This generation must invest in the future by providing a framework for improved pensions

Most European countries face serious concerns about the future funding of pensions for the ageing population. Given that the proportion of older people in Europe will increase dramatically in the near future, governments must consider how they can continue to fund pensions, let alone improve them.

This State is also faced by these issues. However, we are in a relatively advantageous position for a number of reasons.

Firstly, our population is one of the youngest in Europe and a serious shift in the balance between the working and older population will not occur until the second decade of the millennium.

Secondly, we have a well structured pensions system, with a first pillar based on social welfare pensions and a second pillar of occupational and personal pensions. These give us a flexible structure compared to the more rigid systems of many EU countries.

Finally, our economic growth gives us the means to take advantage of the current window of opportunity to put in place a sound pension system for the future.

However, we are faced by a number of major issues which have to be addressed now, and we, as a Government, are determined to do so.

Although our population is still comparatively young, it is only a matter of time before our age profile changes dramatically. The "Actuarial Review of Social Welfare Pensions", which I published in 1997, highlighted the fact that the proportion of people over pension age will increase dramatically in the next millennium.

While there are now five people at work for every one retired person, by the middle of the next century there will be one pensioner for every two persons at work.

There are now 414,000 people over 65 but this will double by 2031 and will increase to more than 1,000,000 by 2056. The actuarial review pointed out that this would lead to a major increase in the cost of funding these pensions if we were to be able to continue to give a decent level of income to our elderly. While our pensions system is soundly based, the level of the social welfare pension was allowed to decline over the 1980s and the first half of the 1990s given our economic problems in the period and the major increase in unemployment. By 1997, the old age (contributory) and retirement pensions had fallen to about 27 per cent of average industrial earnings, and only about half of the working population is covered by second pillar pensions.

The National Pensions Policy Initiative (NPPI), which involved representatives of the social partners, produced its final report, "Securing Retirement Income", which I published last year. This report made recommendations to address these issues.

It recommended that:

social welfare pensions should be raised to 34 per cent of average industrial earnings, building on the commitment in our action programme to rise old age contributory pensions to £100 by 2002;

a new, simplified and user-friendly form of pension, the personal retirement savings account (PRSA), should be introduced;

funding should be set aside now to meet future pension costs. At my request, the Government decided to establish working groups to look at issues arising from these recommendations.

As announced recently by Mr Charlie McCreevy, the Government has now decided to establish a social welfare pensions fund and a public service pension fund to part-fund future pensions, and to invest a major proportion of the Telecom proceeds and an ongoing proportion of GNP for this purpose.

In total about £4 billion will be invested in these funds by the end of next year.

The investment which was made in education in the 1960s made a major contribution to the success of this generation, now this generation must invest for the future.

There is a range of important issues about the social welfare pensions fund which has to be worked out, including the management of the assets and rules for investing in and drawing down funds. These are being considered by one of the NPPI working groups which will be reporting shortly.

One option for consideration is the establishment of a social insurance board involving all the social partners to oversee the development of our system.

Two further groups are looking at the detailed implementation of the recommendations on the PRSAs and the introduction of a simplified tax regime for pensions. Arising from the reports of these groups, I will be introducing the next plank in our programme, a major pensions Bill, early next year. This will allow for the introduction of the new user-friendly PRSAs which will allow people moving from job to job to carry their pension.

When the term of office of this Government ends, I want to be able to say that we have:

increased very significantly the income of our current older people through major pensions increases, taking older people out of the tax net and providing free medical care to a greatly increased number of people;

put in place a social welfare pensions fund so that we can fund old age pensions into the new millennium;

established a simplified system which will lead to greatly improved occupational and personal pensions.

We are well on the way to achieving these aims. We are now one of the few countries in the EU which has put in place a system which will secure pensions into the new millennium.