Seanad Éireann - Volume 178 - 18 November, 2004
Pension Provisions: Statements.
Mr. Brennan Mr. Brennan
Mr. Brennan: Pensions are an international issue and most countries in the developed world face the same challenges as Ireland, namely, how to provide pensions that are both adequate and sustainable in a context where our population is ageing rapidly. The combined effect of large numbers reaching retirement age and rising life expectancy will mean a doubling of the old age dependency ratio. In 2000, the over 65s were equivalent to a quarter of the working age population in the EU. By 2050, it is projected to be nearly 50%. The situation in Ireland is unique. At approximately 11%, we currently have the lowest proportion of older people in our population in the EU and things will remain relatively stable for the next ten years or so. After that the old age dependency ratio will start to increase rapidly. In the circumstances, we face the same challenges as other countries. The only difference is that these appear later, which means we have more time to prepare for the demographic changes to come.
One of the miracles of the modern age has been the rapid improvement in life expectancy. Thankfully, we are all living longer, healthier and more active lives. The number of older people in our society will increase in the years ahead. Regardless of the burden, this is something we should not decry, we should celebrate it. The challenge we face is to provide a pensions system that will provide adequate resources for people to enjoy the type of retirement for which they would wish and which they have earned through a lifetime of work. It is also important to ensure that the system is affordable in the future so that we do not place unsustainable costs on future generations and put at risk the benefits we want for all older people, and for ourselves in due course. In addition, it is important to ensure that our pensions system is modern, that ideally it does not create disincentives to work and that it complements the operation of a smooth labour market.
The pensions system in Ireland comprises two components, namely, a social welfare and a sup plementary pension, both of which I will discuss. Social welfare pensions play an important part in the overall income of our older people. For many people, old age pensions and other social welfare benefits represent their only source of income. In the circumstances, it is important that our payments are set at a level that will ensure older people do not live in poverty. Social welfare provision for older people has been a priority for the Government since 1997. The Action Programme for the Millennium set a target old age pension rate of €126.97 to be achieved by 2002. In the review of the programme for Government, the target was extended to other social welfare pensions and, in most cases, it was achieved ahead of schedule. New targets were then set which will see pensions increase to at least €200 per week by 2007, and significant progress has already been made in this regard. The situation will also be examined in the upcoming budget.
Since 1997, pensions have increased by 69%, some 43% above the rise in the cost of living over the same period. I hope to be able to continue this progress in the forthcoming budget. Ultimately, the aim is to reach a position where the old age pension is set at a rate equivalent to 34% of the average industrial wage in line with the commitment in Sustaining Progress. At present it stands at approximately 31% of the average industrial wage.
At the same time as increasing rates of payment, the Government has sought to ensure that as many as possible can qualify for contributory pensions and thereby reduce our reliance on means-tested benefits. Already there is a decline in the importance of the old age non-contributory pension, with a reduction of 20% over the past ten years in the numbers relying on this means-tested payment. This reflects improved social insurance coverage and increased labour force participation, particularly among women. In regard to the former, there was a series of extensions to social insurance from the early 1970s through to the 1990s with part-time workers, the self-employed and public servants being some of the major groups brought into the system. We have an almost comprehensive social insurance system and this improved coverage is manifesting itself in the increasing numbers now qualifying for contributory payments.
Today approximately 69% of old age and retirement pensions are contributory based, and it is expected that in ten years’ time this will have increased to 85% of the pensions in payment, which I welcome. As well as improving social insurance cover, the Government has also made changes in qualifying conditions to make contributory payments available to more people. The average number of contributions required for a minimum pension was reduced from 20 to ten and special pensions introduced for those with pre-1953 insurance and for some self-employed  people. A range of pro rata pensions is also available to allow those with insurance at different rates or from other countries to receive a payment. At this stage, I consider that the range of pro rata and special pensions available is adequate to deal with most situations having regard to the need to ensure that the contributory principle underlying entitlement to social welfare contributory schemes, which requires a certain level and type of social insurance, is maintained.
I am aware of further demands to deal with other situations, which some people perceive as anomalies. However, in considering any further enhancements or improvements, I must be conscious of the need to ensure adherence to the contributory social insurance principle to which I have already referred. In this regard, my Department is at present reviewing the qualifying conditions for old age contributory and retirement pensions and I hope to publish a report in this regard early in the new year.
As well as providing pensions, the Government also invests heavily in the non-cash benefits paid through the household benefits package, which provide telephone rental, free electricity and TV licences. Free travel is also available to all those aged over 66. These benefits are very highly valued by those who receive them and the Government has also taken measures to ensure that they are available to as many people as possible. All those over 70 years of age are now eligible for the benefits, regardless of their income or household composition. The qualifying conditions have also been eased to allow those without qualifying social welfare payments to receive these highly-valued benefits, which are equivalent to approximately €16.50 per week.
As I already indicated, the support we provide through the social welfare system is an important part of the overall income of older people and complements other services provided by other Government agencies and Departments. We will continue to seek appropriate opportunities to improve on the support we provide so that older people can enjoy a good level of support generally in older age.
Occupational and private pension provision is an important element in the overall pensions system. An increase in the number of people participating in occupational pension schemes, or providing for their retirement through personal arrangements such as personal retirement savings accounts is a priority issue for Government. This extended coverage is important for ensuring the effectiveness of the income replacement function of our pensions system. As I have already outlined, the social welfare system will provide a good basic payment but if people want to enjoy the retirement they would hope for they must make extra provision by joining employer-sponsored schemes or by making their own provision through a private scheme, both of which are highly tax advantaged.
 The Pensions Board in its report on the national pensions policy initiative estimated that up to 70% of people over the age of 30 need such cover, and I am aware that this is an ambitious target we are aiming to achieve. Recent figures released by the CSO suggest that the coverage rate for this important target group stands at just over 59%, so there is plenty of room for improvement.
