Professional Insurance Brokers Association (PIBA) submission on the Green Paper on Pensions-May 2008

Transcription

1 Prfessinal Insurance Brkers Assciatin (PIBA) submissin n the Green Paper n Pensins-May 2008 PIBA Recmmendatins Advice and chice PIBA believe that chice and advice shuld be maintained in any new system designed t enhance cverage. We wuld als pint ut that independent Brkers facilitate cmpetitin between prviders thereby reducing csts, increasing fund perfrmance and enhancing prduct design. T illustrate the ptential impact f such cmpetitin, assume a persn aged 30 cntributes 500 per mnth t a pensin indexed at 5%, retiring at age 65. The impact f a 1% difference in investment perfrmance is as fllws: 5% p.a. investment perfrmance 553,000 fund 6% p.a. investment perfrmance 767,000 fund In ther wrds, there is a 39% increase in the fund as a result f a 1% increase in investment perfrmance. At an individual level, chice fr the cnsumer leads t a mre ptimal selectin f prduct and investment fund. Any system f mandatry r sft mandatry cverage shuld guard against reducing such cmpetitin and chice in the prvisin f pensins. Tax refliefs Current pensins tax incentives play a key rle in encuraging peple t cmmit funds t lng term pensin savings vehicles, within a vluntary system. Within a sft cmpulsry system (cmpulsry enrlment but vluntary pt ut) tax incentives are key t encuraging peple t stay enrlled and cntinue cntributing. Suggestins that a SSIA type tax credit system wuld wrk better with incentivising peple t cntribute t pensins arrangements than the current incme tax relief methd are wide f the mark in tw imprtant respects: The SSIA was a shrt term (5 years) vehicle where all funds (ther than interest r gains) were returned tax free t the cntributr after 5 years. By cntrast in a pensins cntract, a persn may be cntributing nw but nt get access t saved funds fr anther 30 r mre years, and then part f the benefits will be liable t incme tax & Health Levy. 1

2 The mtivatinal factrs are entirely different as between shrt term savings and lng term savings, and what wrked fr a 5 year savings plan (mst f which were depsit based) is nt necessarily ging t wrk fr a 30 year pensins savings prduct (which will likely be equity based). If tax credits were nly t be allwed t pensin savers at the standard rate, but emerging benefits at retirement (ther than the amunt which can be taken tax free) are t be taxed at marginal rate incme tax, then the tax system will then act fr many as a disincentive t cntribute t a pensin. In effect the pensins tax relief system wuld then becme a frm f taxatin, in that a significant number f cntributrs wuld get relief n the way in at standard rate nly (assuming the tax credit is set at standard rate) but wuld pay higher rate incme tax & Health Levy n incme taken frm the vehicle in retirement. With regard t suggested inequities in the current pensins tax relief system: The system already cntains a substantial number f measures t limit and restrict the tax benefits f pensin tax relief: Age related limits, as a % f earnings, n tax relief n persnal/emplyee cntributins A maximum earnings limit fr tax relief n persnal/emplyee cntributins A pensin fund limit intrduced in 2005, which penalises accumulatin f retirement benefits/funds in excess f this limit A minimum 3% pa drawdwn fr tax purpses has been intrduced fr Apprved Retirement Funds (ARFs), starting n a phased basis in February Inequities, if they exist, can be slved by leveling up as well as leveling dwn. The greatest inequities in the current pensins system relate t the quality f benefits prvided t different grups, rather than the level f tax relief prvided. E.g. public sectr emplyees enjy unfunded defined benefit final salary pensins, which are then linked t salaries in retirement, with current and future generatins f taxpayers fting the bill. Hwever in cntrast : Abut 50 % f private sectr defined benefit schemes are underfunded and may nt pay ut the benefits prmised The average emplyer + emplyee cntributin t defined cntributin schemes is 11% f salary, which will never prvide a pensin even 2

