Maturing SSIAs could boost pension provision

Economics: The Progressive Democrats were forced into a bit of silly-season spin control at the weekend after reports that Michael McDowell had said the Government would not run its full term, with a falling out with Fianna Fáil likely by 2006. They had agreed a five-year programme with Fianna Fáil, a PD spokesman said, and intended to carry it through.

Much more enticing politically than the five-year programme, however, is the date when the punters will be getting the money from their SSIA accounts. The accounts are due to mature in 2006 and 2007, but a research note published today by Colin Hunt of Goodbody Stockbrokers estimates that more than 40 per cent will mature in April 2007.

That means €9 billion plus into voters' pockets in the first four months of 2007, with €5 billion in April of that year alone - unless something is done to encourage them to reinvest it. And action must be taken if the SSIA release is not to run the risk of pushing up inflation and /or leading to overheating in certain areas of the economy.

The latest date for calling the general election is - purely coincidentally, of course! - May 2007. You don't need to be a hot-shot political analyst to work out that, barring something catastrophic, Fianna Fáil and the PDs will be clinging tightly to each other until then, hoping that the SSIA feelgood factor will sweep them back to power. Economically, of course, the SSIAs will be an interesting experiment in what happens when a large amount of money is released into an economy. The total amount due to savers will be €14 billion between May 2006 and April 2007, according to Mr Hunt's estimates, an average of just over ... €13,000 per account. This is a massive sum, with annual GNP standing at around €150 billion by that stage.

Goodbody believes that this will be enough to boost growth in 2006 and 2007 to more than 6 per cent, compared to a bit less than 5 per cent if there were no SSIAs.

Consumer spending is one of the things that oils the economic wheels, of course and - who knows - maybe the economy could do with a boost in 2007, depending on economic growth. However, the ostensible goal of the plan was to encourage savings and from this point of view - and to avoid a big wave of money hitting the shops and car salesrooms at one time - it makes sense to provide savers with some attractive options to roll over their money in some way.

Noel Dempsey was quick out of the traps with his idea of a bond that could help fund school-building. This idea is presumably based on US municipal bonds, vehicles floated by state or local agencies in the US to fund schools, roads, hospitals or even big sewerage projects. This basically involves borrowing money from the public who invest for a set period of time and get an interest payment, typically twice a year, with the capital repaid at the end of the term. The key attraction of these vehicles for US investors is that the interest payments are tax free; for a top rate US taxpayer this means that to match a municipal bond return of 4 per cent per annum would require a normal taxed investment to offer a return of some 6.25 per cent.

For the bond idea to work here, a similar decision to make interest-free payments would be required. But there are more fundamental questions. First, the exchequer is not short of cash at the moment. Second, if it does need to raise money, it might be both cheaper and easier to borrow the money on the international capital markets, which currently costs some 3.5 per cent per annum to the exchequer.

Remember, if punters are to be enticed to roll over SSIA money, they will look for a reasonable return.

The US is a huge market and the scale of the investment needs means there is a large and healthy municipal bond market, where investors can buy and sell easily.

Here the scale of the market and the cost of getting such a scheme up and running - not to mention the free availability of other sources of capital to the exchequer - might mean it isn't worth the trouble.

A better approach would be to focus on pensions. Irish people are typically underprovided in this area and the maturing of the SSIA money provides an opportunity to give a big boost to personal pension provision. The appropriate way to do this would require some study. However, there are options.

At the moment people get tax relief for putting money into pensions, whether it be into a company scheme through salary deductions or additional contributions, or into a PRSA or other personal pension plan. A scheme could be developed to encourage the roll over of SSIA money into these vehicles. This would require a one-off relaxation of the rules on how much could be invested in pension vehicles in one year and perhaps an extra tax deduction for transferred SSIA money. One tax expert suggests a write off of 120 per cent of the sum invested, compared to the usual 100 per cent for money put into pensions.

And perhaps savers might then continue putting a portion of what previously went into SSIAs into pension products. The easy availability and simplicity of pension investment products for SSIA roll- overs would be crucial. PRSAs have had a slow birth and issues remain to be tackled to make them attractive.

If handled properly, the maturing of the SSIA funds gives a unique chance to increase the pension provision of the many people not in company schemes and to encourage those in established schemes to undertake the level of further saving needed to assure a decent post-retirement income.

And enough could still be left over for a nice holiday!