The introduction of personal retirement savings accounts last year is an important element of this policy and the results to date have been reasonable with just over 37,000 accounts opened with a total asset value of €106.6 million at the end of September. We have also seen an increase of 2% in numbers covered by occupational schemes in 2003, which now stands at 724,000. Progress is being made but we will need to see a more substantial increase in coverage over the next two years if our strategy is to be considered a success.
For our part we will continue to provide resources for the very successful national pensions awareness campaign being run by the Pensions Board on behalf of my Department. This is designed to highlight pensions issues and to encourage people to consider joining occupational and private schemes. I would also urge employers, trade unions and representative organisations to play their part in selling the pensions message to their employees and members. It is in everyone’s interest to ensure that people have an adequate income when they retire.
As I stated earlier, Ireland has more time than many other countries to prepare for the demographic changes that are coming. However, we cannot become complacent. The facts speak for themselves. Currently Ireland has the lowest proportion of older people in the EU, with just over 11% of the population aged 65 years or over, against a European average of 16%. That gives us some time. This proportion will remain at roughly the same level for the next ten years, after which it is projected to increase steeply to 15% in 2021, 19% in 2031 and 28% in 2056. At present there are five persons in the active age groups — those aged 20 to 64 years — for every pensioner. This ratio is projected to decline steeply over the period to 2056 when there will be just two active people for every pensioner. We will be moving from a ratio of 5:1 to a ratio of 2:1.
These statistics, coupled with the current inadequate level of private pension coverage, are the early warning signals that Ireland faces major challenges in the area of pensions. I emphasise that this is an early warning signal. We are working extremely hard to address this problem through initiatives to increase pension coverage by the voluntary route. Our overall strategy in this area will be reviewed in 2006. However, even before 2006, if we find that the voluntary approach has not delivered the increase in coverage we require, other measures will have to be  considered in our drive for an adequate sustainable pension for all.
There is a variety of pension models and other EU countries are examining them at present. That said, no one pensions hat fits all. We need to ensure that our systems suit Ireland and, ideally, that we can build on our current approach. We are in a relatively stable situation at present, which leaves us some room for manoeuvre to get our pensions system right. However, that window of opportunity will not remain open forever.
There is no doubt that occupational pension schemes went through a very difficult period from about 2000 to 2003 when many sustained very significant losses. Thankfully the position has improved somewhat over the past 12 months, but there is still some way to go before schemes get back to the position they were in prior to recent difficulties.
The funding position of defined benefit schemes is monitored closely by the Pensions Board through the funding standard which, basically, requires pension funds to assess their ability to meet accrued liabilities in the event of a wind-up. There are strong views that the standard is too onerous and is contributing to the difficulties in which many schemes find themselves. On foot of this, some flexibility was introduced in the standard pending a full review of the system and this succeeded in easing the pressure on schemes. Following a wide consultation exercise the Pensions Board is finalising a review of the funding standard and I expect to receive its report in the near future. I will consider this carefully and will bring forward changes if, having considered the report, I consider it appropriate. In considering the funding standard it is necessary to strike a reasonable balance between the interests of scheme members, pensioners and the sponsoring employers. Clearly, the burden of regulation must be such that it does not discourage employers from playing an active role in ensuring good pension provision for their employees.
I am aware, however, that there is a dilemma in that pension provision is, by definition, a long-term investment while on the other hand, a wind-up standard implies some requirement for a more short-term investment portfolio. In addition, presumably the investment strategy of a pension fund should reflect the trustees’ informed judgment following a comprehensive review of the projected assets arid liabilities of the fund, which will differ from scheme to scheme. These are challenging times for trustees and sponsoring employers and, no doubt, the Pensions Board will address this in its report.
We must be careful in developing our pensions system that we do not place unreasonable demands on future generations. The financial sustainability of pension systems is a necessary precondition for the provision of adequate pensions in the future. Ireland was one of the first countries to put in place a national pensions reserve  fund in 2001, as a way of ensuring that future generations of workers are not over burdened with tax and social insurance contributions when the increased pension costs arising from increased longevity and the retirement of the baby boom generation start to bite. At the end of September the fund stood at €10.8 billion. The Government is committed to maintaining its contribution to the fund at 1% of GNP each year.
When considering questions relating to financial sustainability of pensions, much of the focus is on questions of cost and funding arrangements. However, an equally important factor to be considered is the ratio of the active population to inactive persons, the so-called economic dependency ratio. I have already referred to that. In an Irish context there are at present five persons in the active age groups for every pensioner and this will decline over the years until we reach a position when there will be just two active people for every pensioner. In the circumstances, it is clear that focusing on improving the workforce participation of older people, and other groups with a low participation rate at present, can make a significant contribution to the sustainability of our pensions system.
In terms of workforce participation for older people, Ireland has one of the higher levels in the EU and we are very close to achieving EU targets in this regard. Action has been taken in the context of public service pensions which, for new entrants, have raised the age at which full pension can be paid and eliminated the requirement to retire at 65. I am aware of suggestions that a general rise in the retirement age will be required in the future in order to ensure the adequacy and sustainability of the pensions system. This is not something which is being contemplated, though we need to ensure that people are, as with the new arrangements in the public sector, facilitated if they wish to work beyond what we regard as normal retirement age. While we need to ensure that there are no financial disincentives to someone continuing in work, the attitude of employers to the retention of older workers will be an important factor in developments in this area.
The future of national pensions systems has been the focus of an in-depth analysis at EU level through what is known as the “open method of co-ordination”. Under this process agreed objectives in the area of adequacy, financial sustainability and modernisation were set out. The aim is that member states learn from each other while remaining free to develop their pensions systems in accordance with their own traditions, values and priorities.
As part of this EU process we presented a clear strategy to achieve the common goals in relation to pensions of adequacy, sustainability and modernisation. Our overall strategy for the future in the area of adequacy includes a continuation of our policy of significant increases in State pen sions and increasing the number of people with occupational or private pensions. Overall, the EU considered that Ireland had made good progress in ensuring the financial sustainability of our pensions system while at the same time increasing the adequacy of our pensions.
