OPINION:An overhaul of pensions to ensure wider take-up and equity is urgently needed, writes Brian Forrester
AS THE deadline for public feedback on the Green Paper on pensions draws near, I am hopeful that finally legislative changes to facilitate national pensions reform will be put in train. The process for the strategic reform of our national pensions system began with the formation of the National Pension Policy Initiative (NPPI) in 1999. However, despite many recommendations from consultants, the industry, and the public, we are still no closer to implementing a solution to meet the challenge of raising our national pensions coverage.
The average commencement age for our personal pension customers is 39, too late for those hoping to achieve a pension of two-thirds of final salary without significant financial outlay. Women in particular should start their pension savings when they start their first full-time job as they typically have broken career paths due to family commitments.
The SSIA scheme managed to draw in 43 per cent of the nation aged 20-39. These statistics alone impress upon us the capacity for our nation to save regularly over a prolonged period, if only the simple core principles of the savings scheme could be applied to the operation of pension plans.
The Government launched the Green Paper in mid-October last year. My worry is that this all-encompassing paper will not deliver the kind of national pensions reform needed at the speed required to make any impact with our rapidly ageing population.
I fundamentally believe that an SSIA-style tax bonus as opposed to the current system of tax relief could revolutionise the national take-up of pensions. However this is just one of many pension discussion points raised in the 250-page Green Paper, and I fear that the collation of public and industry feedback will delay any action for more years to come.
Back in July 2005, Bank of Ireland Life was the first pensions company to propose an SSIA-style PRSA plan to the Government, with the hope that implementation could start before the first SSIA matured in June 2006. Unfortunately this proposal, advocated by consumers and industry bodies, has yet to be implemented. In fact, it is now a discussion item within the lengthy Green Paper.
I accept that the efforts of both the industry and the Government may not achieve national targets for pension coverage, and a form of mandatory pension scheme may become necessary at some stage in the future.
However, I believe there are many more options to be explored before we go down the mandatory route, such as our SSIA-style pension proposal, which may capture the imagination of the Irish nation and help to initiate the required increase in pensions coverage.
Australia's mandatory pension scheme has already encountered problems, with the minimum contribution becoming the maximum for most participants. How can we ensure that the same problems do not affect us?
Finally, I really hope that in its conclusion, the Green Paper on pensions brings about an equitable approach to retirement benefits for all retirees. Company directors and the self-employed can keep control of their pensions when they stop working by rolling their money over into an approved retirement fund or ARF. The funds are then invested in a range of funds, depending on the client's attitude to risk, enabling the fund to continue to grow free of tax, while also providing a retirement income.
However, most workers do not have this freedom, as the current system dictates that employees on occupational pension schemes must use the majority of their retirement fund, after they have taken their tax-free lump sum, to purchase an annuity - which provides a guaranteed income for life. This guaranteed income offers little flexibility to the retiree, with the annual income determined by the annuity rates at the time of retirement, which are in turn influenced by economic factors and the prevailing interest rates.
In addition the ARF option is considered attractive by many retirees as it enables tax-efficient succession planning for those who wish to pass on their fund to their dependants. Unfortunately for those that are obliged to purchase an annuity, this fund will invariably die with them unless they have included a special spouse's pension benefit at the time of purchase.
The decision as to whether the annuity or ARF option is the right choice for a retiree depends on various factors such as the size of the retirement fund, whether investment growth or security is more important during the retirement years, the health of the retiree and more.
However, this decision should be that of the retiree and not the Government. There are about 300,000 employees in newer defined-contribution pension plans who do not have this choice, yet they are asked to actively participate in their retirement by making investment fund choices, and additional voluntary contributions in order to fund a decent income in retirement.
I believe there is a flaw in legislation that requires such involvement by employees in funding for retirement but does not allow them to choose the retirement option that best suits their personal circumstances.
The period for public consultation on the Green Paper closes on May 31st. I urge the Government to act quickly to bring about a transformation in our pensions system. Since the NPPI was first set up in 1999, our life expectancy has increased by an average of two years, while the number of workers supporting retirees is decreasing all the time.
Brian Forrester is managing director of Bank of Ireland Life