Is the National Pensions Framework a Policy for Pensions or a Policy for the Pensions Industry?

Gerry Hughes: In the National Pensions Framework document the Government points out that between 2004 and 2009 it increased the State Pension (Contributory) by almost two and a half times more than the increase in average industrial earnings and by nearly four times more than the increase in the Consumer Price Index. The increase in the real value of the State Pension resulted in a sharp fall in the risk of poverty for older people from 27 per cent to just over 11 per cent and in consistent poverty from 3.9 per cent to 1.4 per cent.

The strong effect on poverty rates of Government support for the public pension system contrasts with the weak effect on coverage rates of Government support for the private pension system by the introduction in 2003 of tax advantages for Personal Retirement Savings Accounts. Overall coverage of private pensions showed only a marginal increase from 52 per cent in Q1 2002 to 54 per cent in Q1 2008, according to the framework document. The National Pensions Policy Initiative target of 70 per cent coverage for those in employment aged 30 to 65, which was set in 1998, has not been attained. Coverage for this group increased from 59 per cent in Q1 2002 to only 61 per cent in Q1 2008.

The success of the policy of preventing poverty for older people by increasing the benefits of the public pension system is recognised in the framework document by a statement that “the Government will seek to sustain the value of the State Pension at 35 per cent of average weekly earnings and will support this through the PRSI contribution system. “ The Government also recognises that the PRSI system minimises administration costs, is relatively simple to understand and ensures security. However, instead of proposing to develop the public system to build on these strengths the Government simply asserts that the solution to Ireland’s pension problems is to introduce a new auto-enrolment, privately managed, supplementary pension scheme for all employees not covered by an appropriate occupational scheme. The contributions, amounting to 8 per cent for each employee (employee 4 per cent, employer 2 per cent, State 2 per cent), would be collected through the PRSI system and handed over in a competitive process to private pension providers.

No reason is given for why the pensions industry, and the Irish pensions industry in particular, should be rewarded in this way. In the financial crisis of 2008 Irish pension funds had the worst performance of national pension funds in 37 OECD and non-OECD countries. The Irish pension funds lost 37 per cent of the nominal value of their assets, or €27 billion, compared with an average loss of 20 per cent in the OECD area. Employees availing of the auto-enrolment scheme could be exposed to similar losses in the future because “the Government will not,…, provide any guarantees on investment returns.”

The framework document also proposes phased increases in the retirement age. Implementing these increases would reduce the expected lifetime value of the State Pension by 5.5 per cent for current workers aged 62 to 65, by 11 per cent for those aged 50 to 55 and by 16.5 per cent for those aged 49 or younger. At a time when people are reeling from shocks to the financial system, when many employers with DB schemes are reneging on their promise to provide a secure income in retirement and there has been a collapse in the value of pension assets in DC schemes, these are significant losses for the State to impose on employees who have fulfilled their part of the implicit intergenerational Pay As You Go contract on public pensions.
The intention of the proposed auto-enrolment scheme is to assist those in the lower to middle income range to make their own arrangements to bridge the gap and bring their post-retirement income up to the Government’s target of 50 per cent of pre-retirement income. The auto-enrolment scheme is unlikely to enable middle income employees to do this because the proposed contribution rate of 8 per cent is too low. An analysis in the Green Paper on Pensions shows that the average contributor to a PRSA is paying 10.5 per cent of salary and that this is not nearly enough to provide a replacement rate of 50 per cent of pay from a combination of a voluntary private and a mandatory flat-rate State pension.

The TCD Pension Policy Research Group has argued in Choosing Your Future, and Tasc has argued in Making Pensions Work for People, that there is an option available to the Government which would build on the success of the social insurance model in preventing pensioner poverty and provide replacement rates of 50 per cent of pre-retirement income for workers on middle incomes. This is the mandatory State earnings-related option analysed in the National Pensions Review published in 2005. It would provide a flat-rate pension of 34 per cent of average industrial earnings and a supplementary earnings-related payment that would provide an overall benefit close to the 50 per cent target for middle income workers. The total additional contribution required for this option would be 5 per cent to be paid by equal contributions by the employee and the employer of 2.5 per cent of earnings.

Regrettably, the framework document ignores most of the evidence in favour of the superiority of the social insurance system in delivering pensions and opts instead to reward the most incompetent private pensions industry in the OECD.