Workers should be forced to pay into pensions, says OECD

Public servants should move away from the current final salary pension scheme and all private sector workers should be forced to invest in private pensions under recommendations in a report on pension provision in Ireland.

In the most radical review of the Irish pension system to date, the OECD says the “simplest, less costly, and most effective way to increase coverage” is through the introduction of mandatory pension savings.

It also suggests that “healthy” employers should not be allowed to walk away from pension liabilities. Several high profile private sector employers have recently announced plans to abandon final salary schemes, imposing cuts in benefit of up to 50 per cent on workers.

The report, commissioned by Minister for Social Protection Joan Burton, examined all elements of the Irish pension system – the provision of state pensions and occupational schemes in both the private and public sector, as well as personal private pensions. It also set those provisions in an international context among OECD members.

It was charged with assessing the sustainability of the current system in the light of changing demographics and more volatile financial markets, adequacy of individuals’ provision for income in retirement, equity within the system among different groups and the modernity of the Irish pensions structure.

“We hope there is enough political will and and that people are far-sighted enough to recognise that we have to make some difficult choices, said John Martin, director of employment, labour and social affairs at the OECD. “We have talked enough about it at this stage.”

While the report that costing the various measures it proposes was beyond the scope of the current review, Mr Martin said it should take the Government no more than a year to calculate the cost once it decides which approach to adopt in addressing the crisis of future pension adequacy.

The OECD finds fundamental weaknesses in all elements of Irish pensions.

The State pension is complex and inequitable, it argues and should be replaced either with a universal basic state pension, regardless of contributions through PRSI through the working life, or by a means tested pension.

Steps should also be taken to encourage people to work longer, possibly by offering a higher state pension for those who do not tap into it until they are older.

However, ultimately, the OECD says Ireland needs to move to a position where fewer people rely solely on the State pension, partly because it is likely to become unaffordable for the State in its current form.

Addressing this requires an "urgent" increase in private pension coverage – either through occupational or personal schemes – it says, and notes that, among the OECD's 34 members, only Ireland and New Zealand do not have mandatory, earnings-related savings for retirement, although New Zealand does have an auto-enrolment system, which allows for opt outs.

It also calls for a change in the “unequal treatment” of public and private sector workers, due largely to the prevalence of defined benefit, or final salary, schemes in the public sector compared to defined contribution schemes, where the employee carries the full investment risk, in the private sector.

While welcoming the recent changes in public sector pensions, the report says they are being introduced “only very slowly” and are unlikely to affect most public sector workers for a long time.

It also proposes that any new mandatory or auto enrolment scheme introduced for the private sector, which would be a defined contribution model, should also be extended to public servants.

It suggests that recent reforms and any new scheme should be not just for new entrants but also for existing public sector workers below a set cut-off age.