Speech by Joan Burton T.D. at Irish Association Of Pension Funds (IAPF) Annual Benefits Conference


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Irish Association of Pension Funds (IAPF)

Annual Benefits Conference

 

Wednesday 26 October 2011

Convention Centre, Dublin

 

SPEECH

BY

JOAN BURTON T.D.

 MINISTER FOR SOCIAL PROTECTION

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Introductory Remarks

  • Good morning everyone.
  • Thank you Maurice, for inviting me here to your conference this morning
  • Your focus today is on “where we are and how we are likely to move forward”. 
  • We are currently in a situation where as we all know, pension schemes have had a difficult few years.  We have commitments with the EU and the IMF in relation to significant savings in the area of pension tax relief and reforms are forthcoming and planned in a number of areas.    So, I’d like to focus my comments on where we are moving to.

Moving Forward - overview

  • The Government supports retirement and pensions planning and we will continue to do that.
  • We want more people to save for their retirement and we want people to save more.   In fact, the Government is committed to progressively achieving universal coverage, with a particular focus on lower-paid workers.   That is why we are currently working on the development of an auto-enrolment scheme.
  • We must also aim to protect the individual pension rights of members who have paid into schemes with an expectation that a reasonable return will be made to support them in their older years.
  • Moving forward, we’ll have a society where people are living longer.  This is something to be welcomed but to support this we need a sustainable, fair and adequate pension system and this is something we are aiming for.  In order to achieve this, a number of reforms are necessary. 

Defined Benefit Pension Provision

  • I am well aware that pension provision in the private sector has been under enormous pressure in recent years.  Over the past couple of years, a number of measures were introduced to try to ease the pressure on defined benefit pensions in particular.
  • However, given the extreme difficulties that most defined benefit schemes have faced in recent years, and indeed that many are still facing, we must recognise that changes to the current system are required if this type of provision is to survive.
  • Following detailed consideration of the issues involved and the consultation process in which some of you participated, the Government has recently decided to introduce a number changes with respect to defined benefit provision.  There are four key changes:
    • The Funding Standard will be reformed and strengthened by requiring DB pension schemes to hold a risk reserve as a protection against future volatility in the financial markets.  This will be done over a long lead in time of approximately 11 years;
    • The way in which pension scheme accrued benefits are revalued will be changed to ensure equity between the deferred and the active members;
    • The priority order in which funds are disbursed when a scheme winds up in deficit will be changed.  Specifically, a threshold will be introduced which will change the 100% priority given to pensioners to allow for a better return to existing and former employees who have not yet retired; and
    • The Pensions Board will be given powers to wind up schemes in certain limited circumstances.
  • Legislation to provide for these changes will be introduced in the coming months.
  • Initially however, the existing funding standard will be restored and this will give underfunded schemes 3 years in which to restore their funding levels to the current standard.   The Pensions Board will shortly announce a deadline for pension schemes to submit their funding proposals. 
  • I just want to mention the sovereign annuity initiative briefly.    I understand that the Pensions Board guidelines on this have just been published and this will enable potential providers to begin developing products. 

Private pensions generally

  • The complexity of the pensions system overall is another area we will be examining.   In particular, we want to make the whole system more transparent so that people can make informed decisions about their retirement planning.   
  • Of course charges are an important issue too.  It is important that people and schemes know what charges are being paid and what they are getting for those charges.  As you all know, my Department has recently initiated a study of pension charges.  This study will provide comprehensive information on the categories of charges applying across and within scheme types.
  • The increases in State pension age will have an impact on private sector schemes too and in terms of encouraging people to work longer and these issues are also being considered at present. 

Pension Tax Relief

  • I know many of you are concerned about the proposed changes to the levels of tax relief available on pension contributions.    Obviously, I can’t pre-empt what might be in the Budget and the issue of tax relief is a matter for the Minister for Finance in the first instance but I do want to set out the position we are in.
  • The agreement reached with the EU and IMF includes commitments to deliver full year savings of €940 million in tax relief in the broad pension tax relief area in the period to 2014.
  • As you all know, Budget 2011 contained a number of measures in this area such as the removal of employee PRSI relief and the application of the universal social charge to employee pension contributions and the public service pension related deduction.   
  • These various measures combined are estimated to deliver savings of approximately €290 million in a full year.
  • Among the revenue raising measures included in the EU/IMF agreement to deliver €1.5 billion in 2012 is a commitment to further reductions in pension tax reliefs.  
  • Specifically, this would involve the first move from marginal to standard rate tax relief (from 41% to 34%) on employee/individual contributions to pension savings and on the public service pension-related deduction.
  • These changes are estimated to deliver savings of €155 million in 2012 and €225 million in a full year.  Similar savings would arise in 2013 and 2014 from the gradual further reduction in relief from 34% to the standard 20% rate.
  • However, because of the concerns people have, the Minister for Finance made a commitment to examine the potential for alternative savings to standard rating tax reliefs in this area, in the context of the outcome Comprehensive Review of Expenditure.  This examination of alternatives is ongoing but I must stress that any alternatives must be fiscally neutral.
  • In the Programme for Government, we have committed to capping taxpayers’ subsidies for all future pension schemes for politicians, and indeed for everybody, that deliver income in retirement of more than €60,000.   This reform will have an impact on high earners whether in the public or the private sector.

 

The Public Sector Pensions

  • The reform of public sector pensions is a key element of the wider public sector reform agenda.
  • Minister Howlin recently published legislation which will see the introduction of a new single pension scheme for new entrants to the public sector. 
  • The introduction of this single scheme will provide a more straightforward and efficient structure for the management of public service pensions.  As a result, in time, all civil and public servants will have the same basic pension scheme, with whatever appropriate accommodation might be required in particular areas, such as the Defence Forces.
  • In the new scheme, pensions will be based on “career average” earnings rather than final salary.   A specific pension accrual rate will be applied to pensionable pay so that each year public servants will earn or accrue a certain amount of pension which will be payable on retirement.
  • This will be linked to the CPI as will increases in pensions for those who have retired.   
  • The use of a career average rather than a final salary to calculate pensions means a fairer, more equitable system overall and will be progressive in character compared with current arrangements. 
  • There will also be a maximum retirement age of 70 and a new minimum public service pension age of 66 years which then will be linked to increases in the state pension age.
  • The introduction of this new scheme, will provide a major opportunity for improvements in the management of public sector pensions, particularly in the development of shared services, which the Government is determined to pursue.
  • With regard to the pensions paid to politicians we want to ensure that no political pensions will be paid to sitting TDs.   So, our Programme for Government includes a commitment to restrict the payment of pensions to politicians so that in future a member can only qualify for a pension at State pension age upon leaving public life.  
  • As I mentioned a few moments ago the cap on tax subsidies which we intend to introduce will also apply to high earners in the public sector.

Concluding Remarks

  • Thank you again for inviting me here this morning.
  • I’m sure it will be an interesting and very busy morning.
  • As always I look forward to hearing the outcomes of your deliberations.

ENDS

Last modified:26/10/2011