Gimmicks will do little to solve gap in pensions

Business Opinion: Brian Cowen last week reminded people of the incentives available for those rolling some or all of their maturing Special Savings Incentive Accounts (SSIAs) into a pension.

At first sight, it sounds appealing. Having capitalised on the guaranteed winner that was the SSIA programme, the Government is now handing out more money - in this case €1 for every €3 transferred to a pension up to a maximum hand-out of €2,500. In addition, the Government will refund the 23 per cent exit tax it is levying on the investment gain or accrued interest in your SSIA account.

Could it be that Brian Cowen has shed his caution and adopted the largesse of his predecessor Charlie McCreevy, the author of the SSIA scheme?

Hardly. The SSIA transfer incentive is nothing but a sop to hide the fact that this Government has done nothing to address realistically the need to encourage people on more modest incomes to invest in a pension.

On its own, the Cowen incentive would provide a pension of less than €700 a year. Is it a start? Certainly, but it could be effective only as part of a comprehensive policy to incentivise pension saving.

If anything, this Government has seen the effective pension coverage of the working population worsen. The annual survey of defined-benefit pension schemes by consultants Mercer, released last month, made grim reading. Thirty-eight per cent of defined benefit schemes - those which guarantee to pay members a fixed proportion of their final salary depending on years served - have already closed to new entrants and a further 22 per cent plan to do the same in the next three years.

Countless studies and Government pronouncements reiterate the need to open a pension - inevitably a defined contribution scheme - without properly informing people of the sort of money they will have to put into such a scheme to extract any sort of reasonable pension income on retirement.

Some people are contributing as little as €50 a month to their pension and sleeping easily in the mistaken notion that they are taking care of their retirement. Think again. Assuming you're 35 with a salary of around €65,000 and planning for a pension of about half your final salary at 65, including your State pension, you would need to be saving nearly 10 times that amount each month - about 17 per cent of your gross income.

For those paying tax at the standard rate, the situation is even worse because they get only half the benefit of tax relief on pensions that their better off colleagues do.

This is the reality of pensions but no-one in Government is facing up to it. Minister for Social Affairs Séamus Brennan brought forward a review of pension policy because of concern over the lack of take-up by individuals of private pensions. That review, conducted by the Pensions Board, came up with comprehensive recommendations - among them simplifying the way incentives are paid on pension contributions and allowing standard rate taxpayers to avail of the same generous tax breaks as 42 per cent taxpayers.

Instead, the Minister seems interested only in receiving a recommendation for the introduction of mandatory pensions - something that seems certain to be seen as a tax and therefore unlikely to do anything to promote the notion of responsible saving for retirement.

Of course, with a general election now looming on the horizon, the Minister and his colleagues in Government will defer any such initiative until after the people vote.

In the interim, words and political sleight of hand, such as Mr Cowen's SSIA initiative, will have to take the place of policy action.

The only serious pension reform undertaken following the pensions policy review was the introduction of a cap on total personal pension fund size and moves to force holders of flexible approved retirement funds (ARFs) to use those funds - amassed tax-free - to fund their retirement rather than avoid tax on investments.

In itself there was nothing wrong with either move. It seems clear that some were abusing the open-ended relief to avoid tax on income. It is also true that some, at least, were treating ARFs as little more than tax-free investment funds rather than the flexible retirement vehicle they were designed to be - and by that abuse denying any possibility that the positive notion behind ARFs could be extended to those currently locked into unwieldy and costly annuities.

But it is ironic that when everyone is being reminded of the need to invest in their future through pensions, the Government is not even diverting the money saved by closing loopholes to incentivise those with inadequate pensions or none at all.

Ministers, their political colleagues and even the civil servants advising them have the luxury of generous defined benefit schemes that are under no risk of closure. Maybe that is why they show little urgency in addressing a problem that has the potential to undermine the State in future generations.