3 remtely clse t what a similarly paid public sectr emplyee will get in retirement. PIBA therefre supprt either: The maintenance f the current pensin tax relief granted n emplyee and emplyer cntributins, r The granting f marginal rate incme tax relief n all persnal cntributins t pensin arrangements, cmbined with the maintenance f the current tax relief granted n emplyee cntributins Reducing red tape The regulatin f pensins regarding transfers t and frm cmpany schemes and ther arrangements and maximum benefits shuld be simplified. The regulatin f prviders and intermediaries shuld als be reviewed t remve burdensme regulatin that adds little r n cnsumer prtectin (e.g. the certificate f benefit cmparisn fr transfers frm defined cntributin pensins t PRSAs). Insurance Mediatin Regulatins and the sale f PRSAs There is a prpsed exemptin t the Insurance Mediatin Directive Regulatins 2005 that will, if passed, exclude insurance intermediaries wh deal nly with insurance plicies frm the remit f the Investment Intermediaries Act Hwever, an insurance intermediary wh ffers PRSAs thrugh an insurance undertaking will cntinue t be subject t the dual regulatin f the Investment Intermediaries Act 1995 and the Insurance Mediatin Directive Regulatins 2005 (because PRSAs (n) are listed as individuals instruments in the IIA, regardless f whether they have an insurance plicy aspect r nt). It is PIBA s cntentin that insurance Brkers wh sell PRSAs thrugh insurance undertakings shuld gain an equivalent exemptin under the IIA. Otherwise, we feel that the sale f PRSAs will be deterred due t the fact that the regulatry envirnment wuld be anmalus as it wuld require the maintenance f a dual authrisatin by insurance Brkers. PIBA has raised this issue with the Department f Finance; hwever, it is nnetheless apprpriate t this review als given its ptential t hamper pensin prvisin. Sft-mandatry pensins PIBA supprts the sft-mandatry apprach described in the Green Paper as we feel that autmatically entering peple int a pensins scheme, while giving them the 3

4 ptin t leave the scheme if they wanted, wuld be the mst beneficial way f maximizing the current prvisin. It wuld als facilitate in surmunting peple s intertia in jining the scheme. We believe this system can cut ut n marketing csts and thus make it mre viable fr cmmercial prviders t sell apprpriate prducts. Hwever, emplyers shuld be required t give a chice f prviders r at least a selectin is made frm a minimum number f prviders (reviewable every five years) r a Brker (wh must deal with a least five insurers) wuld be appinted t recmmend and manage the scheme. We d nt feel a mandatry apprach t pensin prvisins wuld achieve the bjective in the mst efficient way. The State Pensin is a simple lw cst means f prviding cmprehensive pensin prvisin and shuld nt be interfered with by impsing an additinal layer f mandatry pensins. The impsitin f a mandatry pensin regime might interfere with existing pensin prviders and might frce peple int pensin prvisin where they might be better ff saving fr a mrtgage r educatin. Under a supplementary mandatry system, a key issue is the level f pensin prvisin which the mandatry system wuld prvide. There is a significant risk that whatever level is set will becme the maximum r nrm level f private pensin prvisin fr large sectrs f the wrkfrce, with n incentive fr peple t g beynd this level. Therefre, if the level is set t lw, the impact f the scheme is minimal in terms f imprving pensins cverage. If set t high, affrdability and lss f cmpetitiveness issues arise fr emplyers and the ecnmy generally. PIBA therefre believes a sft mandatry apprach represents the best balance between cverage, the quality f the cverage, and affrdability. We believe in principle with allwing peple t withdraw sme f their fund befre retirement, after a minimum cntributin perid fr a depsit twards the purchase f a huse as a means f encuraging, particularly yung peple, t make pensin prvisin. We, at the same time, d have cncerns that this wuld result in insufficient retirement funding-the very bject f the prcess. There wuld be a definite need t impse limits n this ptin i.e. n the amunt allwable fr withdrawal and the purpse f the withdrawal. We wuld welcme further discussin n this. Apprved Retirement Funds PIBA supprt the extensin f the ARF ptin t all members f defined cntributin ccupatinal pensin schemes, bth: 4

