National Pensions National Pensions FrameworkFrameworkMarch 2010March 2010

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AGENDA

• Background• Aims • Principles• Key Areas• Observations and Conclusions

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BACKGROUND

• First Pensions Review Late 80’s Pensions Act

• Second Pension Review – NPPI Late 90’s PRSAs

• Third Pensions Review – NPF 2010 ?

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BACKGROUND

• Pensions Green Paper - 2006• Mandatory Pension Paper - 2007• Commission on Taxation Report – 2009• McCarthy Report – 2009

Public Sector pensions

• Renewed Programme for Government – 2009 33% tax rate

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AIMS

• Security• Equity• Choice• Clarity• Increase Coverage (low and Middle

Incomes)• Ensure State Support is Equitable and

Sustainable

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PRINCIPLES

• Affordable and Sustainable• State Pension at 35% of Average Weekly

Earnings• Improve both coverage and contributions• Equitable Tax incentives• Involve Employers, Employees and State• Support longer working by flexibility• Focus on Future; ignore Legacy issues

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AUTO ENROLMENT

• Implementation date 2014

• State managed scheme

• compulsory contributions equivalent to 8% of gross pay

• Employee pays 4% from net pay

• State pays 2% and employer pays 2%

• Wage bills up 2% plus administration costs

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AUTO ENROLMENT

• Contribution triggered if earnings exceed threshold

• Example given:

Trigger at €357 per week

8% of salary between €127 p.w. and €995 p.w.

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AUTO ENROLMENT

The table is based on the following assumptions: 5% earnings growth; 7% investment returns; 22:1 annuity for pension; a 40 year employment career. These are reasonable assumptions over a 40 year period.

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AUTO ENROLMENT

• Opt out after 3 months

• Irrevocable after 6 months

• Auto-renewal every 2 years – hassle for employers

• Incentive - once off bonus payment after 5 years.

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AUTO ENROLMENT

• Members are given a limited range of funds.

• Funds are private sector chosen by competition.

• Exemption for those in an employers defined contribution scheme which provides for the 8% contribution and the 2% employer’s portion.

• The alternative funds available may be more attractive than the auto-funds.

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AUTO ENROLMENTAustralian Experience

• Introduced in 1992: to answer same issues

• “resistance crumbled”

• 9% and enjoys wide support

• Employer contributes to scheme of employees choice

• Several different types of arrangement – general and self administered

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AUTO ENROLMENT

2006 Green Paper• Predicted negative impact on GDP and GNP• Reduction in real disposable income• Impact on competitiveness• Savings would increase

Government says:• 2014 only if economic conditions permit• It is conscious of cost to small firms• “the implementation of these proposals will be

cognisant of the current and emerging economic situation”

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STATE PENSION

• Social Insurance Fund decimated

• Retirement age to increase gradually to 68

• Contributory pension based on total contributions made (currently average)

• Home Carers to be recognised with credits

• No credits for legacy issues (i.e. marriage bar)

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PRIVATE SECTOR

• 33% Rate on Personal Contributions• DC Retirement Benefits Simplified• Multiplicity of Contracts to be reviewed

PRSAs, Personal Pensions, Buy-out Bonds

• Defined Benefit Schemes New model proposed

• Pension Board Powers to be reviewed

• Info to Members; Funding Standard Kept Under review

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33% RATE

• Applies to all personal contributions To achieve greater equity?

• 15%- 40% limits remain• €150,000 limit remains• Employer Contributions Unaffected• Pension Funds Remain Exempt

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BENEFITS

• ARFS – available to all DC Not to current Pensioners; DB Implemented 2011

• Specified Income To c. €18k AMRF to end before 75 if this is exceeded

• Tax Free Lump Sum same as Before Taxation above €200k to be considered during implementation 25% or 1.5 x Salary?

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DEFINED BENEFITS

• Possible new model• Fixed Contribution Rates• Flexible Benefits• Allow for Life Expectancy• All beneficiaries Revised Annually and

Equally• Previous Underpayment due to Poor

Investment to be caught up

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PENSION BOARD

• Powers to be reviewed• Powers re Lifestyling• Licensing of Schemes• Info to Members

To be kept under review

• Funding standard To be kept under review

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PUBLIC SECTOR

• New Scheme New entrants only Across all public and civil servants

Legislation by end 2010

• Benefits in line with Private sector Integrated with Social Welfare Based on Career Earnings

Annual Accrual Rate NRA 66 - 70

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PUBLIC SECTOR

• Contributions at 6.5% On all pensionable income

• Fast accrual Remains for Guards, Army Added Years gone

• Applies to TDs, Judges, President in line with Private sector Based on Career Earnings

• Possible CPI for Existing Pensioners

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Miscellaneous

• Flexible Working State pension age to rise to 68

• Tracing benefits Tracing mechanism Possible Dormant pensions Fund

• Financial Education By the Banks!! 6 months Reports from IBF on Progress