Provision for older people remains a priority for the Government. Adequate pensions are essential to ensure that people can enjoy a long, active and productive retirement. The Government has a clear strategy in place covering all aspects of pensions to ensure that it can deliver an acceptable income in retirement for existing and future pensioners. We are determined to achieve the ambitious targets we have set for ourselves in this important area.
The area of pensions represents a major challenge. It concerns me that more than 50% of the workforce has made no provision for retirement and will rely on the State pension. Of the 50% who do have a pension, approximately half of those have inadequate pensions. Despite the good progress we have made, probably no more than 25% of the working population have made adequate provision for retirement. I hope this debate will focus on the message to employers and employees that they must take heed of the situation whereby some 75% of workers do not have adequate pensions. We must consider whether it is sufficient to deal with this on a voluntary basis, as we have been doing. There is no crisis as yet but the situation could become critical for future generations. It must be frightening for people heading into retirement without adequate pension provision and forced to rely on the State pension, which is no more than €8,000 per year. This is an unacceptable situation.
We have made progress and established good systems. The public service is well looked after through the national pensions reserve fund but there is a range of workers who need to get the message on pensions. I congratulate Senators for bringing focus on an issue which will face most people as their lives go on.
Ms Terry Ms Terry
Ms Terry: I welcome the Minister for Social and Family Affairs, Deputy Brennan. I will preface my comments by echoing what the Minister said in his closing remarks. It must be frightening for the many people who face into retirement without a pension. This is an easy statement to make and with which we all agree. It is also frightening, however, for the many thousands of people who have paid into a pension fund but are now facing into retirement with an inadequate provision. I hope to outline why so many people have no pension or an inadequate pension. While I am angered by some of the details in the Minister’s report, I recognise the good work the Government has done with regard to pensions and its commitment to effect further improvements in this area.
 I am mostly concerned to discuss occupational pensions. I have asked for a debate on pensions on many occasions and I thank the Leader that it has finally taken place. I hope the Minister will consider the recommendations I will offer. I understand that he is still finding his feet in his new Department but I trust that he will take a new view on how to assist the many people who have occupational pension schemes and those others who are considering taking out such pensions but feel it is not worthwhile.
Pensions should be guaranteed. Why should anybody bother paying into the pension funds which are being advertised when they know they will not pay out to the value one would expect, and have not done so historically? The industry or the Government should provide a bonding system to protect members. We must address the inequity between the guaranteed pensions for the State sector, where employees enjoy secure employment, and the insecure pensions available to the private sector. The Pension Benefit Guaranty Corporation, PBGC, is the United States Government agency set up to protect private sector pension scheme benefits. An employer in that country must get approval from the PBGC before winding up a scheme. If a scheme has insufficient funds to meet its commitments, the PBGC guarantees the funds. Financing comes from insurance premiums paid by the companies which have their plans covered from investments and from assets of pension plans taken over, but not from taxes. The Minister should consider whether such a model could be adopted here to ensure protection for the many people who have and want private pensions.
Pensions should be dealt with by one of the Departments. It could be argued that there should be a Minister with responsibility for pensions, perhaps the Minister for Social and Family Affairs. The regulatory body of life assurance companies and pension funds is in the hands of the Department of Enterprise, Trade and Employment. The Pensions Board regulates occupational pension schemes while the Department of Finance controls the pensions reserve fund and the SSIA scheme. This latter scheme, if slightly modified, would make an excellent pension vehicle.
The Director of Corporate Enforcement and the Comptroller and Auditor General should investigate the operation of pension funds and quantify any damage done to members’ benefits. They should consider the poor value for money we are getting in terms of tax concessions that have been made to the industry. Why is the industry making significant profits while pension benefits are more at risk than ever before? It should be established whether employers who wound up their pension schemes because of under-funding enjoyed contribution holidays in the preceding years. It will be found that most of them did and that is disgraceful. If those contri bution holidays had not been permitted, the schemes would not be in such serious difficulties. Companies benefited while pensioners today and of the future will suffer.
The continuation of the Pensions Board as currently constituted should be reviewed. Since its foundation, private sector pensions cover has been reduced from 66% to 50% with a significant swing from defined benefit to the less secure defined contributions schemes. The board’s performance in monitoring and supervising the administration of occupational pension schemes leaves a lot to be desired. Once a member leaves a scheme because of early retirement or because the scheme is wound up, he or she is not even retained as a statistic in the board’s records. It is disgraceful that the board is only concerned with members who have schemes. If a member is told by his or her company that its scheme is being wound up or is under-funded, as often happens, the people with frozen benefits disappear from the radar as far as the board is concerned. There are no facts and figures about these people. This should not be allowed. Companies should know about every employee who has ever had a pension in their employment and what happens to such employees when their pension benefit is eroded or put in jeopardy.
Participation in private sector pensions schemes should be optional. I did not like to hear the Minister say that if the current system which operates on a voluntary basis does not work, he will consider something else. He did not use the word “compulsory”, but I believe that is what he meant. Under current circumstances if he made it compulsory for employees to join schemes, that would be disgraceful. I will outline why I believe that to be the case.
The current system, which may be unconstitutional, whereby an employer who is contributing to a pension scheme may make it a condition of employment that employees join the scheme — which does not guarantee any benefits — should be discontinued. I ask the Minister to discontinue such compulsory obligation. If a person gets a job in a company that has a pension plan, employers oblige the employee to join it, even if it is a waste of time, so to speak, which it has been in many cases. Many people who have paid into a pension fund for years because they were obliged to do so are facing retirement with an inadequate pension. Until this system is protected, there should be no mention of making it compulsory for employees to join such schemes. It is wrong to force a person into such a bad situation.
I ask the Minister to examine the current inequity where higher paid workers enjoy a higher percentage tax relief on pension contributions than lower paid workers. If a person is earning €100,000 a year and that person contributes to a pension fund, the tax benefit he or she will get because of paying the higher rate of tax  will be higher than a lower paid worker who also contributes to a pension fund. Euro for euro the lower paid worker’s tax relief on pension contributions is less. That is an inequity which should be addressed.
