NATIONAL PENSION STRATEGY

FEBRUARY 2016 NATIONAL PENSION STRATEGY An Ireland for all. MICHAEL McGRATH FIANNA FÁIL SPOKESPERSON ON FINANCE

Executive summary Pension provision is an issue which should concern everyone in society, not just those who are retired or nearing retirement age. It is our belief that Ireland must aspire to delivering a comfortable standard of living for retirees. This will involve building on the existing strengths of the pension system and making necessary reforms to improve its effectiveness. We must ensure that we have a pension system in Ireland that is secure, fair and straightforward. Given the manner in which State benefits for the elderly have been eroded by this government, there has never been a greater need for such a safety net. After five years the government has not developed a co-ordinated pension policy which reflects the changed nature of the workplace. Few, if any, employees now expect to be with the same employer for 40 years and there is a need to reflect this by providing for more flexible pension arrangements. A more dynamic pension and savings system would take account of other major life events that people have to deal with financially such as redundancy, critical illness, house purchase or debt issues. Nearly 60% of private sector workers do not have an occupational pension. In this context increasing pension coverage will be a major challenge for the State in the years ahead. We believe a national system of auto-enrolment with the annual right to opt out is the appropriate way to build coverage. This offers a balance between a system in which pension saving is compulsory and the predominantly voluntary system which currently operates in Ireland. Fianna Fáil will: Maintain and enhance the State old age pension as the cornerstone of pension provision in Ireland. Introduce auto-enrolment for supplementary pension coverage with an opt-out facility. Maintain marginal rate tax relief for pension contributions. Legislate to cap pension fund charges. Make pension access more flexible by providing for pre-retirement drawdown of benefits in limited circumstances. Propose constitutional protection to prevent a repeat of Fine Gael and Labour s raid on private pensions. Prevent profitable firms walking away from underfunded defined benefit schemes. Introduce an appeals mechanism for restructuring of pension schemes. Establish a national register of pension assets. Michael McGrath T.D. Fianna Fáil Spokesperson on Finance 1

Current structure of pension provision in Ireland Pensioners have suffered significant cuts and increased taxes and charges In the context of assessing pension provision it is important to note that pensioners have taken very significant cuts to their income under the current government. Pensioners have been hit by an average of 1,200 annually in direct cuts to payments, (including the abolition of the telephone allowance and cuts to the household benefits package) and tax increases, including the Local Property Tax and water charges. In addition they have seen cuts to services, increased charges and stealth taxes. For many pensioners this will amount to over 1,000 more in lost income. Demographic changes are creating a looming pensions funding challenge According to research produced by the Department of Health there has been an increase of two and a half years in life expectancy in the last decade alone. This is underpinning an increase in the number of people aged over 65 of 20,000 annually. There are approximately 361,000 recipients of the contributory state pension. This has increased steadily over the past five years, at an average rate of 5% annually. There are 95,000 recipients of the state pension (non-contributory). The number of recipients has reduced by 1,570 (1.6%) since 2011 and the number of new applications is approximately 9,000 per year. The impact of demographic changes is projected to result in very significant changes in the balance between the numbers of people at work and pensioners. In simple terms this means more money will have to beput aside to make provision for pensions in to the future. There is a long term trend towards Defined Contribution Pensions As at the end of 2014 there were 470,000 active members enrolled in Defined Benefit schemes down 26,000 on the previous year. By contrast the number of people enrolled in Defined Contribution schemes was up 22,000 to 263,000. This is a trend that is likely to continue over time. The National Pension Reserve Fund will help support future pension payments The National Pension Reserve Fund (NPRF) was set up with the intention to meet as much as possible of the cost to the Exchequer of social welfare and public service pensions from 2025 to at least 2055. Social welfare pensions currently amount to 6.5bn annually along with 3bn in public sector pensions. These payments are currently met on a pay as you go basis from PRSI and other pension contributions of current employees along with a top up from the Exchequer. This is in contrast to private sector pensions which are typically pre-funded. As the proportion of retired people to employees increases the relative costs of meeting pension obligations will rise. This highlights the merit of putting aside money for future needs in the form of the NPRF. The NPRF was valued at 22.1bn at the end of 2014. 2

