Paying for the Jobs Initiative

Gerry Hughes: In 1988, in the middle of Ireland’s last economic crisis, the Minister for Finance in the Fianna Fáil Government, Ray McSharry, imposed a levy on pension funds for one year. In his Budget speech he justified it by noting that “funded pension schemes enjoy a very favourable tax regime in respect of pension contributions, investment income and lump-sum benefits.” The levy was opposed by the pensions industry and by employer and trade union organisations on the grounds that it would have serious consequences for pension funds. It didn’t. Pension fund assets grew from €6.4 billion in 1988 to €7.5 billion in 1989 and to €39.6 billion in 1999.

Last week the Minister for Finance, Mr. Noonan, proposed a levy of 0.6 per cent per annum on pension assets. It is expected to yield €470 million per annum to pay for a four year programme of measures which the government hopes will stimulate urgently needed jobs in tourism and other sectors of the economy. Nevertheless, the pensions industry is even more opposed to the Minister’s proposal than it was in 1988. Indeed the reaction from the industry has been so strong this time that the Minister has described it as “quasi-hysterical”. The Minister went on to say that the Government “was pulling back a very small proportion” of the tax relief from which the industry has benefitted over the years. How small is this proportion in relation to the amount the Government has contributed to pension fund assets in recent years, in relation to the pensions industry’s annual earnings and in relation to the annual value of the subsidy which the Government will continue to provide for pension funds?

Well the annual Statistical Reports of the Revenue Commissioners show that during the period 1998-2008 the cumulative net cost of pension tax expenditure amounted to €28.5 billion. In relation to the amount the Government has contributed, therefore, the levy is certainly small. It is also small in relation to the amount which pension funds are now in a position to earn on assets which they have mainly invested in international financial markets. The expected yield from the levy suggests that pension assets are now worth at least €78 billion. Rubicon Investment Consulting reports that in 2010 the average managed fund earned a rate of return of 11.1 per cent. Even If the rate of return were to fall significantly over the next four years, it should be manageable for the industry to use its earnings to absorb a charge of around €0.5 billion a year. The levy is also small in relation to the annual subsidy which the Government provides for pension funds through tax forgone on pension contributions, the investment income of the funds and lump sum payments on retirement. In the three years 2006-2008 the value of the tax forgone was about €3 billion each year. Because of the loss of value of pension assets during the present crisis the cost of the Government’s annual subsidy is likely to be around €23/4 billion. A levy of 0.6 per cent would, therefore, claw back 17 per cent of the annual cost of the tax expenditure on pensions.

Apparently the Government discussed with the pensions industry the option of standard rating pension tax relief, as has been done for other tax reliefs. The ESRI estimates that standard rating the reliefs could yield €1 billion per annum. The TCD Pension Policy Research Group, Tasc, Social Justice Ireland, the OECD and other commentators have all argued that standard rating would be a fairer policy. Not surprisingly, the pensions industry rejected a policy which would create greater equity in the tax treatment of pension funds by reducing tax relief for top rate taxpayers but involve no change for those paying the standard rate. Instead it suggested “one alternative option, …, would be a levy on pension fund assets” (see here. Having got its way, the pensions industry should absorb the levy either by reducing its costs and becoming more efficient, as other sectors of the Irish economy are being required to do, or by paying it out of current earnings or out of the annual subsidy which the Government will continue to provide over the next four years.

The debate over the levy on pension assets has exposed the Government’s lack of information about the pensions industry’s charges for different types of funded pension schemes. The Taoiseach has said that he will ask the Minister for Finance and an Oireachtas committee, before the next budget, to examine alternative ways of raising the money to pay the levy by cutting costs in the pensions industry. Such an inquiry would be welcome but its terms of reference should be broadened to ask why all taxpayers have to pay higher tax rates to subsidise an industry which benefits a relatively privileged minority of the population?