Other developments/next steps

• Programme for Government (NPPI target endorsed);

• Consultation process begun – to last until mid 2008;

• Followed by Government response/possible legislative change/framework of interlinked issues

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