Two years of hard work has gone into the production of the National Pensions Policy Initiative (NPPI) report. Another two years will probably pass before many of its recommendations are implemented by Government, industry and the social partners.
But this is one report that is not likely to be put on a high shelf and forgotten about until the next round of demands for pension reform.
Of the two main recommendations of the report that social welfare pensions be increased from the current 28 per cent of average industrial earnings to 34 per cent, and that flexible, low-cost Personal Retirement Savings Accounts (PRSAs) be made available to everyone, regardless of employment status it is expected that the setting up of PRSAs is more likely than higher funding for old-age pensions.
The funding of the enhanced old-age pension, which would result in weekly payments of £99 if it were in place today and more by 2003, did not have unanimous support on the board, with both the employer representative and the representative of the Department of Finance making clear their objections. The "implications of the proposed target rate would have serious consequences for the public finances. . . and the wider economic and employment needs of the country in the wider term," said the Department representative who "could not support this rate".
Industry practitioners say that while they are concerned with the lack of commitment from the Department, they still believe the wide range of recommendations that deal with the Second Pillar pensions for the private, voluntary sector can be advanced, and quickly.
"I think we might see some of the necessary legislative changes in next December's budget," says John Crowe of KPMG's personal financial services division. "The Government appears to be committed to the fact that while we have a young society now, that this isn't always going to be the case and that here is an opportunity to plan well into the future. I think we will see the bulk of it [the report] come into play relatively soon."
There is certainly widespread support for the introduction of PRSAs which will make personal pensions accessible to the lower paid, to part-time workers, people on career breaks, workers with few years service, as well as to workers whose employer does not provide any occupational pension. It is foreseen that PRSAs will also replace the current system of Additional Voluntary Contributions (AVCs).
The Personal Retirement Savings Account, which is loosely modelled on a US design, is positively revolutionary by Irish standards because it can be owned by the individual, regardless of their employment status and it can be carried from job to job.
So flexible is this proposal that an employer can set up a group PRSA scheme for his workers, and if he doesn't make contributions to one himself, (there is no compulsion to do so, as is the case with existing defined contributions schemes), he must nevertheless allow for payroll deductions if his workers set up their own accounts.
Under the proposal the five-year service requirement many employers impose before your pension benefits can be preserved. The board wants this changed to two years.
If an employed worker decides to become self-employed, he can continue to contribute to his PRSA. The woman who takes a few years off work to stay at home with her baby can also maintain her existing PRSA (or buy one) and then bring it back with her when she returns to work. Because there is provision to use unclaimed tax relief in any given year for up to six years in the future, an unemployed person making contributions while he is out of work, will be able to claim that unused tax relief for enhanced contributions he makes when he starts earning an income again.
It is envisaged that the PRSA will be opened with a bank, building society, post office, life assurance company, credit union, supermarket, affinity group, etc. It will attract the same tax relief rates as currently enjoyed, but funding limits will change for the better.
A person aged up to 30 will qualify for tax relief on contributions up to a maximum of 15 per cent of their net relevant earnings, which could then increase by 0.5 per cent "steps" every year to 30 per cent by age 60 or over. Unused tax relief can be carried forward six years or back one year. It is envisaged that contributions will not be rigidly enforced as they currently are and that self-employed account holders, for example, may be able to make "deposit" style contributions as their seasonal or occasional income allows, rather than a set amount.
PRSA-owners who are unhappy with their fund provider will be able to transfer to a new provider and "Kitemarking" will apply to the pension accounts: that is, the Pension Board, which will regulate the sale and operation of these pensions, will set standards for PRSAs, i.e., that they be low cost, simple in construction, easy to understand, have at least four different investment fund options and that all costs be transparent and disclosed.
If the new system is introduced, anyone with a PRSA will be able to take their benefits between age 55 and 70 whether they are still working or not. Gone is the current requirement that you buy an annuity with your pension fund immediately upon retirement. The report recommends that the retiree be allowed to choose the time when it suits them to convert their fund or to leave it to continue to gain investment growth.
Industry practitioners admit that setting a low-cost standard and simplifying tax and other regulations will result in less need for technical advice (about tax relief, levels of contributions, etc) and will have serious implications for the existing life and pension industry.
It won't eliminate the need for good, independent advice, they say, whether sought by an employer wanting to set up a PRSA scheme for his employers, or by an individual who wants to get the best-performing investment fund manager. But it will shift the advice away from being mainly commission driven to either a spread commission basis or to fees.
The Pensions Initiative report has been widely welcomed by industry practitioners. Mr Paul O'Faherty, of the Irish Association of Pension Funds, says its most significant aspect is the personal ownership of the pension, regardless of employment status.
Bank assurance representatives, like actuaries Tom Collins of Lifetime and Brian Woods of Ark Life, believe that if implemented, the PRSA provisions will "widen choice", offer consumers "more flexibility" and certainly offer their own organisations, with their existing low-cost operations and wide distribution base, a chance to get the jump on other competitors when PRSAs are brought in. Needless to say, this is a view shared by the credit unions, with their offices in nearly every village in Ireland and by supermarkets like Tesco and Marks and Spencer which already have similar pension products in place in Britain.
The Irish Insurance Federation has welcomed the main thrusts of the report saying that it is in keeping with the submission it made during the earlier consultative process. Widening the scope of pension coverage (only about half the population has occupational or private pension cover in addition to State benefits) will certainly result in additional business for its life and pensions members.
But widening the distribution of pensions to the likes of credit unions, supermarkets and affinity groups could also pose a short-term threat to life companies and more specifically to their armies of salespersons and brokers, who up to now have been the main sellers of occupational and private pensions.
The Consumers' Association of Ireland (CAI) noted in its response that the Pensions Board, while calling for disclosure of charges did not specifically mention the disclosure of specific charges like commissions to intermediaries, for which the CAI has campaigned.
It is expected that the Sale of Goods and Supply of Services Act will include such a requirement and that this will apply to PRSAs, but until then, the Consumers' Association recommends that anyone contemplating buying an existing personal pension or AVC should make sure that it is a low-cost one, sold on a nil-commission basis in order that it have some transferable value when PRSAs are eventually introduced.