The Government has consistently refused to acknowledge that there are tens of thousands of workers whose employment termination was driven by the pension industry. These workers are now suffering major erosion of their pension payments from schemes they were compelled to join. The threat to the solvency of some pension schemes is accepted by the Government as a valid excuse for not granting a statutory right to the preservation and revaluation of pension benefits earned in respect of pre-1991 service for private sector occupational pension scheme early leavers. People’s pension entitlements should be guaranteed. That is a trend that runs through what I have to say.
The Pensions Board is more concerned with attracting new members. Perhaps the Minister agrees that is what it is supposed to be doing. The board is more concerned with attracting new members than with protecting the interests of its existing members and early leavers. The Minister seems to be of the same view. He seems to be concerned about the pensioners of the future. While I agree with that approach, I hear no mention of the pensioners or workers of today, which I find frustrating. The Pensions Board is supposed to protect the interests of people, but it is not doing so. What it is doing, and it has a pensions awareness campaign paid for by the taxpayer, is all about attracting new members to buy more schemes. However, once they join the board seems to wash its hands of how those schemes work out. That is not good enough.
People are paying into pension schemes and nobody is monitoring the entitlements they should get. The Pensions Board’s claim that its only interest is in the number of active members as this reflects its income, is deplorable. That is a fact which is stated in its report.
Can the Pensions Board be impartial? I would say it cannot be because it relies on pension scheme operators for funds. It accepts sponsorship from those in the industry for their away days. A substantial number of the board members come from the pensions industry. I can understand why the Pensions Board reflects the opinion of the pensions industry more often than it ever reflects the opinions of the workers.
Today’s workers are paying for the current State sector guaranteed pension, the future State sector guaranteed pension through the pension reserve fund and, in many cases, for their own insecure occupational pension. In addition, they are being encouraged by the Pensions Board to contribute to the pensions of their children and grandchildren. Never before were so few asked to provide for so many. When the Minister talks  about providing for future pensions, who is paying? Workers are paying for their own pensions. They have paid for it through the sale of Eircom and the Minister is asking them to pay for future pensions. What about workers today who are hard-pressed and have come through hard times? They are being asked by those in the Pensions Board to pay to look after their grandchildren and their children. They need to get a life.
A good broker would recommend investing in the stock market only with money one can afford to lose. We have all heard that before. However, we are bombarded with advertisements encouraging us to buy pensions which enjoy tax relief only to be invested in the volatile stock market. The Minister is aware that most Irish people do not buy shares on the stock market. Many people had their fingers burned in the Eircom share debacle, which may have been their first and only time to buy shares. People are careful with their money. However, they pay money into pension funds and hand it over to brokers to manage and play with on the stock market like it was Monopoly money. People would not do that with their money but they hand it over it to brokers because they are encouraged by the Government to pay into a pension fund, which they believe will provide for them in their retirement. The Minister is fooling the people in this respect. It is dishonest.
I want to address the pensions industry. Two senior officers of a large national union, one of whom is on the board of the Pensions Board, have recently advocated child pensions, the SSIAs to be diverted into pension funds and mandatory adoption of PRSAs. I would expect these officers to be more concerned with the interests of workers and to seek to protect their pensions rather than advocating those issues and simply trying to secure additional funding for the pensions industry. The unions seem to have been brainwashed by the industry.
The industry is collecting money from ordinary workers which attracts full tax relief. For those people whose marginal tax is at the high rate, the Government is contributing €1 for every €1 paid. The industry is not taxed on the profits from its investments. It is not obliged to guarantee any return. It can freeze and has frozen payments for pre-1991 early leavers. If the fund runs out of money, as is happening quite frequently these days, when it comes to paying pensions, it can wind up the scheme leaving the members with nothing. It is nice business for the industry but bad business for the ordinary worker. As George Bernard Shaw once said, “Every profession is a conspiracy against the lay man”. That aptly applies to the pensions industry.
As a result of the way administration expenses are calculated, the administration costs have gone up while pension benefits have gone down. The pensions industry is taking everything and giving very little back. The industry must learn something from the success of the SSIAs. The Govern ment contributes one euro for every four contributed to a SSIA while it contributes one euro for every euro in the pension schemes. However, PRSAs have been a failure. The Minister says he wants to wait a further two years to see if they will be a success. I doubt that they will.
It is obvious why they have failed. With so many snouts in the pension fund trough, pension funds are being squandered. It is time the pensions industry got its act together. If private pensions could be presented in a formula as simple, transparent and fair as the SSIAs, there would be a much better take-up of pensions than there is today. If the industry is unable to do this, the Government should step in and do it. In only five years more than 1 million adults, with considerable help from the Government, will have voluntarily saved €14 billion. Who is to say how much we would save for our retirement if the Government could organise a simple special savings pension account? The high take-up of SSIAs and the high rate of home ownership proves that the Irish are not squanderers but savers.
The Government must ensure that the pensions industry does not get its hands on the SSIAs, which it is eyeing like hawks. The industry has proved it is incapable of preserving pensions and it now wants to squander the savings of more than 1 million people. The Minister must not let that happen. The Government must retain control of pensions to protect this money and encourage people to continue saving, whether for retirement or not, and make sure those savings are protected. I have no confidence that the pensions industry will protect that money. It will squander it.
Ms Cox Ms Cox
Ms Cox: I welcome the Minister to the House. I am delighted the Leader was able to arrange this debate on pensions in advance of the budget and Estimates. I compliment Senator Terry on many of the points she made regarding the pensions industry. My focus will be on older people.
The current pensions system is made up of two components, the social welfare pension and a supplementary pension. As a young person I was confused about those two elements. I was content that I would receive a pension from the State when I was 65 but it was not until I reached a certain age that I wondered what sort of lifestyle I could have with only a State pension. When one is beginning to earn money and later when one thinks about buying a house, the last thing on one’s mind is a pension. Even if one thinks about providing for the future, it seems far away and not something one needs to worry about. By the time the question of a pension has become urgent and important one may have committed oneself in other areas such as mortgage or loan repayments and be unable to contribute sufficiently to a pension scheme.
