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'Mandy' - Special Savings for Retirement: Report on Mandatory Pension System

The full title of the Pensions Board’s most recent report is ‘Special Savings for Retirement: Report on Mandatory Pension System by the Pensions Board for Seamus Brennan, Minister for Social and Family Affairs’.  Let’s just call it Mandy for short!

Mandy was released by the government last week; and was immediately the victim of misinterpretation, misrepresentation – and perhaps just some simple misunderstanding.  Because admittedly, Mandy is a fairly complex creature, with a somewhat murky past, peculiar parentage – and genuinely difficult to understand!

Let’s be clear about Mandy’s background and origins.  Nearly 30 years ago, a Green Paper was produced in the Department of Social Welfare at the behest of its then Minister for State, the late Frank Cluskey.  Entitled ‘A National Income-Related Pension Scheme’, it set out possible parameters for a national scheme to provide supplementary pensions (i.e. pensions that would supplement the flat-rate state pension), via the social insurance system.  This idea had considerable support from the trade unions, but successive governments baulked at the likely cost (assuming – perhaps wrongly – that it would all be met through increased PRSI) and a White Paper setting out the costings was never published.

Then in 1986 another Labour Minister, Barry Desmond, said pay-related pensions (via the PRSI system) were ‘not a runner’ at that time; and announced the establishment of a National Pensions Board (NPB) to consider a number of major pension issues of the day, including the overall direction and appropriateness of our national pension system. The NPB worked from 1986 to 1993, producing five reports altogether on this and other pension issues. It recommended major reforms to the regulatory system, which resulted in The Pensions Act, 1990 and the establishment of a statutory Pensions Board, which started work in 1991 and is renewed every 5 years. The Board is representative of all the major ‘players’ in the pensions area, including unions, employers, the relevant government departments, consumers, pensioners, individual Ministerial nominees and the various pensions professionals (the actuaries, accountants, pension lawyers, and representatives of pension funds and life assurance companies).

During the 1990s, when all the reforms recommended by the NPB were being introduced, the unions took the view that these would help to support the development of good, secure, occupational pension schemes (OPS).  We worked hard to persuade (and pressurise) employers in both the public and private sectors to introduce and/or improve OPS – with, let it be said – a fair measure of success.  The doubling of OPS membership over the past decade was no accident: it was hard-won by unions, in most cases.  However, the fact that the workforce has also doubled over that period means that coverage for supplementary pensions, as a percentage of the workforce actually requiring it, has remained more or less static.

Unions have always been sceptical about the capacity of the so-called ‘voluntary system’, driven mainly by the tax incentive and the efforts of trade unions, to deliver satisfactory pensions for those on lower and middle incomes, especially the most vulnerable groups like part-time workers, women workers and, more recently, migrant workers.  Or, to be precise, we have doubted the commitment of employers and successive governments to making the voluntary system work, for these groups.

Nevertheless, we have put considerable time, energy and resources at both local and national level, not only into negotiating good OPS for our members, but also to making positive suggestions for improvements in national pensions policy. Hence our steady stream of suggestions, over the years, at Budget-time and in between, for new and imaginative ways of making the present pension system – which we have all had a hand in developing – work to better effect for all present and future pensioners who do not have alternative sources of wealth or income to support a good retirement and old age.

The 1998 Pensions Board Report (‘Securing Retirement Incomes’ – NPPI for short) was a case in point; as was last year’s National Pensions Review by the Board (the NPR).  Despite our growing reservations about the ability of the voluntary system to deliver pensions to women and lower-paid workers, we endorsed the central NPPI recommendations (about improving the state pension to 34% of AIE and introducing a new, more flexible pensions vehicle, the PRSA, that would be tailored to the needs of people with no employment, or intermittent employment, or employment in which the employer was unwilling and/or unable to make a worthwhile contribution, or perhaps any contribution at all).

For various reasons, there were long delays in implementing the NPPI recommendations; and by the time PRSAs were introduced, the then Minister for Finance, Charlie McCreevey, had effectively scuppered their chances of success, by introducing, in the previous year, the apparently far more attractive, short-term saving scheme, the SSIA.  As I recall, the unions were the only voice, at the time, protesting that this would “strangle PRSAs at birth”. McCreevey responded to Congress by assuring us that when the SSIA Scheme ended, there would be ‘major incentives’ for people to put the resultant savings into pension schemes.  But as we know, not only was he no longer around to deliver on this promise, but there were never any signs of any definite plans to do so; and in the end, his successor has brought forth a mere ‘mouse’ which is unlikely to do much to fill the ever-growing gap in pensions coverage.

Despite all that, there are now over 78,000 PRSAs in existence (with a total asset value of €545 million) - not exactly a ‘total failure’ as some have asserted.

The present government, and its predecessor, have consistently ignored the suggestions made by trade unions as to how the pensions gap could be bridged. We’ve suggested improving the old-age pension – but it still hasn’t even reached the NPPI target of 34% of AIE. We’ve suggested improving the tax incentive, to make it work equally well for all workers, not just those paying tax at 42% - e.g. by giving standard-rate taxpayers the same relief on their pension contributions as higher-rate taxpayers. We’ve suggested starting pension contributions much earlier in life – ideally at birth, alongside Child Benefit and we’ve suggested giving people ‘tax-relief’ on their contributions to new pension and PRSA schemes ‘SSIA-style’ i.e. by way of matching contributions from the Exchequer, as this is clearly a more effective and transparent incentive.

