Social Welfare and Pensions (No 2) Bill 2013

5th December 2013 - Olivia Mitchell TD

I welcome this legislation. That so many defined benefit schemes are collapsing is a disaster of monumental proportions for many people and another aspect of the fallout from our economic woes. A failure to recognise or address the collapse of pensions schemes would be an even greater disaster for the many workers who, until recently, could assume their retirement income was assured. Approximately 2,500 defined benefit schemes were in place until well into the 1990s. The members of these schemes believed they did not have to give a moment’s thought to their pensions, as they would flow to them seamlessly on retirement. By 2011, a mere 800 defined benefit schemes had survived, and they continue to close, virtually by the week. Many thousands of people continue to depend on these schemes. While estimates vary, I have seen figures suggesting that at least 80% of defined benefit schemes are underfunded.

We have all heard heartbreaking stories of people who discovered on the brink of retirement that their pensions had been decimated while current pensioners in the same scheme continued to enjoy full pensions. This clear intergenerational injustice needed to be addressed. Like Deputy Finian McGrath and others, I have received complaints from people who are retired. Who can blame them for complaining? It is a blow to existing pensioners to learn their income may be reduced. While not every retired person will be affected, some will suffer a reduction in pension. The level of reduction provided for has been made as fair as possible through the introduction of a sliding scale of liability. I accept, however, that it is difficult to be fair when taking money from people who had every right to believe it was theirs. In my view, the possible consequences of doing nothing, in terms of social disruption, would weigh even more heavily on pensioners generally. Nevertheless, I have great sympathy with the complaints that have been made in this regard. The economic recession has shattered expectations, most certainly on the pensions front.

It should have been obvious to all of us that the concept of a defined benefit pension scheme is utterly daft. It is almost impossible to have a guaranteed flow of income in a volatile market. When markets are stable one can reasonably calculate the level of investment necessary to produce a certain income. However, markets have never been predictable or stable over the period of a typical working life and retirement span. The State has discovered this to its cost, having built up defined pension liabilities, the payment of which will continue to impact on every other service it provides for a long time. Last year, for example, public servants – everyone present is a public servant – paid a total of €3.8 billion in income tax, including the universal social charge. In the same year, the State paid out €3.1 billion in public sector pensions. The total contribution of the entire public service to its members’ pensions and the running of the State was a mere €700 million, much of which will be wiped out when the universal social charge is abolished, as we must assume it will be. While I appreciate that changes have been made to public sector pensions, these will probably not become effective for another 40 years. In the meantime, the cost of public sector pensions will continue to weigh heavily on the public purse.

I agree with the Deputies opposite who pointed out that we face, in pension terms, a perfect storm. We have an ageing population and a pensions industry in disarray. Perhaps “shambles”, the term used by Deputies opposite, is a more accurate description of the sector. Nobody is in charge of pensions because responsibility is shared between the Departments of Social Protection and Finance, the Pensions Board, the Central Bank, the Pensions Ombudsman and the Financial Services Ombudsman. I understand a new pensions council is also to be set up. It is a tribute to the Minister that she has tackled head-on the immediate, specific and urgent problem, namely, the requirement to restructure defined benefit pensions that are in deficit and to wind up those that are insolvent.

The pensions problem is much larger than this and it is necessary to have a coherent single-agency-led solution. We must find a way to encourage or compel everybody, but particularly young people, to provide for old age. We must decide whether to introduce a compulsory State system, a private-sector incentivised system or a combination of both. What we do not need are disincentives to saving for a pension, which is, I am sorry to say, the case with the current pensions levy. This measure runs utterly counter to the policy of encouraging savings. A revolution has only been avoided because few people understand the extent to which the levy affects their final pension. The measure is also inequitable in that it hits most egregiously those elderly workers who have accumulated a lifetime of pension contributions and are on the brink of retirement. They are the very people who, because of their age, do not have any prospect of benefiting from a recovery in the value of their investments.