5 T act as an encuragement t emplyees t jin such schemes and t make larger cntributins t such schemes, and T remve the inequity in the current system whereby the ARF ptin fr emplyees applies t AVCs, retirement annuities and PRSAs, but ddly nt t benefits frm a defined cntributin ccupatinal pensin scheme. There is n lgical reasn t prvide an emplyee with the ARF ptin if he cntributes t a PRSA, but nt t an ccupatinal pensin scheme. The intrductin f a 3% pa minimum ARF drawdwn, fr incme tax purpses, deals with any tax inequity there may have been with funds transferred t an ARF r t the purchase f an annuity. Lng term care This issue must be dealt with t prperly address financial security in ld age. Rules fr funding in advance r taking sums (tax free) frm retirement/arf funds t cver this shuld be explred with a view t having a meaningful plicy n prviding financial security in ld age. Insurance against lngevity Deferred annuities purchased frm an ARF shuld cver the risk f a pensiner utliving his/ her fund but they dn t seem t be ffered at present by Insurers. Addressing lng term care and lngevity risk will free up the financial wrries f peple that ften cause them t ver cnserve their funds in retirement t the detriment f the quality f life. We will discuss these cncepts further if required by the Department. Cntrl f csts and charges The Green Paper cnsiders that mandatry r utright cmpulsin is an ptin fr cntrlling csts/ charges assciated with supplementary pensin arrangements. PIBA is cncerned that this wuld remve the need fr advice frm the market- the creatin f simplified, cmpulsry prducts and arrangements dn t require the prvisin f individual regulated advice t emplyers and individuals. 1 A scheme run by the state wuld be very cstly t implement and wuld result in an unimaginative, cumbersme and inflexible slutin. We particularly believe that this apprach wuld interfere inapprpriately and inadvertently with the existing vluntary supplementary system and wuld result in unnecessary cmplexities. We als believe the absence f cmpetitin in such a system will reduce any gains ver time Green Paper n Pensins 5

6 Pensins Awareness/ Educatin The public need t be educated n what prvisins they shuld be making and why. This shuld frm the basis f a strategic plan fr gvernment. This is especially imprtant with increased life expectancy and the need fr adequate prvisin fr life. Educatin is key t making sure that peple make adequate funding arrangements fr retirement and that they are empwered t make infrmed decisins abut their retirement funding. Yur retirement incme is at risk if yu fail t keep up payments. This statement shuld be used n sales literature etc. as a means f prmting the significance f retirement funding. Equally the ld adage if individuals fail t plan, they plan t fail shuld frm a premise f pensin prmtin. Prviding that the security f prducts is nt cmprmised, prviders shuld be allwed mre flexibility in the design f prducts. A mre attractive prduct will increase cverage. Cmpetitin in the market place drives cnsumer chice and is t their ultimate benefit. Public service emplyees have n difficulty in cntributing t a pensin scheme frm the start f their emplyment. A similar culture needs t be cultivated in the private sectr and the pensinable jb needs t me prmted as attractive and desirable. Cnclusin In cnclusin, we believe that cmpetitin, chice and advice shuld be at the heart f any new pensin system. The current pensins tax relief system fr cntributins can encurage higher take up f pensins, when cmbined with a sft mandatry apprach t private pensin prvisin. The ARF ptin shuld be extended t all members f defined cntributin pensin arrangements, t encurage peple t make higher pensin cntributins as well as t prvide equity in the marketplace. Regulatin shuld nt impede the design f attractive prducts nr shuld it impede their sale. Educatin must be at the frefrnt f the strategic fcus f the Gvernment. These factrs shuld result in a much higher participatin f the general public in private pensin prvisin and in the quality f such prvisin. 6