Fianna Fáil plan to improve pension provision in Ireland 1. The State pension will continue to be the cornerstone of pension provision Social Welfare pensions are flat-rate payments with eligibility based on either achieving a particular level of social insurance contributions over a person s working life or through satisfying a means test. Means-tested payments are funded through taxation. The maximum personal rate of both the contributory pension is 233.30 per week for a single person corresponding to approximately one third of average earnings. Despite claims by the government that older people have been protected from cuts and tax increases, the reality is that they have been particularly hard hit by reductions in income and increases in taxes and charges. The Fuel Allowance has been cut, free electricity and gas units have been reduced, the telephone allowance has been scrapped and households have been hit with property tax and water charges. On top of these cuts a range of new stealth taxes have hit older people making it hard for them to get by from week to week. The National Pensions Framework sets a target of maintaining social welfare pension rates at 35% of average earnings. In this context the 3 increase in the weekly pension in Budget 2016 was insufficient. Over five budgets we will increase the State pension by 30. This would also include proportionate increases for qualified adults, where applicable. The cost of this is 927m in a full year and is provided for in our manifesto. This increase in the State pension will provide an effective means of maintaining a floor against pensioner poverty. In addition we will examine amending the calculation method for Contributory Pensions. The system already disregards time spent working in the home since April 1994 for the purposes of calculating yearly average contributions. There is no logical reason why this cannot be backdated further. Similarly, consideration should be given to allowing actual past payments to be disregarded, thereby altering the date at which the individual is considered to have entered the permanent workforce. We believe that individuals should be allowed to disregard up to 200 pre -1994 A1 PRSI payments for the purpose of calculating their date of entry to the workforce. 2. Prevent profitable firms walking away from underfunded pensions The total number of members in defined benefit schemes in Ireland is approximately 470,000. In general companies that have defined benefit schemes tend to be large employers and the defined benefit model is common across the semi State sector. Underfunding exists in pension schemes when assets are insufficient to meet pension liabilities. This implies that pension promises made to scheme members may not be fully met. In the UK a solvent firm cannot walk away from a deficit on the company pension scheme. In Ireland if there is a deficit on a pension scheme the trustees must agree a funding proposal to restore the fund to the statutory minimum funding level within a three year period. However it may be possible for a company to walk away from a pension scheme deficit. The ability to do this may be constrained by a number of practical considerations. However the possibility of using winding-up as an active threat if amendments are not agreed exists and is used in practice. 3

