IRISH PENSION funds have performed poorly over the past decade, achieving minimal growth and failing to match inflation. The result is a pensions industry in serious difficulty as retirees enjoy better health and live – and receive payments – for longer. Most of the State’s private sector defined benefit schemes, where a pension is linked to an employee’s salary are in deficit. In many of these company schemes, employers and employees have raised their contributions and cut retirement benefits. And in some cases, pension payments no longer take account of inflation.
Against this background, Freedom of Information (FOI) material obtained by this newspaper offers some insight into the policy advice the Government received before it decided to introduce a temporary 0.6 per cent levy on pension funds. Its aim in doing so is to raise €470 million for each of four years to pay for a job creation programme.
The Department of Finance warned ministers of the parlous financial state of pension funds and advised that the levy would have a negative impact on thousands of company pensions schemes which, due to their existing financial difficulties, are required to submit plans to the Pensions Board later this year outlining how they will reduce their funding deficits. The challenge facing them is compounded by the fact that in making cost cutting adjustments, they will now face an additional burden of providing for payment of the pension levy.
The FOI material also shows that Minister for Social Protection Joan Burton had major reservations. With so many pension funds in significant deficit, she feared that some may be unable to meet the pension promises made to members. She also indicated that the levy may have adverse long-term implications for pension policy by making employers more reluctant to provide for the retirement of employees and by making individuals less likely to save for their retirement.
Certainly, the poor investment returns achieved by pension funds in the past decade offer people little encouragement to take retirement planning seriously. However, if they are further discouraged by a lowering of the tax relief allowed on pension contributions – as proposed in the EU-IMF bailout plan – and by the imposition by government of an effective tax on their pensions savings, they will have very little incentive to save for retirement. As a result, in attempting to solve a jobs problem now, the Government may be creating a bigger pensions problem later.