The SSIA initiative aimed at increasing retirement savings is a distraction from the core problem, writes Jim Stewart
The Minister for Finance has announced a number of new measures in the Finance Bill 2006 which are designed to increase pension saving and pension coverage. These measures consist of granting tax and other reliefs designed to encouraged those holding SSIA accounts to transfer funds into a PRSA account.
Such a measure was advocated in the recently-published National Pensions Review and by the pensions industry. The reason for this initiative is low coverage of occupational pensions. Pension coverage, according to the latest CSO survey (January 2006), at 51.5 per cent, is in fact falling despite the large sums spent on "awareness campaigns" by the Pensions Board. The industry wants to capture this large pool of SSIA saving because their fee income is a function of the size of assets under their control.
However, the Pensions Board and the industry do not appear to understand why SSIAs were successful and PRSAs were not. The board seems to consider that the success of SSIAs was due to the "means of granting tax relief" and "branding".
The reality is that these products had guaranteed rates of return (provided, as in the vast bulk of cases, they were not invested in equities); these rates of return were higher than any other savings product before or since; there were no charges (unless they were equity-based); and they were virtually risk-free (again unless they were equity-based). And, because they were short-term, there was little longevity risk (it is highly unlikely that those with SSIAs would die before they matured).
The Minister for Finance noted in his Budget statement that the current cost of tax reliefs in terms of revenue forgone is in excess of €3 billion per annum, yet occupational pension coverage appears to be falling. So it is puzzling why even more tax reliefs would increase coverage. One reason why increased tax reliefs will not increase coverage is because of complexity.
The rules under which tax relief will be granted under this current initiative are complex (seven pages of the Finance Bill!). Tax relief will also be restricted in various ways.
For example, only those with incomes in the previous year of less tha€50,000 and paying tax at the lower rate are eligible.It is likely that the bulk of SSIA savings are held by those who are currently members of occupational pensions.
Those with SSIA savings who are not currently members of an occupational pension scheme would do well to note the costs charged by pension-providers, which are likely to be higher for those with equity-based SSIAs.
Three main issues need to be addressed strategically in relation to pension-provision.
Firstly, the large and growing number of those aged 65 and over. Secondly, the low numbers who are members of an occupational pension scheme and the inadequacy of the pensions many have now and will have in the future. This means that large numbers now, and many more in the future, will be dependent on the State old-age pension for retirement income. Currently, the State old-age pension is about 60 per cent of the minimum wage and about one-third of the average industrial wage. The third main issue is that many defined-benefit pension schemes are in financial difficulty.
As argued in the Tasc publication For Richer, For Poorer, there are a number of reasons why so many people either have no pension at all or one which is not adequate for their needs. One of these is the excessive charges made by those selling pension products. The Commission on Public Service Pensions, for example, estimated the costs for one type of personal pension as varying between 12 per cent and 20 per cent of contributions, and this estimate excluded certain charges.
A second reason is that there are considerable tax advantages to pension savings. But for those who are unemployed or changing jobs, or for whatever reason are not earning taxable income, the value of tax allowances is reduced or may be zero.
If you have an atypical working career - for example, many women opt out of paid work during child-rearing years - the value of pension tax reliefs for those years is zero.
A third reason is the risk people take when they establish a personal pension. The returns for them are very uncertain. This means that where average returns are expected to be positive, individual returns may still be negative. There may also be variations in returns over a time period. These factors can have a considerable impact on the size of eventual pension payments. Other risks borne by pension-providers can impact on individual pensioners: circumstances such as when pensioners live longer than anticipated, and the pension-provider has not adequately provided for future pension liabilities. Such a situation arose for those with pension and other policies with Equitable Life, and this remains unresolved.
For future retirees, Tasc believes that the most efficient (and cost-effective) way of increasing retirement income for those without current pension coverage is to increase social welfare pensions. The cost to the State can be reduced by significantly reducing tax relief. Currently, pension tax expenditures in Ireland as a proportion of GDP are the highest in the OECD countries.
Such a solution would have the merit of introducing a greater measure of fairness into the pension system. It would redistribute State expenditure currently devoted to tax reliefs to increasing State pensions, and it would help redress the anomaly where those who are already well-off benefit disproportionately from pension tax reliefs.
The pensions commission in the UK advocated a more generous and inclusive state system in addition to, for example, a national savings scheme, to which employers would be required to contribute.
In launching the National Pensions Review, the Minister for Social Welfare stated: "There is a view that some form of mandatory provision is the only way of ensuring that people make adequate provision for their retirement." We already have a mandatory pension - the social welfare pension. Why not use it?
• Jim Stewart is a senior lecturer in the School of Business at Trinity College and a member of the Tasc Economists' Network. Tasc is an "independent think tank committed to progressive social change in Ireland"
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