At present Irish legislation does not require an employer that initiates the closure of a scheme to ensure that it is brought to a level of full funding. In the UK, underfunding is a debt which can be legally enforced. It is our view that profitable firms should not be allowed to walk away from a defined benefit scheme unless assets cover a minimum of 90% of pension liabilities. This would provide specific additional protection for pension scheme members. 3. Introduce auto-enrolment for pensions with annual opt-out facility Independent consumer research carried out on behalf of The Pensions Board found: Almost eight out of ten people, who do not contribute to a pension, say that the State Pension would not meet their needs in retirement. Although employers are obliged by law to offer employees access to a pension, 43% of those interviewed had not been offered access, of those 93% had never asked an employer about access to a pension. Nearly 60% of private sector workers do not have an occupational pension. Amongst OECD countries only Ireland and New Zealand do not have compulsory pension saving. Under our proposals those between the ages of 21 and the State Pension Age and earning more than 15,000 annually would be automatically enrolled into a pension scheme offered by their employer. This scheme would be phased in over 3 years focusing initially on larger firms. Employees after being enrolled, would be given the option to opt-out of the scheme by filling in a form and returning it to their employer. Employers would be obliged to re-enrol these employees every two years, at which point the employee must actively opt-out again if he/she wishes not to remain in the scheme. Since the introduction of automatic enrolment in the UK in October 2012, almost all larger employers have enrolled their workers in a workplace pension and the proportion of people choosing to opt out has been lower than expected. We will examine the feasibility of the NTMA administering a national savings fund which would provide a low cost pension scheme option. The NTMA would appoint individual asset managers to invest the funds in the scheme. This would result in lower costs for scheme members. 4. Marginal rate tax relief for pension contributions will be maintained Marginal rate pension tax relief is under attack from Sinn Féin who want staggered reduction of private pension tax reliefs. While Sinn Féin want people to think that it is only high earners who will lose out under their proposals the reality is that tens of thousands of ordinary workers will be worse off. It will mean less take home money for people who are paying a contribution towards their pension. It is worth remembering that ultimately a pension is designed to allow individuals to spread the income they earn (and the tax paid) over their entire lifetime rather than just their working life. The logic of allowing marginal rate tax relief is to incentivise employees to lock up money which they will not be able to access until they retire by giving them tax relief at the same rate as they will pay when they draw down their pension. We will ensure that pension tax relief is maintained at the marginal rate. 4

5. Legislation will be introduced to tackle pension costs One of the persistent criticisms of the private pension industry is that it operates in a manner that generates considerable income from industry participants, fund managers, administrators and intermediaries but often offers poor value for pension holders. A report in 2015 for the Department of Social Protection demonstrated the impact of high charges, particularly in the case of small schemes. It showed that someone who saved 250 a month from the age of 35 could end up with a fund of 200,000 after 30 years. This would leave them with an annual pension of 10,000 in retirement, if there were no charges. An average charge of 2.18pc a year would reduce the fund by 62,000 and this would leave a pension of just 6,900, according to the report. Fianna Fáil will legislate to ensure price transparency in the market and place a legal obligation on the pension industry not to impose charges that cannot be justified by objective criteria. We will do this by placing a limit on the Total Expense Ratio (TER) for a pension scheme. Trustees will be obliged to manage schemes in a manner that ensures that the TER limit is observed. 6. Early access to pension savings should be improved In 2012 the government introduced a measure that, for a three year period only, employees who had made additional voluntary contributions (AVCs) to their pensions had one-off access to take back up to 30% of these contributions. Drawdowns were subject to marginal-rate income tax. Only 60 million in tax revenue had been generated from the measure to date, well below the expected 200 million over 3 years. This is not surprising given the restrictive nature of the scheme. Employer paid contributions, regular employee contributions, self-employed personal pensions and normal Personal Retirement Savings Account contributions are excluded. For the lifetime of the next government we propose an amendment that would widen the current range of pension assets that could be accessed before retirement to include those in Defined Contribution schemes (including Personal Retirement Savings Accounts) subject to certain qualifying conditions: Redundancy First Time buyer home purchase Critical illness Dealing with debt problems This concept has worked successfully in other countries and can actually result in more people saving for their future as they do not see it as locking money up for decades with no chance of accessing it should they need to do so. 5

