Remarks by Tánaiste and Minister for Social Protection
Joan Burton T.D.
At IBEC Pensions Conference
26th November 2015
Good morning and thank you for inviting me to speak at your pensions seminar this morning.
As you will all be aware, in recent years pension provision in all its forms in Ireland has experienced considerable challenges and change. Demographic and economic developments are the main factors that are driving Irelands need for pension policy reform which is necessary to promote both adequacy and sustainability in our pension system over the long-term.
In Ireland, the over 65 year old population is projected to increase from 12.4% of the total population today to 25% in 2050. While this demographic change is to be welcomed - representing as it does longer lives for our people, it brings significant challenges.
For example, currently there are 5.3 people of working age for every pensioner but this ratio is expected to decrease to 2.0 to 1 by 2050. This demographic shift will have significant cost implications for both the State and taxpayers.
As matters stand and as the OECD has observed, Ireland today is in a relatively favourable position compared with most OECD countries, both with regard to pension spending and the adequacy of retirement income provision. Most importantly, the economic situation of pensioners in Ireland is comparatively good, both with respect to other age groups in the population and in international comparison. The OECD observations on Irish pensions policy has also shown that policy decisions made are in line with the roadmap needed for pension reform.
The overall objective of the pension system in Ireland is to provide an adequate and sustainable basic standard of living through direct State supports. It is also to encourage people,through generous tax reliefs, to make supplementary pension provision so that they may have an adequate income replacement rate when they retire from work.
In terms of our minimum income provision, the State pension will remain the bedrock of the Irish pension system. However, while the State pension is expected to provide a basic retirement income for workers, a lot of people retiring from work may experience a significant income drop if they do not have adequate supplementary private pension provision.
Fortunately we are living longer, healthier lives. It is self-evident that as life expectancy increases, so too must the provision individuals make to fund their retirement if they wish to maintain a standard of living in retirement similar to the standard of living they had pre-retirement.
As matters stand however, not enough people are saving for their retirement and without changes the current pension system is unlikely to deliver significant improvements in coverage.
Encouraging increased retirement savings and greater pension take-up will be best supported through building greater confidence and trust in our pensions system, particularly amongst consumers. As such, I have previously highlighted that there is a need for reform and simplification of the wider pensions landscape. In my view this is essential to achieving increased coherency and consistency in the pension system and to increase the understanding of savers.
The current supplementary pension system has become extremely complex and difficult to understand. The present system needs to be simplified so that it is more understandable to members, potential members and to the general public. With this in mind, I have asked that policymakers and the regulator bring forward reforms which will make pension rules easier to understand and to remove anomalies in the present system and I know Mary Hutch, the Head of Policy from the Pensions Authority, will be briefing you on areas of reform later on this morning.
Having contributed its views to the consultation process undertaken by the Department of Social Protection regarding a revision of the EU IORPS Pensions Directive, IBEC will be aware that officials have been engaged in discussions at a European level on the provisions that, in the medium term, would give greater protection to scheme members by providing for:
o improved governance requirements for pension schemes;
o enhanced requirements to provide members with clear and relevant information about their pension entitlements; and
o measures that will ensure our pension regulators have the necessary tools to enable them to more effectively supervise pension schemes.
In line with these principles, the Pensions Authority has been asked to bring forward proposals to raise the standard of Defined Contribution schemes. This is to ensure that such schemes have a greater capacity to provide consistently good value, good investment choices and high standards of communication to members.
Areas where there could be positive reforms include:
o higher standards for scheme trustees;
o a reduction in the number of pension schemes to promote improved governance and greater efficiencies;
o value for money through economies of scale; and more effective regulation and prudential oversight of schemes.
Notwithstanding the increasing importance of the Defined Contribution model, the Pensions Authority will continue to bring forward reform proposals regarding the supervision of Defined Benefit schemes. Many of these schemes have encountered funding difficulties over the last few years and the Pensions Authority is working with the trustees of these schemes to secure sustainable pension provision for scheme members.
The overall aim of the Pensions Authority, in this regard, is to supervise the ongoing management of defined benefit schemes to ensure that the trustees are running them in such a way that reduces the likelihood of schemes being unable to meet their commitments.
