The report fails to make a decision on the issue of mandatory pensions, writes Dominic Coyle
The report of the National Pension Review proposes the most dramatic shake-up of the Irish pensions system in a generation.
However, it fails to come down on either side of the argument over mandatory pensions.
The document currently before the Cabinet recommends consideration be given to increasing the age at which State pensions are paid.
It also proposes the adoption of a more easily appreciated SSIA approach to tax relief on the Personal Retirement Savings Accounts introduced in 2003. Personal contributions to these portable pensions should be matched euro for euro by contributions from the Government rather than offset by tax relief which operates behind the scenes, the report suggests.
The report makes a number of recommendations targeted at lower-paid workers - to be funded in part by a cap on incomes for pension contribution and benefit purposes. Chief among these is the proposed introduction of a flat rate of relief - 42 per cent - on all pension contributions within statutory limits. Currently workers paying tax at the standard rate can receive relief at only 20 per cent, a factor that is seen as dissuading lower-paid people from making supplementary pension provision.
Removing the 23 per cent exit tax on SSIA funds for people outside the income tax net and those on the standard rate is one proposal put forward in relation to the State-sponsored scheme to encourage pension saving by the less well off.
The report also suggests a one-off increase in the upper limit on pension contributions eligible for tax relief for those people who have not fully used their pension contribution allowances "in the recent past".
However, there will be concern among both workers and their employers that the Pensions Board has failed to arrive at any conclusion on the issue of mandatory pensions.
The issue of forced saving for retirement was first mooted in the National Pensions Policy Initiative (NPPI) in 1998. The Pensions (Amendment) Act 2002 for the first time introduced an element of compulsion in its requirement that all employers offer a workplace pension savings option by registering with one of the 10 providers of PRSAs.
However, the NPPI suggested any further element of compulsion be "held in reserve".
Minister for Social and Family Affairs Séamus Brennan has dropped broad hints during the National Pensions Review that the Government would consider mandatory pensions and an element of compulsion featured in the majority of the five pension models examined by the Pensions Board in the review.
"Some members of the board believe that a mandatory approach is the only certain way of achieving the NPPI targets, and that such an approach should be considered urgently," the reports states. "However, others believe the cost of this certainty is too great in terms of potential economic and other impacts."
One of the key issues considered by the board in relation to mandatory pensions was the issue of State liability that might arise.
"If those working are to be obliged to save part of their earnings for retirement, the return that they will receive must be considered carefully," the report's authors write. "It has been suggested that if a mandatory system obliges investment with a financial institution, the State should consider providing an investment guarantee."
The report says that, if introduced, the Government would also have to consider whether to phase in a mandatory element or to limit it to new entrants to the workforce, an approach that might disincentive employment.
The review, which attracted 36 public submissions, which was submitted to the Minister earlier this month and discussed at Cabinet earlier this week, was brought forward by a year following the perceived failure of the PRSA initiative to make any inroads on the NPPI target of ensuring that 70 per cent of the workforce over the age of 30 have sufficient pension provision to ensure retirement income amounting to 50 per cent of the pre-retirement earnings.
The review was to have taken place three years after the introduction of the measures proposed in the 1998 NPPI. These measures, with the PRSA scheme at their core, were introduced in 2003 under the Pensions (Amendment) Act 2002.
However, sales of PRSAs have disappointed. Fewer than 60,000 individual contracts have been activated in the 19 months to the end of September.
With the exception of the Department of Finance representative, the Pensions Board says the NPPI targets remain valid, with some members pressing for a higher minimum pension target than the 34 per cent set down in 1998.
But the review states that most Pensions Board members believe NPPI targets will not be met without some further change to the present pension system.
"Although some members of the board do not think that the proposed enhancements will achieve the National Pensions Policy Initiative targets, they nonetheless support the proposed enhancements as a means of improving the current situation," the report states.
The Department of Finance was again left isolated on whether consideration should be given to State-guaranteed annuities in certain cases - notably for members of defined benefit schemes wound up involuntarily and for holders of small pension funds. Board members apart from Finance also advised examination of the prospect of a State guarantee of investment returns on standard PRSAs.
The report confirms that pensions coverage and adequacy remain lowest among the lower-paid and particularly among women. The PRSA initiative, designed specifically to appeal to women and the lower-paid, appears to have made no appreciable difference in this key area, according to the report, although it argues that the decision to bring forward the report by a year meant there was insufficient time properly to assess the impact of the changes in 2003.
It proposes a further review of progress in improving pension coverage in 2008.