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Submission 214

Green Paper Submission

May 08

The current system of private pension provision has failed under every relevant criterion. Millions of euros of public and private money have been spent on promoting and advertising private pensions. Billions of tax-revenue has been forgone in subsidizing them, yet take-up is poor. For those who have invested, the outcome in terms of providing a decent retirement income has more often than not been disappointing.

If private pensions were perceived as good value, more people would buy them. However, it is plain to see that in spite of all the promotion and advertising, most people believe private pensions are bad value. Over the last decade the average return on Irish pension funds has failed to beat even inflation. The private pensions industry has delivered rotten value both to individual policy-holders and to the tax-payer.

The industry will point to exceptional factors, such as two market downturns during the last ten years as the reason for its underperformance. However, there is no guarantee (or expectation) that the next ten years will be any better. In any case, it would be expected that the funds would earn at least enough to pay for the generous charges and fees the fund-managers award themselves for managing our pension-funds (irrespective of whether they increase or lose our money). They don’t. The only thing which makes these fees and charges sustainable is the fact that they are disguised by the tax-subsidy on the income invested in these funds. It would be hard to avoid the conclusion that all this forgone tax-money has done little to further the social-end (decent pension-provision) for which it was intended, and has gone largely to sustain and subsidize these fees and charges. It has been a bad use of public resources.

And what are we paying these fees for anyway? The sum total of investments IS the market. Factoring out the overall rise and fall of the market (which the fund-managers are at pains to tell us are beyond their control anyway) investment in the market is a ‘zero-sum-game’. For every fund that beats the market, another will be a commensurate loser. Given that it is impossible to predict net winners or losers over any given time-period, what are we paying for?

We shouldn’t really be surprised. There is a precedent – the endowment-mortgage scandal. Private pensions are exactly the same instruments as endowment-mortgages in every salient aspect. The only difference is that one is supposed to discharge the loan on your home; the other to buy an annuity. It is nowadays accepted that pushing an endowment mortgage on the average borrower would constitute miss-selling. Why then should it be considered prudent to fund our retirements with products which are considered too dodgy to finance our homes?

The private pensions industry has had its chance. It hasn’t produced the goods in spite of billions of euros in tax-subsidies. Neither will it. All its proposals are merely permutations of the schemes which have served the financial services industry so well and the investing public so badly.

Finally, there is no avoiding the fact that because of the other pressures on family-income, investing in pension provision will be a low priority for many people – particularly the young. If universal pension provision is the desired end, some form of compulsion will be necessary. However, two decades of banking-scandals which has led to a low level of public-trust in the financial-services sector, and the notorious bad-value of private pension products, make it unacceptable to force people into the type of schemes operated by the financial services industry.
 

My Proposal:

My proposal is a universal, compulsory, and portable pension-scheme managed by an agency akin to the NTMA. This agency (Let’s call it the National Pensions Management Agency or ‘NPMA’) would manage the national pension fund.

The scheme would apply to all employees, and the self-employed. Within a comprehensive system, the rationale for separate pension systems for public and private employees would no longer exist, and the new system would apply to all persons entering public employment once the scheme becomes operational.

  1. The basic state pension would be the entitlement of every retired person upon reaching the designated retirement-age.
  2. All pension income, including the basic state pension would be taxable as income. However, the tax-threshold for retired persons would be set significantly above the level of the basic state pension.
  3. All persons would be assigned a “Personal Pension Account” (PPA) in the same manner as they are assigned a PPS No. These accounts would remain the private personal property of the account-holder. These pensions would be separate and additional to the basic state pension.
  4. A small statutorily fixed percentage of all income above a set threshold would be payable into the PPA in the same manner as income-tax is payable to the Revenue.
  5. In addition, income-earners would be allowed to invest up to a combined total of 15% of their gross income in their PPA. This additional contribution or investment could be provided by the earner and/or employer. Employer contributions could be a matter for individual or collective negotiation and agreement between employee and employer. Employer and employee contributions in respect of permanent and tenured public employees could be fixed by law.
  6. All money invested, whether by employee or employer, would be exempt from tax on the part of the contributor.
  7. Self-employed persons could still opt to invest income (other than the statutorily fixed percentage) in private pension-schemes. The maximum 15% of income qualifying for tax-relief would apply.
  8. The PPAs would be managed in gross by the NPMA. The NPMA would be responsible for devising a suitable investment-strategy subject to criteria set by law. (A very widely-spread and conservative portfolio would probably be the result, with a portion of the fund kept in government-bonds and cash in proportion to the number of PPA-holders nearing retirement). The proportion of any individual account notionally assigned to equities, bonds, and cash would vary according to the age of the PPA holder. As a result, gains in the funds transferred into the PPAs as income would be according to a published formula relating to the age of the PPA-holder.
  9. The administration of the scheme would be financed by a levy on investment income earned on each account (As distinct from a levy on contributions paid into the accounts). This means that in times of poor or negative investment returns subvention might have to come from the exchequer. Alternatively, the levy could be increased in times of better market-conditions.
  10. Each PPA-holder would be able to inspect (on-line, or at government offices)  his or her PPA. Each account-holder would be furnished with a full PPA statement on an annual basis, or on demand. However, until retirement the PPA would remain “virtual” insofar as it could not be drawn down.
  11. The capital sum invested in PPAs would be guaranteed by the government. This amount would be shown on the account statement, as would the current value, and the accumulated administration charges. Accounts would be automatically updated at the end of each month.
  12. PPA-holders would be able to take their pension at any time after the age of 55. The NPMA would produce and publish on a monthly basis a table or index showing the actuarially calculated reduction in benefits applying to persons retiring before the age of 65 (and the increase for those delaying retirement after 65). The PPA holder would not be allowed take his or her pension below the age of 65 unless the PPA was capable of funding a pension equivalent to the basic state pension.
  13. The NPMA would produce and publish on a monthly basis a table showing the retirement lump-sum and retirement salary purchasable from the NPMA corresponding to the balance held in the PPA on retirement. (The lump-sum component would be the elastic element, contracting in times of lower investment returns)
  14. Upon the death of the PPA-holder before retirement, the PPA would be assigned to the designated dependents of the deceased PPA holder in the normal manner.
  15. An independent board of overseers would be established to deal with the NPMA on behalf of the PPA-holders and to deal with queries and complaints.

 

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