Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh Pensions Seminar - Tallinn Orlaigh Quinn Ireland 7th September 2005

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh Demographics in Ireland  Lowest proportion of older people in the EU %  No great change for the next ten years  15% in 2021, 19% in 2031 and 28% in 2056  Cost of public pensions (social welfare and public service rising from 6% of GNP to 13% in 2050)

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh Structure of Pensions System Two Main Pillars  State System - Social insurance pensions - Means tested pensions - Flat rate payments  Voluntary Supplementary Pensions - Occupational pensions provided by employers - Private pensions arranged by individuals

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh Objectives of the Pension System  Provide a basic income for all residents on retirement  As far as possible to deliver this basic income through social insurance rather than means-tested benefits.  Ensure that as many people as possible have a supplementary pension which will enable them to maintain their pre- retirement standard of living

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh Occupational/Private Pensions  Intended to provide earnings-related element of pensions system.  Relatively immature (35% of existing pensioners have occupational pension)  Overall coverage of about 55%  40% Occupational, 13% private, 2% both.  Main target is 70% for those over 30 years of age, currently 62%

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh Options for Pensions Decumulation in Ireland Annuities offered by insurance companies  Value dependent on time of retirement  Requires conservative investment strategy  Must be used to insure benefits by DC schemes  DB schemes can pay benefits out of own funds - But DB statutory Funding Standard and wind up requirements based on insuring benefits with annuities Approved Retirement Funds  Available to personal pension holders (PRSAs and RACs)  Flexible drawdowns permitted, subject to minimum requirements

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh The Irish Annuity Market  Limited number of providers  No interest from overseas providers at present, and limited capacity in marketplace  €250m turnover per annum at present, compared to €80 billion of pension fund assets  Will grow over time – pension funds immature and DC becoming more prevalent, must insure benefits  Limited index linked provision – 75-80% of annuities sold are not indexed  Government does not issue index linked bonds

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh Factors Driving Annuity Prices Long term interest rates  Low compared to historic levels in Ireland, despite recent rate rises Insurer’s expectation of future mortality  Irish life expectancy at age 65 rising rapidly, and insurance companies assume good health  Insurer has only one opportunity to set price so assumptions may be conservative Insurer’s allowance for expenses and profit

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh Amount of pension payable to a 65 year old male which would have been secured for €10,000 based on annuity rates applicable over the past 26 years (guaranteed for 5 years, with 50% spouses pension, spouse age 63, and 3% pension increases attaching) Source: Irish Association of Pension Funds

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh Cost of annuities compared to funding of benefits by schemes (Source: Irish Association of Pension Funds)

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh Approved Retirement Funds  Introduced in 1999  Available only to personal pension holders  Fund can earn an investment return while the member draws down a flexible income  A view that ARFs are inequitable for other DC members, who do not have access  Policy concerns about whether flexible drawdowns suitable for all pensioners (squandering, mis-selling)  Distortion of EET – some ARFs used for estate planning  ARF holders now required to pay income tax on a notional drawdown if less than their actual drawdown

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh The State as an Annuity Provider  Could be just as a ‘provider of last resort’; would ease funding requirements on DB schemes  The State to provide annuities more widely, particularly to DC members with ‘small pots’  State has no capital or profit requirements, and can back annuities provided with riskier investments  But would take on risks – longevity, investment  If mandatory pensions are introduced => increased pressure on State to become involved? Guarantees ?

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh Issues for Irish Pensions System  Adequacy – flat rate state pensions and poor coverage of supplementary pensions mean a high risk of relative poverty for pensioners.  Increasing cost of pensions  National Pension Reserve not sufficient  DB schemes under pressure through funding issues and accounting standards - 40% closed to new members  Contributions to DC schemes inadequate.

Department of Social and Family Affairs An Roinn Gnóthaí Sóisialacha agus Teaghlaigh Reform Process  National Pensions Review 2006  Social Partnership agreement  Government commitment to a Green Paper on pensions to be published Oct 07  Consultation process and framework for future policy  All options being considered.