Finance rules out mandatory pension scheme

The Department of Finance has dismissed as unworkable a mandatory pension scheme drawn up for Minister for Social and Family Affairs Séamus Brennan.

The system, which would see a major increase in the State pension alongside mandatory contributions of up to 10 per cent of salary, was put together by the Pensions Board as the request of Mr Brennan and published yesterday

But William Beausang, assistant secretary at the department, who represents Minister for Finance Brian Cowen on the Pensions Board, said the proposal would have "significant Exchequer costs, broader macroeconomic costs and a prospective adverse impact" on existing voluntary private pension provision. It is projected that the scheme could cost the Exchequer up to €3 billion a year.

Business lobby group Ibec has also opposed the proposal. It withdrew its representative on the body compiling the report because, it said, of the Minister for Social and Family Affairs' insistence on having the board recommend an "appropriate" mandatory system despite the lack of consensus on the need for a mandatory approach.

The Pensions Board itself, despite putting forward a preferred "hybrid" option, makes clear in the report that this "is not a recommendation for or against the introduction" of a mandatory system.

In a letter to Mr Brennan, which accompanied the report, board chairman Tiarnan O'Mahoney said: "The National Pensions Review [ published last January] had set out that there were differing views among board members on the merits or drawbacks of mandatory pensions. The board has not reconsidered its views for or against the introduction of a mandatory system and this report . . . is a technical examination of the practical issues . . . if such a system were to be introduced."

The Special Savings for Retirement scheme proposed by the board would apply to all workers - whether self-employed or working for others.

It would see employers and employees each paying 5 per cent of relevant earnings - between half of gross average industrial earnings and double that average (approximately €15,000-€60,000 in today's terms).

The Exchequer would also contribute 5 per cent in lieu of tax relief.

Alongside this, the State pension would rise significantly to 40 per cent of gross average industrial earnings by 2016 from 33 per cent at present.

At 2006 values, that would see the pension rise from €193 a week to about €232.

The savings would be managed under a defined contribution scheme, where the final pension depends on investment performance, probably by the National Treasury Management Agency. Some Pensions Board members argue that the scheme should provide guarantees of minimum investment return or minimum retirement income.

Under the proposal before the Minister, there would be no access to these funds before retirement nor any opportunity to voluntarily opt out of the system.

People with "adequate" existing occupational or personal private pension provision or "sufficient" savings could be exempt, although no details are set out.

Ibec's director of policy, Danny McCoy, said last night that employers continue to oppose obligatory pension provision.

"Flexibility in response is the appropriate reaction to an uncertain future and mandatory pension provision flies in the face of that wisdom.

"In a dynamic, competitive economy like Ireland, the Government needs to encourage, not compel, savings behaviour. This is clearly best pursued by building on the current voluntary approach to pension provision."

Mr Brennan, who received the report over a month ago, said yesterday that, despite the concerns of businesses and the Department of Finance, there had been "real progress" in addressing the pensions issue.