PRIVATE SECTOR pension funds were last month due to pay a 0.6 per cent levy – the first of two annual instalments to raise €460 million for each of four years – to finance the Government’s job creation programme. When the latter introduced the levy last year, it suggested the payment might be absorbed, in whole or part, by the pension industry cutting its costs, and its fees. However, there is little sign this has happened. Equally, little evidence the levy has done much to boost job creation.
Private sector schemes, in Ireland as elsewhere, are now in a state of deep crisis. As people live longer and enjoy better health, the cost of pension provision has risen, just as the economy has deteriorated sharply. Accordingly, pension funds in recent years have operated in a low-growth and challenging investment environment. And they have struggled to achieve the high financial returns needed, both to pay pensioners and fund the future benefits of existing members.
Some key indicators highlight the major problems facing the pensions industry. In 2011, the sales of Irish life and pension products fell by 8 per cent. An estimated 80 per cent of defined benefit – or final salary – schemes are now in deficit, which means they cannot fully meet their obligations to members. As a result, some pension schemes are likely to be wound up. And since 2008, the economic recession has depressed the investment performance of pension funds, which have relied heavily on buoyant stock markets to boost their returns. So over the past decade, Irish pension funds have recorded minimal growth when measured in real – or inflation-adjusted – terms.
The pension levy – which has cut the income of those in retirement and reduced the capital sum already saved by members of private schemes – when allied to the depressed state of financial markets and a likely lower rate tax relief for pension contributions, all serve to communicate a clear and negative message to savers. Savers are left with far fewer reasons to invest in a pension for their retirement. This message reflects the ambivalent position successive governments have adopted on the pension issue. They have deplored the low level of participation in private sector pension schemes, while greatly reducing the incentives for pension participation. This Government, by imposing the 0.6 per cent annual levy on the assets of pension funds – some four-fifths of which are in deficit, struggling to survive – has made the bad position that it inherited even worse.