Rax relief incentives are a convincing way to encourage private sector employees to provide for their own retirement and should not be removed, writes Tony O'Riordan

The problems facing Ireland in relation to future pension coverage and adequacy are well documented at this stage. It is widely accepted that the Government's target of 70 per cent pension coverage for workers in Ireland over age 30 by the year 2007 will not be met and that many of those who are in private pension arrangements will fall short of the National Pensions Policy Initiative's (NPPI) target of 50 per cent of pre-retirement income.

While I support the State's commitment to aim to provide a social welfare pension of 34 per cent of average industrial earnings, I also strongly believe that the State should also continue to encourage supplementary private pension provision through the present system of granting tax relief on contributions made by both employers and employees (at marginal tax rates). Any move away from this system, as has been mooted in some quarters recently, would be detrimental to long-term pension savings in this country.

I hear the cynics among you sighing already. "Well, he would say that wouldn't he?"

After all, pensions are my bread and butter. True, but look at it another way.

Pension tax relief is available to encourage people to make private pension provision, either themselves or together with their employers.

Pension tax relief for the private sector attempts to mimic, to some limited extent, the benefit that public sector workers get with very generous pensions funded almost entirely by taxpayers.

However, the private sector is also partly funding, through its tax contributions, the National Pensions Reserve Fund that partly pre-funds future public sector pensions. The reality is that, in addition to trying to pay for their own pensions, the private sector is also paying today for the future pensions of public sector employees. Effectively, the private sector employee is currently carrying a double pensions burden.

Any review of pension tax relief afforded to the private sector must therefore also take account of the value of pension benefits enjoyed by public servants and how the cost of public sector pensions is to be borne between different sectors of the workforce.

To compound the problem further, we find ourselves in a situation whereby the cost of providing a pension has almost doubled in the last 15 years.

Pensions, or annuities as they are sometimes called, can be bought from any life assurance company. The cost of buying a pension is determined by several factors, such as life expectancy of the individual and interest rates.

The lower the interest rate, the more expensive it becomes to buy the pension. Longer life expectancy means the pension will be payable for a longer period, again leading to additional cost. For example, the purchase price of a non-indexed pension of €25,000 for a male employee retiring at the age of 65 has increased by 80 per cent to almost €400,000 since 1990. The cost for a female employee is even higher again, due to women's longer life expectancy. It must be understood that as the assets of private pension funds grow, the potential for the collection of income taxes in the future also grows. This future tax revenue will be available to the State at the very time that it will be most needed - when we have an older population with fewer people working.

Tax relief has the positive effect of encouraging both employers and employees to contribute to future pension provision. This is consistent with the partnership approach to industrial relations. Removing the incentive from either party would inevitably lead to a decline in funding levels, ultimately increasing the burden on the State.

In a nutshell, without encouragement from the tax system, private savings will never take over the role of providing for retirement. Remember, in New Zealand, where there are no tax incentives available on pension savings, only 24 per cent of the workforce has private provision, less than half the current Irish number. We need to go forwards on this - not backwards.

Hibernian Life & Pensions recently published the results of a retirement survey. One of the most surprising findings was the lack of awareness of the tax treatment of pension contributions. Fifty-four per cent of those surveyed were unaware of the tax benefits of pension or PRSA contributions.

On a practical level, this is a problem that should be addressed by the Pensions Board and the wider pensions industry, through education and marketing. It is quite clear that, if a concept is clearly understood, (SSIAs for example) and properly targeted, it can improve the take-up rate.

By linking tax incentives to pensions we are encouraging efficient, effective, long-term provision of income and economic independence for a greater proportion of the population. Ultimately, this will be of benefit to all, as it will allow the State to support those who have the greatest need for its support.

Tony O'Riordan is managing director, Hibernian Life & Pensions.