Many changes have been introduced in the last number of years to assist Defined Benefit Schemes with funding difficulties. For example;
o Measures were also introduced in 2009 to allow schemes restructure their pension benefits.
o The order in which the assets of a scheme are distributed on the wind-up of a scheme was initially changed in 2009 to give the expected benefits of active and deferred member a higher priority than post retirement increases for pension in payment.
o The option to purchase sovereign annuities was legislated for in 2010 and 2011. This provided trustee with a facility to provide pensions at less cost that would otherwise be available through the purchase of traditional annuities, thereby freeing up scheme assets to meet the liabilities of active and deferred scheme members
o Legislation in 2013 strengthened the protection of DB plan members when plans wind up by providing further protection to members of a double insolvency, that is the insolvency of both scheme and employer, in the form of a State guarantee where all of the beneficiaries of the scheme, that is pensioners, current employees and former employees, not yet retired, will receive at least 50% of their benefits. Existing defined benefit pensions in payment in such schemes will be 100% protected up to €12,000.
o The 2013 Pensions Act also facilitated the Pensions Authority to introduce tighter regulation to protect DB scheme members. This entails refusing to accept funding proposals from schemes with less than 50% funding and forcing schemes to take actions to address their very poor funding situations. It allows the Authority impose additional obligations to ensure significantly underfunded schemes achieve a base level of funding in the short term.
In addition there are regulatory reforms including:
o Changes to actuarial guidance ensuring that it is relevant and unambiguous; and
o Obligations on trustees to satisfy the Authority that they are managing the scheme appropriately;
o Provision of the necessary powers to the Pensions Authority to oversee the ongoing management of defined benefit schemes.
In relation to supplementary pensions more generally, while the State pension has been successful in lifting older people out of poverty and compares well by international standards, the financial challenges of our changing demographics and aging population mean that we need to improve occupational and private pension coverage.
Informed by these challenges, the development of a system to progressively achieve universal supplementary pension coverage has been a stated goal of Irish pensions policy for a number of years. This is because less than 50% of workers have supplementary pension coverage. Despite the considerable efforts to incentivise participation in supplementary pensions, the marginal changes in coverage over the last 20 years indicates that the voluntary approach to participation is not achieving the desired goal in terms of increasing coverage to an appropriate level.
You will be well aware the key recommendation contained in the OECD review of the Irish pension system was to improve the adequacy of pensions by increasing coverage in the funded part of the pensions system through a universal mandatory or quasi-mandatory employment based pension scheme. In making its recommendations, the OECD has observed that Ireland is one of only two member countries that do not have mandatory/quasi mandatory earnings related supplementary pensions for workers.
Following on from the OECD report and the Statement of Government Priorities 2014-2016, in January of this year, the Government decided to proceed with work to develop a roadmap and timeline for the introduction of a new, universal, supplementary workplace retirement saving system.
This work is being progressed by the Universal Retirement Savings Group, the broad role of which is to consider the factors involved in constructing an efficient and effective universal retirement savings system including the broad scheme design features, cost estimates and phase-in timeframes.
To inform this work, a broad consultation process has been undertaken to utilise expertise and facilitate input from, and engagement with, the various sectoral interests including those from the pensions industry, representatives of small, large and multinational employers, trade unions and consumer/interest group representatives.
I am aware that IBEC has made written contributions as part of this process and representatives have met with those undertaking the work to share their views and professional insights. I would like to take this opportunity to thank you for your involvement in the process so far. Whilst I think there is general agreement on the need to address substandard pension provision which will in itself support the consumer economy, clearly any reform must be cognizant of employer concerns regarding administrative and labour cost considerations.
As IBEC has observed, ongoing engagement with sectoral interests including employers and their representatives and a clear communication of any reform pathway will be key to successfully introducing any universal system.
What is of critical importance is that any system chosen is correctly designed and the development of a universal pension system leads to improved outcomes in terms of income adequacy for future retirees. Whilst the establishment of any definitive operational date for the introduction of a universal retirement savings system will require careful consideration and will be influenced by a wide range of factors and the presence of a favourable economic environment, the need for such a system is clear.
In closing I would like to re-iterate the Government’s recognition of the importance of the pensions sector and I look forward to seeing the fruits of reform work reflected in brighter retirement outcomes for our pension savers.
Thank You.