Business Opinion: Few people expected Séamus Brennan to retire gracefully to semi-obscurity in the Department of Social Welfare, writes John McManus.

But at the same time not many people would have predicted that the Minister would stir up controversy with something as unpromising as the Council Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003. On the Activities and Supervision of Institutions for Occupational Retirement Provision. But by moving swiftly to implement this piece of European legislation - known to its hard core fans as the IORPs directive - Mr Brennan has cut across what is fast becoming the tax break of choice of Ireland's super wealthy.

The EU takes a pretty dim view of pension funds borrowing money and the IORPs directive bans such activity. The problem is that one of the last gifts to Ireland's wealthy from former finance Minster Charlie McCreevy before heading to Brussels was lifting the restrictions of pension fund borrowing that existed in Irish law in the 2004 Finance Act.

This resulted in a explosion in highly leveraged property investment by pension schemes, many of them one man or self-administered schemes. Nothing wrong with that when you consider that in the current climate a leveraged property investment is going to provide a far bigger nest egg on retirement that sticking your cash into unit funds.

There are apparently several problems with this.

The first is that leveraged single member schemes are open to abuse by people who are not so much looking to fund a pension as structure a property investment in a tax efficient manner.

The other problems are of a more prudential nature, including whether it is appropriate for pension schemes, which are meant to be risk averse, to take on a large amount of debt and whether they should be encouraged to invest heavily in one particular asset class, namely property.

It was these prudential concerns that led the Pensions Board to advise Mr Brennan to implement the IORPs directive in full.

In theory, he could have availed of a clause in the directive that allows member states to exempt schemes of less than 100 members from various aspect of the directive. The purpose of this clause was to prevent small schemes being saddled with onerous reporting requirements that were really only necessary for larger schemes.

The ink was barely dry on the 2004 Social Welfare and Pension Bill, published earlier this month, before the screams started emanating from the cottage industry of advisers and banks that have cashed in on the opportunities created by leveraged pension schemes.

Out of nowhere appeared a self-appointed "working party of the pensions industry" made up of stockbrokers, investment advisers and pension fund managers. Along with various other vested interests they made a beeline for Mr Brennan's office.

As a result, Mr Brennan will propose an amendment to the bill in the Oireachtas this week that will reserve the right to avail of the exemption for small schemes in this area. He is setting up a working group comprising the usual suspects (Pension Board, IFSRA, the Revenue Commissioners etc) to consider the issues and then he will decide whether to avail of the exemption.

From Mr Brennan's perspective, it is essentially a prudential issue. His responsibility to ensure pension scheme members are well protected. The argument can be made, however, that he does not really have any prudential role in one member schemes as he would in effect be protecting the individual from themselves.

If an individual wants to risk his entire pension pot on a block of flats in Sheffield, that is their prerogative, the argument goes.

Taking this argument a step further you can make the case that his responsibility is proportional to the number of people in the scheme.

It is an argument that finds favour with the minister and he is understood to be disposed towards some sort of graduated restriction on pension schemes rights to borrow that takes into account the number of members in the scheme.

While this may be the solution from Mr Brennan's perspective it does not really address the issue of leveraged pension schemes being used for purposes other than saving for pensions.

That issue falls more properly into the bailiwick of the Minster for Finance, Brian Cowen, argue Mr Brennan's people (with a silent sigh of relief, one imagines). They also point out that dealing with it opens a much bigger can of worms, which is the equity of the tax breaks given to members of private pension schemes.

Of the €2.5 billion in tax relief granted every year on contributions to private pension schemes, around half goes to the top 20 per cent of earners. And it is a fair bet that quite a substantial portion of this is used for purposes other than providing for a comfortable retirement.

Mr Cowen has nailed his colours to the mast in terms of cutting down on the abuse of the various tax breaks granted by the State, but this is one area he might think twice about before getting involved in it.

jmcmanus-irish-times.ie