NO SUBJECT has produced more analysis by experts and less action by government than pension reform. Over the past decade a succession of reports and reviews have proposed wide- ranging change in the operation and funding of private and public sector pensions. Successive governments, while noting their contents and promising to consider their recommendations, have shirked taking the hard decisions in what were easier times.
The Commission on Taxation is the latest to address the pensions issue. Its report accepts that defects in the pension system cannot be remedied by tax changes alone. Nevertheless, tax does represent a major part of any solution. The commission’s main proposal is to cut the tax relief on pension payments made by those on the higher (41 per cent) tax rate and to give those on lower incomes greater relief on their pension contributions. On the grounds of equity, the proposal cannot be faulted. For a standard rate taxpayer to make a €100 pension payment would cost €62 net after tax relief – €10 less than currently applies.
The impact of such a change is, however, less easy to predict. A reduction in the tax incentive for top-rate taxpayers may well discourage some from investing for their retirement. And the extra incentive offered to those on lower incomes to increase their pension provision may have a disappointing take-up, given the financial difficulties that many face as unemployment rises and the economic outlook remains depressed. Yet, the Government should not delay its response to this aspect of the commission’s proposals.
The problems facing the pensions industry are not unique to Ireland. Economic recession and falling stock markets have produced a global pensions crisis. Most pension funds invested heavily in equities on the expectation of high returns which have failed to materialise. In Ireland, an over-concentration on Irish equities by pension fund managers made matters worse. Irish pension fund losses in the last two years have wiped out the capital gains made in earlier years. Most private pension schemes are facing serious funding difficulties and are in substantial deficit. And many defined-benefit schemes, where a pension is based on final salary and the number of years served by an employee, are closed to new members. The pension problems in the public sector are no less acute given the weak state of the public finances.
The McCarthy group report on public spending identified the cost of public service pensions as an “area of concern” and highlighted the wide gap between pension pay and entitlements in the private and public sectors. Some major and costly differences exist, which are no longer sustainable. The pension rate of a retired public servant is indexed to earnings, a benefit that very few private sector workers enjoy. The McCarthy group has recommended that the Government secure “an appropriate contribution” from public service pensioners with earnings-linked pensions.
On pensions reform, the Government has neither time nor excuse for continued inaction.