It has been too easy to set up a pension scheme in Ireland. The tax treatment of pension contributions and benefits are “complicated and inconsistent, with a requirement for expensive professional advice as a result”.
These are not the opinions of an arch critic of the system. Rather, they are the considered words of Brendan Kennedy, the pensions regulator. They are contained in the latest annual report of the Pensions Authority which was published in July.
Mr Kennedy goes on to criticise the “piecemeal nature” of past changes and the increased complexity of the system. He highlights various shortcomings: “There are plenty of examples of high cost, inappropriate investments and poor member communications.”
Clearly, the status quo in Irish pensions is no longer sustainable. One half of the total number of pension schemes in Europe, 160,000, are in Ireland and the result is that most schemes are lacking in transparent and saddled with excessive running costs.
At the same time, just 35% of people working in the private sector in this country are contributing towards a pension. When public employees are included, the proportion rises to 47%
Big changes are on the way, however. A road map for pension reform covering the period 2018 to 2023 has been agreed by the Government. According to the inter-departmental pensions reform and taxation group, this “sets out a comprehensive plan to reform our pension system”.
On the regulatory side, much of the impetus for change is coming from Brussels.
An EU Directive, IORP II (referring to the European Insurance & Occupational Pensions Authority ), has been introduced to promote improvements in the supervision of occupational retirement arrangements, with new fitness and probity requirements on pensions scheme trustees.
The directive is due to be transposed into law in Ireland, though this has been delayed while the Pensions Authority launches what it describes as a “programme of intense engagement”.
Trustees will have to come to the job with a clean record (no judgments against them ) and without the potential for conflicts of interest. Under IORP, trustees will be expected to adopt a structured approach to risk management. There will also be a new set of professional standards.
The Pensions Authority will get new powers in the area of supervision. There will be a drive to rationalise the number of schemes.
There is much work to be done. While the regulator has welcomed the improved financial situation of many defined benefit schemes, concerns about the “fragility” of the sector persist.
As David Begg, the chairman of the authority, observed:
He warns that the implementation of the directive “will result in considerable cultural, governance and administrative challenges for trustees”.
It is accepted that while the State pension will always be at the heart of the retirement package, supplementary pensions will be expected to play an increasing role. The sustainability of the State pension at current levels is itself in doubt given the rises in life expectancy.
One solution is to permit, indeed encourage people to work past the mandatory retirement age. There is some interesting case law on this, with courts and tribunals more inclined than in the past to decide in favour of employees seeking to prolong their careers.
The Government has indicated that any changes in the State pension will be linked to demographic changes. In 2022, an assessment of trends in life expectancy is due to be carried out. New findings could trigger changes which would be introduced with 13 years’ notice being given.
Assessments are due to take place every five years. The key domestic measure aimed at boosting employee sign-up to pension schemes is the auto enrolment plan. A basic set of ‘straw men’ proposals were published last year and submissions were invited.
More than 100 have been received. There was some criticism of the initial proposal to exclude those aged under 23 or over 60, and those earning less than €20,000 a year from the automatic enrolment arrangements.
The Society of Actuaries called for more diversified arrangements for investing the proceeds of funds received under the auto enrolment schemes. In February, the Minister for Employment Affairs and Social Protection, Regina Doherty indicated her intention to submit a full plan to the cabinet by the end of the summer recess.
During a Dáil debate in April, Sinn Féin spokesman John Brady suggested that the National Treasury Management Agency could play a role in the investment of the monies received.
While the crisis surrounding Brexit is absorbing the lion’s share of attention in the Government, it seems clear that important ground- work leading to long- awaited reforms of the pension system is in the pipeline. It remains to be seen whether those reforms will be in train by the year end.
What is clear is that the powers that be will have to balance a series of conflicting interests.
In its submission to the inter departmental group, the Law Society warned that a fair balance would have to be struck between the interests of employees and the self employed. The submission calls for greater flexibility in pension arrangements. It is hard to argue with this.
Many lawyers operate in small private practices rather than in large organisations and in this, they speak for many people who run small firms or are self-employed. They require clarity regarding charges yet transparency in this area is often not provided by the pensions industry.
The Law Society points to anomalies which favour PAYE workers over self- employed self-funders of pensions. For example, the self employed, except when suffering ill health, cannot take benefits before age 60. They call for harmonisation in the treatment of all contributions.
Regulators need to attend to the requirements not just of those employees in established schemes.