Plenty to ponder for Government in report with few easy choices

OECD calls for a fundamental reworking of both the State pension system and public sector pension provision

We’re living longer and are likely to continue to do so and bond yields are at historic lows which means the cost of providing pensions is higher than it has ever been.

We’re living longer and are likely to continue to do so and bond yields are at historic lows which means the cost of providing pensions is higher than it has ever been.

Mon, Apr 22, 2013, 16:20

Ireland’s pension system may be delivering for the current generation of retirees but the outlook in the absence of major reform is bleak, if the long-awaited report on the OECD is to be believed.

On pretty much every measure it considered – sustainability, adequacy, equity and modernity – the OECD prescribes extensive change. And although much of the focus of the debate in recent years has been on encourage private pension saving, it calls for a fundamental reworking of both the State pension system and public sector pension provision.

Some of the issues are well known. We’re living longer and are likely to continue to do so and bond yields are at historic lows which means the cost of providing pensions is higher than it has ever been. The OECD states the obvious. We need to work longer and we need to save more.

While the Government is phasing in an increase in the working age to 68 by 2028, that will only ensure the problem gets no worse, the agency warns. Further rises in the retirement age seem investable.

On the saving side, it’s prescription is stark. Attempts to date to encourage private sector pension saving have failed. The proportion of the workforce with private provision has proved stubbornly immovable. The answer, it suggests, is mandatory pensions.

This is likely to prove contentious even if, as it notes, there are ways of phasing contributions to take account of the higher financial commitments of childcare and mortgage costs in early adulthood.

There is also the danger that the level of saving set will be seen as an effective maximum rather than a minimum threshold – possibly worsening the position for some existing private pension members.

As the efforts to find a workable fix for the Croke Park II deal continue, the suggestion that public sector workers should adopt the same system are sure to be unwelcome, especially to Labour party ministers.

However, the OECD says the current system is inequitable. It notes that, taking the whole average weekly income, male public sector retirees’ incomes are 38 per cent higher than those of men in the private sector. The figure for women is even more dramatic – 42 per cent.

Trying to force a mandatory defined contribution system on the private sector while leaving the restructured defined benefit, or final salary, scheme in place in the public sector could undermine the whole exercise, the OECD argues.

Its proposals for the State pension are equally radical – removing what it says is a complex, opaque and inequitable system and replacing it either with a basic State pension for all regardless of contributions or a means-tested system. Either would aim to provide an “absolute, minimum standard of living”, including those items provided by the household benefits package – free travel, and subsidised energy and phone costs – which would be dismantled.

Ministers will be more favourably disposed to measures on the priority order for schemes that are forced to wind up – where the agency suggests the current absolute protection for pensioners at the expense of those scheme members still working is unfair – and the call to ensure that “healthy” employers are forced to ensure that assets cover at least 90 per cent of liabilities before walking away from defined benefit plans.

All in all, the virtue of the report is it straight talking. If nothing else, none of the stakeholders can plead ignorance any longer of the many issues confronting the sector.

The good news, such as it is, is that we have time. The agency accepts that introducing major reform in the current economic climate may be undoable, and the current system is far from broken yet, but it is getting impatient.

John Martin, the head of employment, labour and social affairs at the OECD, notes that successive Irish governments have been discussing pension reform for over a decade.

“We see many challenges for pension adequacy into the future,” he said yesterday. “Kicking the ball into touch makes things more difficult.”