7. We will provide constitutional protection for pension assets is needed The extension of the pension fund levy into 2015 was a betrayal of the government s consistent claims that it would a temporary levy to fund job creation. It joins a long list of broken promises from preserving child benefit to not raising third level fees. The amount raised by the levy in 2015 was 169m, 34m more than expected. This brings to 2.4 billion the total amount taken from pension savings over five years. According to information prepared by the Irish Brokers Association the levy means a person who is 50 years of age and earning 60,000 a year has seen the levy take 2,400 from their pensions savings over five years. It is important to remember that pensions are fully taxed when drawn down. The levy was a clear case of double taxation. The raid on private pensions has added to the difficulties of many pension schemes already struggling to pay the benefits pensioners are entitled to. Pension schemes, such as the Aer Lingus pension fund (whose members have already have their benefits slashed), have seen their assets further depleted. Pension funds were already in crisis before the levy was first introduced in 2011. Hundreds of defined benefits schemes have either closed to new members or have been shut entirely. The continuation of the levy made a bad situation worse. The government have been particularly harsh in their treatment of older citizens, by savaging the household benefits package, multiplying prescription charges and increasing DIRT tax. Given the manner in which State benefits for the elderly have been systematically eroded by this Government, there has never been a greater need than now for such the safety net of private pension provision. The levy on private pension funds is directly contrary to this aim. Fianna Fáil believes that private pension schemes should never again be raided by a government, and we will legislate to protect them. 8. We will introduce a requirement for 3 quotes for purchase of an annuity According to a 2015 Central Bank report, a consumer with a retirement fund of 50,000 could increase their income by up to 29.57 per month, over 350 a year, by choosing the annuity provider with the best rate. Thousands of customers are potentially living on a reduced pension income as a result. In simple terms, when someone retires they will need the pension savings they have accumulated over their working life to deliver for them as large a retirement income as possible. However, it is clear from the Central Bank report that many people are getting poor value for money from their pension provider. The pension industry thrives on inertia and customers not fully understanding the products they are purchasing. In the UK, it has been reported that 91% of retirees buy their pension annuity from their fund manager without checking other market options. We will introduce a requirement for any retiree purchasing an annuity to have quotes from 3 different pension providers in order to ensure that they have the best choice available to them. In addition, the industry should be required to provide a number of standardised products that can be more easily compared across providers. In a manner similar to the health insurance and mobile phone sectors, there is a suspicion that the provision of additional products and options is more designed to bamboozle customers than to provide them with real value. 6

9. Create an appeals mechanism for restructuring of pension schemes We believe there is a need for an appeals mechanism for pension scheme members where trustees have decided upon reduced benefits for members. At present trustees must notify in writing scheme members and the trade union or other groups representing scheme members before they make an application to reduce benefits to the Pensions Authority. Individual scheme member or their representatives are entitled to make written submissions to the Pensions Authority. There have been a number of high profile cases where deferred scheme members in particular have felt that their interests have not been recognised. This highlights the need for an independent appeals process to ensure that any category of pension scheme members have not been unfairly treated in any restructuring arrangement. 10. We will establish a national register of pension assets Work patterns have changed considerably over recent decades. Few people now expect to be with the same employer throughout their career. It is not inconceivable that someone could build up entitlements across up to 10 different employers over their lifetime. A more mobile and transient workforce means that pension schemes are building up far greater numbers of deferred pensioners. There is a real risk that many people are not getting the full pension benefits that they are entitled to. In the UK, the government took a proactive approach to the issue by establishing the Pension Tracing Service. It received over 145,000 queries in 2014 and succeeded in putting nearly 90% of people in touch with a former pension provider. Given that Ireland has a broadly similar pension system to the UK, there could be anything up to 10,000 people annually who would benefit from a similar service here. Estimates from the pensions industry suggest that between 500m and 1bn of pension assets in Ireland are currently unclaimed. It is important that every effort is made to help people obtain their entitlements. Last year, the Tánaiste and Minster for Social Protection Stated in a parliamentary reply that Consideration is being given to developing more streamlined mechanisms to assist both scheme trustees and individuals trace accrued pension rights. The Minister recently advised that Engagement with the pensions industry on the development of a pension tracing service is ongoing. While this is welcome, Fianna Fáil believes the pace of progress on this issue has been far too slow. The only solution is a national pension tracing system, the cost of which should be shared between the pension industry and the Department of Social Protection. While trustees have a responsibility to ensure that entitlements are paid out, they are faced with a huge difficulty when they may not have had contact with an employee for decades. A dedicated pension tracing service, established on a statutory basis, would help former employees and pension fund trustees ensure that pension rights are paid out. 7