The Pensions Board has a responsibility to educate the public. This education must begin in the  schools so that people understand the need to provide for their own futures, both through the State pension and a supplementary work-related pension. We must understand that we need enough money as we get older to continue to provide for our needs. We are all living much longer. We cannot expect to die in our 50s. Many of us live into our late 60s, 70s and 80s and we must be able to provide for that. Young people think the State will provide a pension, which will be sufficient for their needs at the age of 65. How many 20 year olds think 40 year olds have had it? It is important for us to realise, and to convince our children, that the future must be provided for, what that will cost, and how much of a challenge it will be.
Senator Terry and the Minister both referred to the personal retirement savings accounts. I am delighted it is recognised that they have been a very successful initiative. Although many people derided the former Minister for Finance, Deputy McCreevy, for his concept, they have encouraged the most unusual people to save.
Ms Terry Ms Terry
Ms Terry: Senator Cox is speaking about special savings incentive accounts.
Ms Cox Ms Cox
Ms Cox: I am sorry. I was talking about SSIAs. It is a particularly important and attractive scheme. It was simple, clear and transparent. Everyone understood that whatever money was saved would be backed by the Government and that tax would only be paid on the interest. A number of weeks ago the Minister said he was considering the impact interest on SSIAs might have on means tests for social welfare payments. I hope he will be successful in that regard. It would be unfortunate if older people or those in receipt of social welfare lost out because they had earned interest on savings they had generated themselves. I hope the Minister wins that battle. The transparency and ease of SSIAs and the fact that they appealed to everyone should be taken into account by the Minister when he reviews pensions and in the Government’s review of how we will face the challenge of 2025 when many more people will be entitled to pensions.
The voluntary nature of the personal retirement savings accounts is essential. I deal with many international companies who come to Ireland to recruit and to set up here. They are part of our economic success and contribute to our full employment. If we create a compulsory tax in order to provide for our pensions and make pension contributions non-voluntary we will ruin our competitiveness. Compulsory payments, whether by the employer or employee, will destroy the nature of voluntarism. We must create an environment where people see the value of contributing to a pension scheme, get value for money from their contributions and want to contribute. That is our challenge. We should not take the easy way out. In the review  of 2006 it would not be helpful to decide that because only a small percentage of people have taken up PRSAs and are providing for the future, contributions should be made compulsory. Compulsory contributions by employers would create an additional tax on employment and compulsory contributions by employees would impose an additional tax on earnings. Such a decision would impact on our competitiveness. If, between now and 2006, PRSAs are found not to be as successful as the Government had hoped, I appeal to the Minister to be broad minded in addressing that issue and not to take the easy course of compulsion.
Education and awareness of PRSAs is essential. The Pensions Board’s awareness campaign has been very successful. Nevertheless, we need to do more. We also need to focus on women. The Minister’s predecessor, Deputy Coughlan, took cognisance of this issue. There is a huge gap in pension provision for women. Women work in part-time jobs, take time out to job share and take time out of the workforce completely to stay at home to look after children. For these reasons we lose out in making adequate pension provision. Some families do not have sufficient money to make pension contributions for the parent who is not the bread winner. The bread winner’s pension may be funded by his employer and it is assumed that he will always be there.
That is not good enough anymore in this age of separation and divorce with families facing the challenge of moving into two households. There are too many women in this country who have no pension provision; what will they do when they reach the age of 65? They are mothers who have brought up their children and some of them went hungry to provide for children in poor circumstances. When they reach 65 they will face the old age pension or become a qualified dependant, which is not good enough. That is a challenge for the Government.
I wish to focus on a number of key issues the Minister might consider examining, perhaps not in the forthcoming budget but in subsequent budgets. There is a range of benefits and free schemes that are means tested for those over 65 but are free to those over 70. Will the Minister look at the issue of waste charges levied on old people living in reduced financial circumstances? They are forced to justify to a local authority why they should be entitled to a waiver scheme where one is available. Where a local authority may not have a waiver scheme, however, the elderly are being forced to pay waste charges of between €300 and €400 per annum. It is a significant amount of money for such people.
I understand that a pay-per-volume system is to be introduced but a minimum sum will still have to be paid for the provision of that waste disposal service. People aged 65 and over should not have to pay such charges at all. The Govern ment should fund local authorities in order to provide that service free of charge to such people. Those over 65 are entitled to free travel and do not have to purchase a television licence, so they should not have to pay waste charges either.
The Minister referred to people over 65 continuing in the workforce, which is a great idea. Many people aged 65 or 66 are not ready to retire but they should not be obliged to pay tax at that age. If someone has worked all those years he or she should be exempt from income tax because he or she has already made a contribution. While not every cent may be tax free and there might have to be some limit, if people choose to work after 65 years of age why should they pay tax? I ask the Minister to consider that matter. It is a matter of choice, so if people in their 60s want to continue working they should be allowed to contribute to society. However, it should be recognised that by the time they get to 65 their tax contribution has been made so they should have the full benefit of the money they earn at that stage. If they choose to spend the money on their children, grandchildren or the wider society, that is their business. They should be allowed to keep all the money they earn. If we are prepared to allow people to retire at 65 we should not ask them to continue to provide for State services through taxation at that age.
The position of women within the social welfare system is unique and not enough is being done to recognise it. I have repeatedly come up against a rule in the social welfare system whereby a person can only receive one payment. Therefore, a widow looking after family members cannot claim a carer’s allowance because she is in receipt of a widow’s pension. When her husband was still alive she would have received a carer’s allowance because she would be entitled to a disregard on her husband’s salary or pension of approximately €250 per week. As a widow, however, she only receives one payment and so must choose between the widow’s pension or the carer’s allowance, whichever is greater. There is no equity in that situation, which arises due to a rule that one cannot receive more than one social welfare payment. It is unfair and inequitable so the Minister should consider changing the position in the next couple of years.