Indeed, the recent Irish Life survey (mentioned by David Went in last Monday’s Irish Times) suggested that the level of interest in transferring money into pensions, on the part of SSIA-holders, could be quadrupled (from 9% to 36%) by this one single change.

I don’t disagree with David Went when he says it would be better to make the present system work more effectively (by implementing the kind of reforms recommended by the Pensions Board last year, in the NPR), than to go to all the complication and expense of devising a new mandatory system and making sure it does not adversely affect the many good schemes we’ve already achieved. But the point is: we’ve now been waiting about 30 years for governments to bite the bullet and do precisely that.  We can’t go on like this!

Hence Mandy: the logical ‘child’ of NPPI and the NPR. The NPR said very clearly to the government: there are ways of making the present system work for those who need it to work for them.  You can adjust the tax incentive to make it work fairly and effectively at all low and medium income levels. And you must take cognisance of the social consequences of not having a good, inclusive pensions system – not just the financial ‘cost’ of providing one.

Yes, there were those of us on the Pensions Board – and not only the trade union representatives – who pointed out that successive governments had every opportunity (and, more recently, the resources) to at least give the voluntary system ‘one last push’.  So there were some of us who argued that if this were not done, or if it proved insufficient, we would have to look again at the idea of introducing some form of compulsion into pensions planning and provision. This was not some ideological dogma: just a strong view that the time for patience and complacency is over.

The government failed to act on the unanimous recommendations of the NPR, for reform of the present system; and in February 2006, Minister Brennan asked us to have a more detailed look at what sort of mandatory system might work, in Ireland, given our particular stage of pensions development, if the government were to consider going down that road.  A reasonable and rational request, in my view, because a lot of work was needed to work out the kind of detail required; and this had not been possible in the context of last year’s NPR as the Minister had halved the time available for that (requesting its completion by autumn 2005 rather than autumn 2006 as envisaged by us and required by legislation).

Mandy was delivered extremely quickly, but nevertheless with considerable care and expertise; and should not be lightly dismissed and cast aside. The Group considered just about every possible permutation and combination: increase the state pension dramatically; introduce a ‘tough’ mandatory regime; introduce a ‘soft’ mandatory regime; devise something entirely new; invest and manage the money in various ways; etc. etc.  It looked at how various systems were working in other countries. Eventually, it narrowed down the possibilities to five broad approaches and costed each on the basis of five sets of assumptions (about GNP growth, phase-in times and so on).  Hence the 25 sets of tables contained in this fairly bulky Report.

The system proposed in Mandy is tailored to the Irish experience. For good reasons, we didn’t just copy or lift the systems tried in Australia, Chile, or anywhere else – we invented our own. It’s open to further moulding and reshaping, of course – but the bones of a good system are there, for anyone to see who is seriously committed to the idea of good pensions for all and not just some.

One of Mandy’s key features – widely misreported this week – is the 15% contribution rate which the Pensions Board took as its starting point for any new system that’s going to produce worthwhile results (otherwise, why bother?). This is not, of course, 15% of one’s total earnings, but 15% of what Mandy calls ‘eligible income’ i.e. that tranche of your income which is to be ‘pensioned’ by the new system. Mandy suggests a state pension of 40% of AIE and ‘eligible income’ of between 125% and 500% of that increased state pension (i.e. between roughly €15,000 and €60,000 in 2006 terms).  This targets the group most likely to need supplementary pensions and assumes that those on higher incomes are already making some form of provision for their retirement. 

The 15% figure should also send an important message to people currently contributing less than this, in total (i.e. between employer and employee), on the need for better provision.

Mandy does not actually say that the 15% contribution should be shared equally by employers, employees and the Exchequer.  What it says is that an Exchequer contribution of 5% should be included in that; and should take the form of an actual contribution (SSIA-style), rather than tax and PRSI relief.  In my view, the fair and obvious way to share the other 10% that’s needed is for employers to pay 5% and employees to pay the other 5%; but not all Board members would agree with that (notably IBEC and the Chairperson!).  Clearly, that would be a decision for government to make, if and when they finally decide to abandon the voluntary approach and introduce compulsion in this matter.  (Requiring employees to pay the entire 10% would have huge IR consequences, on which there is no space – and probably no need - for me to elaborate.)

Similarly, as regards the phasing-in of any such system: getting fairly impatient at this stage, I would be arguing for doing it over 5 years; others would say 10. But don’t forget, we’ve already waited nearly 30! If we had started back in 1977, we could by now have the world’s first truly comprehensive pension system – at much lower cost than we’re now looking at.

Finally, on that crucial issue of cost: well obviously, if we are to include the ‘other half’ of the workforce who don’t and won’t have decent pensions, in a system that is going to be truly inclusive, we are talking about more or less doubling what we put aside – one way or the other – for pensions.  It takes actuaries and other good mathematicians to work out these costs precisely, but it doesn’t take genius to work them out roughly, given what we all know about Ireland’s demography, workforce, GNP, migration trends, etc. 

The main issue is whether, as a society, we are sufficiently committed and determined to meet that cost, for both social and economic reasons; and whether we can make this sufficiently clear to our political leaders.

(An abridged version of this article appears in the Irish Times – August 17, 2006.)

Rosheen Callender is an economist with SIPTU; she is the union’s National Equality Secretary, and is currently Vice-President of the ICTU. She served on the National Pensions Board (1986 to 1993); has been a member of the Pensions Board since 1996; and was a member of the Pensions Board Sub-Committee which oversaw the preparation of ‘Mandy’.



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