State Pensions and National Pensions Policy Orlaigh Quinn Irish Institute of Pensions Management 27 April 2011
Department of Social Protection 87 million payments made each year 2.1 million people in receipt of a payment 1.2 million individuals + qualified adults + children 2.6 million new claims made annually 6.5m telephone calls 6,000 Staff in 145 locations 62 Local Offices, and 12 HQ areas Daily, weekly, monthly contact with customers Budget of 21.5billion Admin costs 2.6% of expenditure 2
Expenditure by Life Cycle - 2011 1% 15% 29% Children Working Age Older People Operational 55% 3
Scope of Business. What we do Policy development Income support over 50 Schemes Activation Control and risk management Referral Information services Who we do it for Government and the tax-payer Children and families e.g. Child benefit, FIS, carers, school meals People of working age Jobseekers, lone parents, disabled, widowed Older people Pensions, household benefit etc. Direct Provision How we do it Via Agencies Collaboration
Recent Pension Innovations Online application for Widows and State pension (contributory) and statement request facility Claim initiation - invites customers to apply on time for State pension (contributory) and encourages on line application SMS - automatic acknowledgement on receipt of new claims All domestic customers paid electronically Automatic award of widow(er)s and surviving civil partner s contributory pension, also qualified child increase Savings of approx 15m from the pursuit of non-notified deaths through the use of General Register Office 5
Opportunity Longer lives that are healthier, richer, more active and fulfilling Major impact on individual well-being, economic prosperity and social progress. Action
Risk Longer years lived in ill health, financial insecurity or poverty High costs for the individual, society & the economy. Inaction
How Have Older People Fared? 8
Poverty Rates - 2009 40.00% 35.00% 30.00% 25.00% 20.00% At Risk of Poverty Rate Consistent Poverty Rate 15.00% 10.00% 5.00% 0.00% All Ages Age 0-17 Age 18-64 Age 65+ Age 75+ Lone Parents Source: EU SILC 2009 9
Current Pensions in Ireland Defined benefit schemes 1,200 Public sector workers 330,000 Private sector members 250,000 Defined contribution schemes 83,000 Members 267,000 Others e.g. PRSAs 171,000 51% of workers between age 20 and 69 have a pension 1 million people have no occupation or private pension 500,000 people over age 65 in receipt of State pension or widow(er)s payment 32% of current pensioners have occupational pension 10
State Expenditure on Pensions Pension Number of people Expenditure 2010 in receipt (provisional) State pension (contributory) 280,000 3.5 billion State pension (non-con) 97,000 1 billion State pension (transition) 10,000 108 million Widow(er) (con) 115,000 1.3 billion Widow(er) (non-con) 2,000 25 million Total 505,000 6 billion Tax expenditure Public sector Total State expenditure 3 billion 2.5billion 11.5 billion 11
Pension Challenges People are living longer By 2050, less than 2 workers per older person compared to 6 workers today Number of older people increasing 59% increase in over 65s in the next 10 years; by 2050 numbers will treble State expenditure on pensions costs will increase from 5.5% of GDP to 15.5% Pension coverage 51% have private pensions Adequacy of pensions - people not saving enough, and not saving for long enough Specific groups - women and younger workers Funding problems in defined benefit schemes 12
Demographic Challenge 2002 2052 AGE 85+ 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 Males Females AGE 85+ 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 Males Females 250,000200,000150,000100,000 50,000 0 50,000 100,000150,000200,000250,000 250,000 200,000 150,000 100,000 50,000 0 50,000 100,000 150,000 200,000 2 Population Population 13
Recipients of State Pensions 2000-2009 400000 350000 300000 250000 200000 150000 Non-Con Con 100000 50000 0 2000 2003 2006 2009 14
Persons Expenditure ( BN) Projection to 2021 Projected older population and old age expenditure No. People aged 66+ No. People Age 70+ Old age expenditure 800,000 12 700,000 600,000 500,000 400,000 300,000 200,000 100,000 10 8 6 4 2 0 2006 2011 2016 2021 0 15
Programme for Government We will reform the pension system to progressively achieve universal coverage, with particular focus on lower-paid workers, to achieve better risk sharing, and to provide for greater flexibility for those who wish to retire on a phased basis. 16
Framework Principles Affordable and sustainable Seek to maintain value of State pension Encourage sufficient retirement income Increased pension coverage Equity in the tax system Role for State, employers, employees Focus on the future 17
Elements of the framework - Aim is to deliver security, equity, choice and clarity Social welfare Tax relief Auto-enrolment Retirement age Existing voluntary New DB model Public service Tracing/Dormant Account 18
Changes to State Pension Seek to maintain value of State pension at 35% average earnings Increase in minimum paid requirement for State pension (con) from 2012 (legislation in place since 1997) Introduce homemakers credits from 2012 Introduce a total contributions approach in 2020 to replace the current averaging system Abolish State pension (transition) and standardise age 66 for all State pensions and benefits in 2014 increase State pension age to 67 in 2021; 68 in 2028 Allow people to postpone receipt of State pension 19
Total Contributions Approach Average contributions test has created anomalies Perceived as unfair, particularly for women From 2020 a person will require 30 years contributions and credits to qualify for max pension 10 years contributions for minimum pension Level of pension payment will be proportionate person with 25 years contributions will receive 25/30ths of a pension Credits to be capped at 10 years (520) 20
Auto-enrolment Focused on low to middle income earners Optional for employees, mandatory for employers State, employer and employee contributes Small number of investment funds; low risk default No Government guarantee on investment returns Opt-outs allowed; automatic re-enrolment every two years Exemptions if employer has better DB/DC scheme Commence phase-in 2014 at the earliest 21
Benefits of auto-enrolment Ensures most people will have 2 nd tier pension 58% of employees not offered a pension by employer Overcomes problem of inertia 21% never got around to it 28% of those aged 25-34 never got around to it Opt-out allows choice for individuals Experience shows: USA - participation increased from 37% to 86% Greatest impact on low paid, women and young workers New Zealand - Two-thirds remained enrolled 30% of enrolled are under 25 years 22
Progress to date Implementation Group established New ARF rules extended to DC schemes Increase contributions for State pension and replace homemakers disregards with credits legislation in place and IT requirements being established New public service pension scheme - legislation being drafted Abolish State pension (transition) and increase pension age legislation being drafted Auto-enrolment - details of rules and admin structures being developed; tax changes will be revisited Sovereign annuities legislation enacted New DB model consultation to issue shortly 23
Defined Benefit Funding problems in defined benefit schemes for the past decade financial shocks; increase in longevity; more mature pension schemes, poor investment strategies, inflexible design of existing DB model; employer contributions at maximum... Many interventions: SW Act 2009, Pension Insolvency Payments, sovereign annuities. Have reduced problem but 75% schemes still in deficit and unable to meet their pension promise 24
Options for Consultation Aim is to achieve a better pension promise, more robust in relation to downturns, more flexible design, - but it does not solve existing deficit problem Potential options include variations of the following: Funding Standard credits schemes that invest in bonds, schemes hold additional risk buffers (more funds) to provide protection, give trustees more flexibility in relation to annual revaluations, increased governance by the Pensions Board External factors: EU development Any solution must be negotiated by employers, employees and unions Consultation with key stakeholders planned 25
And finally information deficit? 12% of people who have a 2 nd tier pension did not know what type of pension they had People do not understand what their main source of income will be in retirement 26% state the State pension (20% in 2005) 20% did not know at all (16% in 2005) 48% of non-nationals did not know 72% of those with 2 nd tier pension expect it to be main source of income 30% of people do not know when they will retire 26
Thank you for your attention