Pensions must be operated on a voluntary basis because an additional tax cannot be imposed on employment. If we are to maintain competitiveness and full employment we must ensure that our competitive level in every boardroom, when measured against boardrooms in the United States, India and elsewhere, is not penalised by taxation. I ask the Minister to bear that in mind.
I thank the Minister for attending the House and I am glad of this opportunity to contribute to the debate.
Mr. O’Toole Mr. O’Toole
Mr. O’Toole: I welcome the Minister to the House and wish him well with his new  responsibilities. I want to raise a number of points and while I realise that some of them are perhaps the responsibility of the Minister for Finance, the question of pensions moves between the Department of Social and Family Affairs and the Department of Finance. Some of the matters I think should be examined here have worked in other countries. Senator Cox referred to American board rooms so I will begin with a proposal that has worked over there. Traditionally, pension legislation has been characteristically hidebound but in recent years the former Minister for Finance, Deputy McCreevy, relaxed it more than any of his predecessors. People have been afraid to touch some fundamentals, however, because of the sort of conservative thinking one gets from officials in the Department of Finance. I know this to be the case because I have argued some of these points with them.
I will cite one example in which I became interested five or six years ago, having met a man who had retired from the ESB. He had worked all his life in the ESB in a technical management area and was highly skilled. He was the most experienced person in his area and had been involved in the development of overseas tendering and bidding. It will be recalled that the ESB was involved in such work for many years before we made it legal, because the company was not supposed to be doing overseas work prior to that. This man had built up a wide level of experience. When he reached retirement age he was active and felt like doing more work, although he was not prepared to do so for nothing. He wanted to do some work for the ESB but under the terms of his pension arrangements he could not be paid a pension and a salary at the same time, although he may have been able to do some consultancy work. The man finished up working for Viridian, or the Northern Ireland Electricity Board as it was called at the time, which was the ESB’s main competitor. Therefore, all the experience paid for by the ESB crossed the road to work for the competition. It would not be allowed to happen in a small shop down the country, let alone in a major national organisation.
I spoke to a number of people, particularly in Boston College, who had done much research on ageing and pensions. I found that some changes to the system had been made in the United States. The Economist picked up on the issue for a significant period. I am sorry to be long-winded about this but I think the Minister could build on this experience, which he may find attractive. They altered pensions legislation in the USA to allow people to change into different kinds of employment. That is the single biggest problem in this country; people are working full time one day and have nothing to do the next. The Minister should persuade the Government to take a more open view on the matter. Take, for  example, a person in a major industry in Connecticut, who reaches an age where he or she does not want to work full time or retire fully. Under the American system, such a person can work in New England during the summer and then spend the six winter months taking it easy in Florida, on a rotating basis. How it works is rather complex, however. For the six months he is on retirement he is receiving pension at that rate. When he returns for six months, he still receives his pension and also receives a salary based on the hours he works. Out of that salary comes a pension contribution. I would not make this up if I had not checked. This is what happens on a six-months-on, six-months-off basis. People also work on a month-on, month-off or a half-time basis and everybody is a winner. The company is a winner, the person’s quality of life is improved, creativity is maintained, productivity is increased and it is beneficial in all sorts of ways. The only reason we cannot do this here is that the law does not allow it.
I made a very strong case for this in the public service. While I will give the example of a teacher, it could apply to any workplace in the public or private sector. A school in Senator Cox’s area of west Galway might require special needs support or remediation support. However, to have a full-time teacher in that locality could cost a significant amount of money and might exceed the school’s requirements. A teacher living locally who has retired early might feel that he or she would not mind working three or four hours per week, but does not want this impacting on his or her pension. The school should be allowed to give the person four hours paid work per week while he or she continues to receive a pension. This solves approximately three problems at the same time.
As part of his work previously and now, the Minister will know that life expectancy has changed completely. I had major rows with the former Minister for Finance, Deputy McCreevy, when he made various changes affecting elected public representatives and others. Leaving that aside, everybody knows people will work longer but differently. Whereas different work patterns are coming in, they are not being reflected quickly enough in more flexible pension arrangements.
If I had total control over this matter, as well as introducing flexibility at the retirement end, I would also introduce a mandatory position at the early end. As the Minister will be aware, only 52% of people in the workforce have a pension. I have a simple theory, which I have argued with those in the private and public sectors and my colleagues in the trade union movement. For every year worked, an employee should have a year’s pension contributions somewhere. I would have no difficulty supporting legislation requiring anybody working in employment for longer than six months to pay into a pension fund. We should  not charge the employer with this task; dealing with the employer is another issue. I know how my colleagues in the trade union movement feel about this matter as I have had the argument with them. Not having this requirement is not doing anybody a favour.
Mr. Ryan Mr. Ryan
Mr. Ryan: Hear, hear.
Ms Terry Ms Terry
Ms Terry: Who is looking after that pension contribution?
Mr. O’Toole Mr. O’Toole
Mr. O’Toole: I will come to that matter. It is wrong for people such as those mentioned by Senator Cox to have spent a career working with no pension entitlement. We would be irresponsible to allow that to happen. It is as important as wearing safety belts.
In my first two years here I made representations on behalf of Members of the Houses to, I believe, the Gleeson committee — the one prior to the Buckley committee. I proposed that Members should not be allowed to cash in their pensions. If this went on outside these Houses we would regard it as irresponsible. Some Members, who lost elections, found themselves with no money and cashed in their pensions. Someone asking the Department of Finance to cash in his or her pension will receive a cheque in the morning. It is the quickest cheque one can get money from the Department of Finance because it knows it is great to give it back.
We stopped that for anybody who is in these Houses for a period of longer than a year or so — it does not apply to those appointed by the Taoiseach for a week so that they can get into the Members’ bar and find out what is going on. I ask the Minister to consider this matter and I support that view. We need to get away from the straitlaced thinking of full-time work and full-time pensions. We need to create that grey area. I can give examples from Canada, Australia, Holland and the US, and a huge amount can be done.
