Mixed omens as pensions sector in a crisis
EU Commissioner, Mairead McGuiness, has responsibility for Capital Markets Union. Many people in business would like to see pension funds being freed up to invest in more SMEs, infrastructure and in loan finance.
In October 2010, I was part of a team of pensions people who were asked to address the Finance Committee of the Oireachtas as to how pensions could assist the recovery of the economy from the Great Recession. The central thesis of our presentation was that, with a bit of legislative change, pension funds could form a central part of the recovery.
The basis of this approach was that other economiesâ the UK, Australia, the US â were much more successful at channeling local pension funds into local investments.
At the time the total value of funded pensions was north of âŹ70 Billion and a redirection of 10% of those assets could have given the economy a âŹ7 Billion boost whilst at the same time helping pension savers.
Ultimately this would also boost the coffers of the State as more pension savers would have more income in retirement offsetting State expenditure and/or increasing tax yield.
The Fine Gael government that took power in 2011 took none of this on Board. Michael Noonan, the soon to be Minister for Finance, suggested the âdelegates have come to the wrong shopâ. Subsequently his government chose austerity over investment, bank bailouts over boosting business and international vulture funds over Irish pension funds.
In introducing a levy on pension funds Minister Noonan ignored his own advice (on a previous 1988 levy), that it âwas not only unfair but downright dangerous, not only to the pension fund but to the interests of the pension holders, to tax a pension in the manner suggestedâ.
The government of which he was Minister for Finance failed to draw on lessons from the financial crisis of the 1980s. Back then Fianna Fail led governments first experimented with a pension levy (in 1988) before recognising the need to boost the economy through the famous Jacques Delors billions in Structural Funds in 1993, which ultimately contributed to the creation of the Celtic Tiger.
Why the need for this history lesson?
In the words of George Santayana âThose who cannot remember the past are condemned to repeat itâ.
Once already in this century we have ignored the lessons of the past. We now have another financial crisis, another coalition government, another decision on how to treat pensions.
The omens are mixed.
Mairead McGuiness, Irelandâs new EU Commissioner, has responsibility for Capital Markets Union. This has as its objective the removal of restrictions on investment across the EU. In particular, it envisages pension funds being freed up to invest in more SMEs, infrastructure and in loan finance.
However, the previous government, led by Leo Varadkar with Regina Doherty as Minister for Social Protection, decided to go in the opposite direction and place obstacles in the way of such investments. Why?
This decision clearly conflicts with EU policy. It also overrides a long-standing Irish policy that had been supported by all parties in government over the last couple of decades. As normal practices of public consultation and pre-legislative scrutiny were abandoned in this case, the rationale for this radical change remains a mystery.
With a new government and Michael Martin as Taoiseach, it is reasonable to hope that this decision can be overturned politically (it is already being subjected to legal challenge).
However, the current Ministers of Finance and Social Protection, Paschal Donohue and Heather Humphreys, were part of the Cabinet that made the decision to restrict pension investment. Will they continue to defend their previous decision?
Whilst a Pension Commission has been proposed it is ominous that this issue of investment restrictions is not one that will get an airing.
The ability of pension funds, and in particular, smaller self-directed schemes, to invest in wind energy, in solar, and in SMEs generally has been fundamental to their development. It is still not too late for this government to make the right decision.
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