Call to end pensions ‘apartheid’

A call to end the “apartheid” which gives defined benefits pension holders a potential €64,000 a year advantage over those in defined contribution schemes, has been made by IFG Corporate Pensions.

Director of corporate pensions with IFG Corporate Pensions Fionán O’Sullivan, said the system favours those in defined benefits (DB) pension arrangement — public servants, bankers and employees of large long-established firms — over those in defined contribution (DC) schemes — typically self-employed and workers in newer firms including multi-nationals.

“The current cap of €2.3m allows a DB member to have a pension of €115,000pa as the rules allow for a factor of 20:1. In the ‘real world’ annuity rates of between 30:1 to 45:1 apply to DC members and therefore their maximum pension can only be between €51,000-76,600pa.

Mr O’Sullivan said pension fund cap of €2.3m may not seem too penal to most pension savers, but its application does highlight the inequity of the 20:1 valuation basis adopted for defined benefit schemes which ensures that these employees benefit from preferential tax treatment when compared with the treatment of their defined contribution counterparts.

“If we look at the example of an employee in a defined benefit scheme earning €200,000 at retirement, on the current structure they enjoy a retirement pension of €100,000pa (50% of salary) plus a lump sum of €300,000 (150% of salary). The assumed notional value is 20 x €100,000 + €300,000 = €2.3m which comes under the cap resulting in no double taxation at retirement.

“Compare that to an individual in a defined contribution (private sector) pension trying to fund a comparable benefit and planning to retire at age 60. The cost of buying a joint-life annuity of €100,000pa with indexation in payment is circa €4,000,000. If you add a similar cash lump sum of €300,000, the total fund required comes to €4,300,000. As it’s over the cap, they will be subject to an additional tax liability at 41% of €2,000,000 = €820,000,” Mr O’Sullivan said.

The IFG executive said that if the private sector worker tried to replicate a senior civil servant retirement benefit package, requiring a fund of circa €4m, he/she would have to surrender all of their lump sum and probably sell their house to meet the tax penalty. That does seem more than a little inequitable.”

IFG Corporate Pensions said there were plans to correct this anomaly in 2011 but these were “mysteriously deleted” by a technical amendment to the Finance Act 2011.

“Perhaps one solution here is for the regulations to specify a maximum pension amount which is the same for both DB and DC schemes, rather than a capital value. This would allow the decision makers to end the ‘pension apartheid’ and become the Desmond Tutu of pensions,” he said.