I compliment the Government — I believe I am the only one from this side of the House——
Ms Cox Ms Cox
Ms Cox: The Senator never does.
Mr. O’Toole Mr. O’Toole
Mr. O’Toole: ——who has completely supported the national pensions reserve fund. I called for it, supported it and negotiated for it; it is a great idea. It is the most far-sighted move I have ever seen any Government take. There are no votes in it and indeed there is opposition to it. Every time there is tightness of money, some party leader will call for us to put our finger in the till and take some money out. We made a great decision on that fund.
However, we should recognise that we took that decision when times were different. The idea germinated and developed when we had just come out of a period of net emigration and before we started experiencing net immigration.  It is now considerably less important because thankfully if we allow all those immigrants to do the work they want to do, they will pay our pensions for us in the future.
Some 48% of workers have no pension contributions. Ten years ago those with private pension arrangements in pension funds, etc., only had one option, namely, to buy annuities. While many rip-offs exist in the financial sector, that was probably the greatest one. At its peak, it was possible to buy annuities of approximately 9%. Somebody who had, for example, saved 200,000 into a pension fund over a working career was guaranteed 18,000 per year. In present day terms that would look very good. In reality the 200,000 did not form part of a person’s estate.
As people got wiser and as they began to cope with figures of more than a few thousand, they began to ask what would happen when they died and the money was gone. While a reduced annuity might be paid to a spouse, the money was lost. People rightly stopped paying into pension funds because they were being ripped off by financial institutions that paid money for a few years without any ownership of the money in an estate afterwards. People decided to do something else and many bought property.
Many of those without pension funds will point to having bought a house outright. Fair play to them if they have done so and if it looks after them. However, this does not carry the same level of security. The property market is cyclical and whereas everybody sees it one way at the moment, it is a bit like unemployment — people forget it when it no longer exists. While houses might be worth considerable amounts, their liquidity is not always very attractive. Those who invested in shoddily built apartments 15 years ago will have great difficulty selling them on the market because of the availability of higher specification modern apartments.
Whereas this may not be in his brief, the Minister should consider bringing greater flexibility to the retirement age. However, as we are discussing pensions he should bring these issues to Government or to the attention of the Department of Finance. We need a greater debate on the issue of defined benefits as opposed to defined contributions if only to give people an understanding. While it might not sit easily with the Minister’s thinking, as Members, we are all in the luxurious position of having a defined benefit. Those with such a pension arrangement do not appreciate it. I spent 20 years trying to convince teachers that it was the most important element of their employment conditions. People may not be aware that I actually offered to pay more for it, rather than let anybody start messing around with it.
I do not know how many years it is since we introduced a European directive on portability of pensions but it is not working. Trying to transfer pensions from one place to another is a pain. People often say they will leave it where it is to  preserve benefits down the line and set up a new system elsewhere so when they reach retirement age they must deal with three or four different sources of income. It is not that bad if they have it but there should be a neater way to approach it and legislation should facilitate that approach.
To get back to a year’s pension entitlement for every year worked, we must be stricter on pension arrangements for establishment periods. People should also be able to move and make payments and there should be the same flexibility for defined benefits as there is for people who have made their own pension arrangements that they can carry with them.
It is now mandatory for employers to explain pension arrangements to new employees. I suggested to the Minister for Finance that this is a great idea but it makes no sense for an employer to explain pension provisions to an 18 year old part-time worker. Before 26 years of age, young people should have the opportunity to make the same savings as for pensions, with the same tax encouragement, except they would be placed in a specially designed deposit fund in a building society to be used for the deposit on a house. This would also give young people the savings habit. I have discussed this with the Revenue Commissioners and while there are certain problems they are not insurmountable. It would be a progressive and creative way to deal with this issue.
Mr. Morrissey Mr. Morrissey
Mr. Morrissey: I welcome the Minister to the House and congratulate him on his appointment to this new portfolio. I also thank Senators, particularly Senator Terry, who made the case for this debate.
I agree with Senator O’Toole. People have stopped putting money into pensions and have put that money into housing because of the difference in returns in the past 15 years. That is why the housing boom has had a perverse effect on new entrants to the market. As Senator O’Toole said, it is fine to hope that a house is a wise investment but it is not liquid if money is needed in a hurry. If we continue to build such large numbers of houses, there will be an over-supply when people wish to cash in on their property.
The Minister pointed out that dependency ratios have fallen from five to two in a generation. The onus lies with the employer to explain pensions to people who have come to the State to seek work but it does not register with them. Why would it? Those people, however, will stay in this State. Over 100,000 people have work permits and we need them because we will be dependent on them in years to come. There is an onus not just on employers but on the Government to explain this situation to them, it cannot be left to the Pensions Board. Employers can say they have fulfilled their obligations under the law and it is entirely up to the employee to take up the plan.
The retirement pension is payable to people aged 65 and over. At age 66, a person can transfer  to an old age pension but on taking a retirement pension, a person who wishes to stay in business or at work can only earn €37 per week gross otherwise he or she will lose the retirement pension. A person who is 66, however, can change to the old age pension and earn unlimited amounts from external sources. In that year, people will lose their business contacts. The economy needs people to remain employed and our life expectancy has increased by six years since we joined the EU so we must look at the retirement age. The age was increased for new entrants into the public service in last year’s budget but this anomaly between retirement and old age pensions remains and it should be examined.
People have claimed to be socialists——
Mr. Ryan Mr. Ryan
Mr. Ryan: Senator Morrissey does not need to worry that he will be accused of being a socialist.
Mr. Morrissey Mr. Morrissey
Mr. Morrissey: ——but the former Minister for Finance, Mr. McCreevy, proved he was the real socialist by establishing the national pensions reserve fund and putting this money away. At the last election the Opposition said it would raid this fund and reduce the amount being paid in.
