1. Should Public or Private Pension Provision Be Enhanced? Gerard Hughes Trinity Business School Trinity College Dublin Presentation for ICTU Conference Changing the Pensions Landscape: The Case for Universal Pension Provision in Ireland 29 September 2016

2. Selection of Official Reports on Pension Policy 1997 Dept. of Social Welfare & Pensions Board, National Pensions Policy Initiative: Consultation Document 1998 Pensions Board, Securing Retirement Income - use PRSA to increase coverage 30+ from 54% to 70% 2007 Dept. of Social & Family Affairs, Green Paper on Pensions 2010 Dept. of Social & Family Affairs, National Pensions Framework

3. Analysis Underlying Pensions Policy Ireland can only afford a flat-rate State pension amounting to no more than about 1/3 AIE Workers should supplement State pension with workplace occupational schemes or personal pension plans State should encourage saving for retirement by giving generous tax reliefs Objectives of policy should be - increase private pension coverage rate to 70% - State + private pensions to replace 50% of pre- retirement earnings Rely on private provision because the State pension is unsustainable due to population ageing

4. Fundamental Choice for Pension Policy Posed in Green Paper on Pensions (2007): “ There is a fundamental choice to be considered in addressing the question of pension adequacy between, on the one hand, concentrating largely on enhanced Social Welfare payments and, on the other, focusing mainly on measures to encourage greater personal savings through supplementary pensions.” (par. 8.15)

5. Overview of Presentation Structure & coverage of pension system Performance of public & private provision in delivering pensions National Pensions Framework (2010) proposals for pension reform including auto-enrolment What should be the way forward ?

6. Structure & Cost of Public & Private Pensions in Ireland

7. Coverage Around 2013: Universal for Public Pensions Partial for Private Pensions

8. Tax Reliefs for Private Pensions Were Increased from 1997 Onwards

9. Shifting the Balance Between Public & Private: Percentage of Total Resources (Direct & Tax Exp.) Going to Public & Private Pensions, 1980 & 2014

10. Trends in Occupational & Personal Pension Coverage in Public & Private Sectors, 1985-2015

11. Comparison of Distribution of Tax Relief on Employee Cont. in 1994, 2005 & Employee & Individual Contributions by Quintile in 2014

12. Performance of SW & Private Pensions: Public pensions provided income for 91%, private pensions for 32% of pensioner units in 2005

13. Public Pensions Most Important Source of Income in 2014 for Nearly 80% of Pensioners

14. State Pensioners Benefit from Rising Living Standards through Indexation with AIE not CPI, 1961-2015 ( Jan. 1961 = 100)

15. Outcome of State Pension Replacement Rate Policy & Pensioner Poverty, 1997-2012

16. Proposals for Reform in National Pensions Framework (2010): Public & Private Pensions State Pension Age: increase from 65 to 66 in 2014, to 67 in 2021, to 68 in 2028 Increase in pension age will eventually reduce value of State pension by 16.5% for those born in 1960 or later Contributions: in 2020 introduce total contribution requirement of 10 years for min. & 30 years for max. pension will mean about half of pensioners will not qualify for full State pension (Actuarial Review of Social Insurance Fund 2010) Private Sector Employees: give tax relief at 33% rather than standard rate (20%) & marginal rate (41%) Would increase cost of tax relief on private pensions by over €150 million

17. Proposals for Reform of Pension System in National Pensions Framework (2010): Personal Pensions Increase coverage rate through auto-enrolment in individual DC pension accounts to be managed by private sector at contribution rates: employee 4%, employer 2%, State 2% Total 8%

18. Contribution Rates for DC Pension Benefits Too Low A survey of 6,430 defined contribution (DC) schemes in 2014 by the Irish Association of Pension Funds which estimated that the average contribution to a DC pension was 11.1 per cent observed that “many workers in these pension schemes (even those with long service) may not achieve the comfortable retirement life they had planned ”.(IAPF Press Release 26 May 2014)

19. DC Pensions Not Fit for Purpose “the current defined contribution pensions system is not fit for purpose for anyone who is not rich, or who moves in and out of work due to bad health or the need to care for others.” (UK, Select Committee on Public Service and Demographic Change, Ready for Ageing? (2013) “most people who are members of [Defined Contribution] schemes will not have sufficient funds at retirement to provide themselves with the recommended pension minimum of 50 per cent of pre-retirement incomes, unless they start to make additional contributions.” (Society of Actuaries, 2003)

20. Potential Problems of National Pension Framework Proposals for Auto-enrolment Risk: shifted to individuals Admin Costs: individ. DC plans higher than group DC Contributions: too low to provide an adequate pension Financial Literacy: ESRI/TILDA 2/3rds members over 50 don’t understand their pensions (DB 50% DC 70%) No Guarantees: government will provide no guarantee on investment returns Loss of Contributions: in 2008 Irish pensions industry lost 35% of pension assets

21. Proposals for a Fairer Private Pension System Reform tax reliefs by giving them at the standard rate of tax (20%) & lowering the earnings limit to twice average earnings (€72,000) and lifetime size of individual pension fund to less than €1 million Saving on tax forgone would be around €500 million

22. Proposals to Strengthen the Basic State Pension & Introduce a State Earnings- Related PAYG Pension Public policy in most OECD countries has two objectives: - poverty relief - maintenance of living standards in retirement Poverty Relief: Use the savings to strengthen the State pension by increasing it by €50 to around €280 (replacement rate = 40%) - this would eliminate pensioner poverty (PPRG, Tasc, Social Justice, Age Action) Maintain Living Standards: Introduce a pay-as-you-go earnings-related State Notional Defined Contribution (NDC) pension

23. Advantages of State Earnings-Related NDC Pension:1 Every employee pays a contribution of x per cent on earnings to an individual notional account The notional individual a/c grows with new contributions and is credited periodically with a rate of return related to the growth of the economy

24. Advantages of State Earnings-Related NDC Pension:2 At retirement the notional account is converted into an annuity which takes into consideration an increase in life expectancy This feature is essential for long-term sustainability NDC accounts avoid management risk and investment risk which private funded pensions face due to management incompetence and fluctuations on the stock market Countries which have adopted State Earnings- Related NDC Pension Scheme: Sweden, Italy, Latvia, Poland, Norway

25. Conclusions The State pension delivers income for 90% of pensioners & is source of most income for 70% of pensioners Occupational DB pensions have failed to deliver their promise and auto-enrolment DC pensions are unlikely to deliver adequate pensions as contribution rates are too low Increase the State pension to eliminate pensioner poverty, introduce an earnings-related State NDC pension, give tax relief at the standard rate of income tax & use the savings on tax forgone to finance reform of the State pension system