Noonan was cautioned on effects of pension levy

TENS OF thousands of people face sharp increases in the cost of pensions or reductions in benefits as a consequence of the Government’s pension levy to fund job creation, senior Department of Finance officials have warned.

Last May the Government announced it would impose a 0.6 per cent levy on pension funds for four years to generate €470 million a year to fund up to 100,000 jobs.

In advance of the decision, senior departmental officials warned Minister for Finance Michael Noonan in a confidential note, released under the Freedom of Information Act, that pension funds were facing serious deficits and the levy would have a negative effect on the solvency of thousands of pension schemes.

Among the issues highlighted were:

* Employers and employees did not have the resources to make additional contributions on the scale required to fund existing deficits, estimated at about €10 billion to €15 billion.

* About 75 to 80 per cent of defined-benefit schemes are technically insolvent. When they submit plans to the Pensions Board later this year, “many will face the need for large increases in contributions or reductions in benefits” creating significant public concern.

* It will raise questions over inequitable treatment of public and private sector pensions because public sector pensions will be unaffected by the move.

* The danger of “capital flight” from pension funds was raised. This was because the levy would affect funds whose administrators or trustees are based in Ireland. As a result, officials warned that individuals may “decide to transfer pension fund assets to foreign pension fund administrators or trustees to avoid the levy”.

* Further moves to reduce tax relief on pension contributions – as provided for under the EU-IMF bailout – cannot be ruled out, even though many in the industry believe a levy would replace the need to reduce tax relief.

Mr Noonan said at the time of the announcement that the levy was “pulling back a very small proportion” of the tax relief enjoyed by the industry over the years.

He also accused some in the pension industry of a “quasi-hysterical” reaction to the levy. Latest official figures show pension funds in serious deficit as a result of a number of factors.

These include people living longer, reduced contributions from employers as a result of wage cuts, and heavy losses from investments in equity markets.

Many pensions experts fear the levy will prove to be a “tipping point”, accelerating the closure of defined-benefit schemes as private sector employers – faced with soaring deficits – find them less affordable.

In fact, a consultation paper produced by Government officials and the regulator outlines a design for a “new defined-benefit model” which will provide lower benefits and feature greater reserves to allow for market volatility.

Separate papers also show the extent of Minister for Social Protection Joan Burton’s concerns over aspects of the levy, which emerged earlier this year. The levy, she said, would lead to demands for greater State pension rises and could also push some hard-pressed firms over the edge. “The current view is that employers are paying the maximum possible contribution and any additional costs could threaten . . . viability of some firms.”

Ms Burton said the policy rationale for the levy would not be easy to explain to employees and pensioners who have saved for their retirement, only to see funds “diverted to a jobs initiative for others. This will be particularly difficult when one considers that the vast majority of pension funds are in significant debt and may not be able to fund the pension ‘promises’ made to members,” she said.

Ms Burton said saving for retirement was a long-term investment and that pensions policy should be aimed at ensuring an individual’s savings were secure. “A pension levy is likely to reduce the individual’s incentive to save for their pension. This will have long-term implications for pension policy and may deter both employers and individuals from providing for retirement.”

Other documents reveal that officials were considering an alternative to the levy.

This involved a 10 per cent tax on investment income for pension funds. However, given the performance of pension funds and the state of the market, officials felt it was not realistic to assume there would be significant returns from investments over coming years.