Ms Terry Ms Terry
Ms Terry: Is the Senator saying he did the right thing?
Mr. Morrissey Mr. Morrissey
Mr. Morrissey: When one reads the Minister’s speech, its importance for the future is clear. The former Minister did this State some service.
Ms Terry Ms Terry
Ms Terry: What about the people of today? He did not look after them. We do not know what the future holds.
Mr. Morrissey Mr. Morrissey
Mr. Morrissey: Pensions are about the future.
Ms Terry Ms Terry
Ms Terry: There are pensioners today as well.
Mr. Morrissey Mr. Morrissey
Mr. Morrissey: In the national pensions reserve fund, the Minister established a body that should not be altered by future Governments, it should be supplemented.
Ms Terry Ms Terry
Ms Terry: The PDs do not care about the present population.
Mr. Morrissey Mr. Morrissey
Mr. Morrissey: A national campaign to address the dependency ratio is necessary. The years to 2056, over which a reduction will take place in the ratio of working people for every one retired, from 5:1 to 2:1, is the equivalent of only one generation. That spells disaster.
Some people will be very well looked after with defined benefits, which I wish I had. Senator O’Toole spoke about the different kinds of Senator, defined benefits and when one could draw one’s pension. As I still consider myself young, I do not think about drawing a pension. I would like to know how defined benefits were costed in the recent benchmarking exercise. One  cannot put a price on the value of a defined benefit on one’s salary in the years to come. We must consider those who are not so fortunate. That may mean taking a firmer approach to ensure that any deduction from an employee’s salary is automatically placed in a fund by an employer as is the case with health levies. As this is a road we will have to travel in future, we should give the matter serious consideration.
This has been a timely debate and I do not doubt that we will return to it. I beseech the Minister to consider the difference between the retirement pension and the old-age pension and ask why there is such an anomaly between them. If the issue was addressed in the forthcoming budget, it would bring joy to a great many people.
Mr. Ryan Mr. Ryan
Mr. Ryan: Cuirim fáilte roimh an Aire, duine i measc na hAirí Stáit atá tar éis a rá le gairid go bhfuil sé ar an eite clé, mar aon leis an Taoiseach. Cosúil leis an Teachta Joe Higgins, tá mé ag brath go bhfuil an spás in a bhfuilim beagáinín plódaithe le daoine atá ag iarraidh——
Mr. Brennan Mr. Brennan
Mr. Brennan: Níl mé cinnte.
Mr. Ryan Mr. Ryan
Mr. Ryan: One of the remarkable developments in civilised western societies has been the extraordinary consensus that one cannot leave people who move beyond working age to fend for themselves according to some law of the jungle. According to my often faulty memory, it has been 150 years since Bismarck introduced the idea of an old-age pension and 100 years since it was first conceived of here. Notwithstanding Senator Morrissey’s comments, there is greater political consensus than conflict about what approach to take to this matter. We want to ensure that a population, which is ageing but not old in the sense of being inactive, can enjoy extra years of reasonable health in reasonable comfort.
There is no single solution. People on my side of the traditional political divide used to be of the opinion that pension provision should be income-related, inflation-proofed and paid for from general taxation. That was simply a way of transferring the burden from one generation to the next. It was to say we would allow the next generation to worry about us when we became old. It is not that I have anything against the next generation, but I am not madly keen to leave my security entirely to it. On the other side of the political divide there was a view that people should be left entirely to fund their old age themselves. In the more extreme version of this perspective, one would not even be given tax incentives to make pension provisions as the level of personal taxation would be so low.
While I can say plenty about my political opponents as Members will know, we do not differ significantly on this matter. However, when my party suggested there were better uses to which the national pensions reserve fund could  be put, it was making a perfectly valid point. For the Labour Party to question why the money was being used to fund infrastructure developments in Japan while this country was suffering a major infrastructure deficit was to make a balanced and reasonable contribution to the debate on how to use the reserve fund. While I understand the need to diversify risk and all the other arguments, it does not make sense to suggest that it is always better to invest a fund of this type abroad.
To make a political point, it is a bit rich to make political remarks on comments on the national pensions reserve fund within two years of a raid by the previous Minister for Finance on the social insurance fund to cover a hole in his budget figures. The social insurance fund is another form of pensions reserve fund. It is paid for by the social insurance contributions of working people to fund social insurance payments. At a time of enormous surplus in the fund, the Minister for Finance raided it and made no attempt to hide the fact.
We must inculcate a culture which has always existed in the public sector. In my other public service career, I have been paying 6.5% of my income in pension contributions since I started work after leaving college at approximately age 25. It is not a funded pension but, by the standards of the abolition of defined benefits, probably quite generous. It would be interesting to discover what level of contribution would have been needed, if tax allowable in its entirety, to fund an equivalent pension for public servants like me. I agree with Senator Morrissey that there will always be a degree of uncertainty. While there is no easy answer, my approach would be to integrate all of these things. The role of the State should be to encourage, fund and facilitate the maximum possible contribution from the private sector in the management and organisation of pension funds. Having observed the frightening variations of the marketplace over the past decade, I consider a fundamental role of the State should be to act as a guarantor of a certain level of pension for everybody. It would be required to do so to a greater extent in hard times and to a lesser extent otherwise.
A number of questions must be addressed. While I have no problem with contributions and share fully Senator O’Toole’s views, there is significant reluctance in this area. Some weeks ago, the issue of compulsory pension fund deductions was raised in Britain to great resistance by financial services interests and others. I have asked people about it, but still have no idea why. Across the political divide we must accept that if the Government was to decide that from 2005 everybody would be required to pay up to 8% of gross income, tax allowable in its entirety, to fund their pensions, many would be led by the O’Reilly newspapers to scream about a 10% tax increase. If we must deal with that level of hysterical nonsense, we will never provide for pensions. The  great attraction of the national pensions reserve fund is that it is not imposed on individuals, but is simply a sum.
Seanad Éireann 178 Pension Provisions: Statements.