Retirement provision still falls short

Comment: Retirement provision will have a major impact on the future progress of the Irish economy and the scale of the issue has the potential to result in serious consequences for the country at a macro-economic level.

Adequate retirement provision also has an enormous personal impact on individuals in terms of their future quality of life.

Ireland's current pension policy is a partnership between State and private pension provision. The State pension is designed to avoid poverty and to provide replacement income for lower paid people in the workforce. Private pension provision is on a voluntary basis and at this time just over half the workforce has made some provision.

Private provision is supported by excellent tax encouragements and is mostly provided through employer pension schemes, with the remainder through personal pensions or Personal Retirement Savings Accounts.

Ireland has a more favourable retirement position than most of our other EU neighbours, but the recent National Pensions Review identified issues that need to be addressed.

Firstly, private pension coverage is not increasing and there is still a sizeable number of people who face retirement with no provision to replace their income other than the State pension.

Secondly, many of those who have made pension provision are not putting aside enough to provide them with a good level of income in retirement.

Favourable Irish demographics give Ireland a window of opportunity to ensure adequate retirement provision, but that window is likely to have closed in 20 years time.

The serious issue facing the State is to find a way of ensuring adequate provision. This could be done through the current voluntary private system, which would mean more people contributing and, in most cases, considerably higher levels of contribution, or it could mean the introduction of some form of mandatory pension provision requiring everybody to set money aside for their future.

The recent Pensions Board report has set out the options starkly and these are currently being considered by Government and the social partners.

Defined-benefit pension provision is the most attractive form for employees and it is heartening that there is still a good number of Irish employers who are doing everything possible to continue providing this valuable employee benefit.

However, approximately 30 per cent of the defined-benefit pension arrangements being operated by Irish employers have funding deficiencies. This was exacerbated by poor investment returns in the early years of this decade, but the greater and ongoing causes are low interest rates and substantially increasing longevity, which have raised the overall cost of pension provision considerably.

The Pensions Board is re-examining the statutory funding standard by which it monitors defined-benefit pension schemes in order to ensure that this facilitates employers in continuing this type of pension provision as far as possible.

However, the statutory funding standard would not seem to be the main issue as employer concerns would appear to be more driven by the impact of accounting standards requirements for pension scheme reporting in company accounts.

There is general acceptance that SSIAs have greatly encouraged saving habits among a new generation of Irish people.

Various encouragements are likely to be put forward for SSIA savers to encourage them to re-invest at least some of their SSIA payout in pension products. In particular, the recent Finance Act 2006 introduced an incentive for transfer of SSIA money for lower-paid people to pension products and it is hoped that this attractive incentive will get a good level of take-up among people who have not previously made pension provision.

It is equally, and perhaps more, important that all successful SSIA savers over the last few years should consider continuing their savings habit through pension provision. The tax reliefs available to pensions make this extremely attractive and those on the higher rate of tax will enjoy an even greater benefit than under their SSIA.

Whatever decisions are made about future Irish pension provision, the increasing levels of public awareness remains important.

Next week is National Pensions Action Week and there is a series of focused events planned for the week that will encourage and help people to get started or take action on their pension plans.

Next Friday will see a pensions forum being held in Dublin Castle.

It will aim to advance the national debate on the big decisions facing the country on future pension policy and will feature international and local views on the options available and the consequences of these.

Ireland has come a long way in recognising its pensions issues, and we are fortunate that we have done this in time to resolve them, but we should not forget that this time is running out.

Anne Maher is chief executive of the Pensions Board