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Pensions - icebergs ahead!
The recently published OECD report on Irish pension policy is the first time that the organisation has focused in such detail on the pension policy of a single country. As the report was carried out at the request of the Minister for Social Protection, its recommendations can be expected to be taken seriously by the government.
Most of the press comment has focused on the prospect of compulsory pension saving requirements being introduced as a way to increase levels of coverage. This has rightly caught the attention of the newsprint media, but is perhaps one of the least controversial recommendations set out in the report. Other potentially more controversial recommendations include radical reform of the state pension system and a much more aggressive introduction of changes to public sector pensions. Surprisingly, these recommendations have attracted little or no coverage, but for many, will have a much more profound impact.
The proposals in relation to the state pension include moving to a fully means tested benefit in place of the (near) universal benefit that is currently available. This would result in a reduction or complete stoppage of the state pension benefit for many current retirees. The proposals also entail eliminating household benefit packages and free travel allowance by incorporating them as a monetary amount into the means tested core benefit.
Given the furore a few years back around proposed changes to the medical card for retirees, implementing changes along these lines would certainly provoke a strong reaction once the various pressure groups understand what is being proposed. However, if we are to reform our pension system to avoid hitting an affordability iceberg in the future, radical measures such as this are needed. As an example to follow, we need look no further than Australia where they implemented similar measures not so many years ago.
The acceleration of radical changes to pensions for public servants is another recommendation that would draw a strong reaction. Not surprisingly, we can expect our policy makers to look towards this particular iceberg with a Nelsonian eye, but that would be foolish. The current public sector pension promises are simply not affordable in the longer run, and the sooner the issue is addressed by changing tack, the lesser the ultimate pain involved.
The OECD has a pretty dim view as to the future of private sector defined benefit (DB) pension arrangements. It is particularly critical of the adequacy of existing member protection requirements and concludes that “at any rate, the future for traditional DB plans in Ireland is rather bleak given the current funding situation, longevity risk and investment challenges”.
The recent ECJ ruling on a case brought by former Waterford Glass employees, which found that the Irish government did not comply with its duties to protect employees of insolvent employers who have an insolvent pension plan, is another looming iceberg. The likely ramifications include the imminent imposition of a legislative debt on the employer obligation where they sponsor a DB pension plan and a new on-going levy on pension funds to pay for future insolvencies. These changes will further accelerate the run-down of the remaining private sector DB pension schemes.
Any mandatory pension saving structure that will be introduced in future years will almost certainly be on a defined contribution (DC) basis. In the meantime, it is clear at least for those in the private sector that much greater individual reliance on individual savings (along with employer support where available) through DC pension arrangements will be the new norm.
Members of DC arrangements need to look out for themselves and pay particular attention to governance, contribution levels, investment choices and costs. One wonders if the lookout on the bridge of the Titanic that is Irish pension policy will take the necessary actions to avoid the system hitting the various icebergs that the OECD and others have clearly plotted...