The most damaging aspect of the pensions levy is that it introduces uncertainty to an area where certainty and security matter. The purpose of a pension and the incentive for having one are to be secure and certain in one’s old age. While young people take risks, older people tend not to do so because they cannot afford risk. They will put their money where they believe it to be safe and secure, as was the case with pensions before the equity markets collapsed. The last thing people expected, having taken a hit as a result of the collapse in the market, was for the State to step in and expropriate their savings. Given the extraordinary lengths to which the State went to protect bank savings, one would expect pension savings to be at least as worthy of protection. The lesson young savers will learn from this decision is that they should not put money into a defined contribution pension or any voluntary fund because it may be taken from them subsequently. Even if we were to abolish the levy today, the damage has been done. By setting a precedent that savings are fair game for expropriation, the incentive to save for pensions may have been seriously undermined. It is vital that the pension levy does not become a permanent feature of savings and is abolished as soon as possible.

As I stated, I support the measures set out in the Bill, including that the State should step in to ensure a minimum level of pension where there is a double insolvency, which is an essential provision. However, I do not support the decision to use the levy on defined contribution pensions for this purpose. Many of those whose savings are the target of the levy have pensions of a lesser value than €12,000, the level of defined benefit pensions they are being asked to support. This is nonsensical. The individuals in question have suffered exactly the same market collapse in the value of their funds as defined benefit funds and in many cases their funds are entirely the result of their own saving efforts, which is not the case with defined benefit funds. These pensioners could be forgiven for being outraged at the prospect of their meagre and depleted funds being targeted to support people who are much better off than they are.

I understand the double insolvency funds must be supported, but the money should come from general taxation.

The Minister for Finance, Deputy Michael Noonan, did suggest when the levy was introduced that it might be absorbed by the companies managing funds, and a report was commissioned to assess their ability to absorb it. Nothing came from that aspect of the matter, but a good report was compiled. I am really pleased that the Government has accepted all of the recommendations made in the report and intends to follow through on it. The thrust of the report was the need for transparency around charges, with which I completely agree. There is a real need for consumers to be aware of what they are buying when they invest in a pension scheme and how much they are paying to those who will make the investment for them. The report provides a noteworthy example of the impact on a smallish fund of €200,000 which, in theory, should give a pension of €10,000 a year. According to the report, the average charge on pensions is approximately 2.8% which over the savings period reduces the pension payable by a staggering 31%. If consumers were acting rationally and fully informed, they would not consider this to be good value. One might instead consider a speculative purchase to cater for old age, such as buying a painting or backing a horse, which might at least give some entertainment and enjoyment, or one might decide, if one was careful, to put one’s money under the mattress, but it is difficult to see any sense in spending that kind of money on a pension scheme and have somebody manage one’s money. That 31% figure would certainly wipe out the value of any tax relief received. I point out to Deputy Richard Boyd Barrett, who spoke about a figure of €2.9 billion going in tax relief on private pension schemes, that such a figure is erroneous and also that the tax relief is not permanent but represents tax deferral; there is no pot to be spent on subsidising pension schemes generally. My point is that consumers need to know this information. If they are to make rational decisions, they need to know what it is they are buying and how much they are paying for it. There should be absolute transparency around the purchase of any product. In Tesco one expects to know the price of the goods one is putting in the basket. It is all the more important when one is buying a life-changing product such as a pension that one knows how much one is paying for it. Without such information on prices, the normal competitive market forces cannot operate. This facilitates the emergence of cartels and oligopolies and certainly does not lead to better prices for consumers. I am glad that the report’s recommendations have been accepted by the Government and will be followed up on.

I note that a new pensions council is to be set up to advise the Government on policy changes needed for the future. The Bill is a major and urgently required step to deal with what is an emergency in the defined benefit pension scheme sector, but there is still a long way to go in meeting the overall challenges posed by the pension problem. As a work in progress, I see the Bill as a welcome step.

While the Minister is here, I will put in a word for a group who, as it stands, will miss out on the provisions of the legislation. I refer to workers whose pension schemes are in the process of being wound up but where the fund has not yet been distributed. They face a double whammy in that when their now depleted funds are distributed, they will be subject to the levy, as well as everything else. They will also have last call on what funds there are available. Their request is that they be included in cases in which funds have not been distributed in order to benefit from the redistribution of funds as between pensioners and those still in employment. I ask the Minister to consider their position if possible. Another Member has stated that 50,000 persons have been members of defined benefit pension schemes that have been closed who virtually have no pensions left. If there are some who could be captured within the net of this legislation, it would be in everyone’s interests to see what we could do in that regard.

I very much welcome the legislation. It is, as I said, a work in progress but still welcome.

Social Welfare and Pensions (No 2) Bill 2013

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