The National Pensions Framework and the implications for employers and employees - Part 2
March 2010
HR & Recruitment Ireland
Part 2 - Published 30 March 2010
A major reform of future State, private and public service pension provision was announced by the Taoiseach, Minister for Finance and Minister for Social and Family Affairs on 3rd March 2010.
Auto Enrolment
The new supplementary pension scheme will be introduced for employees aged 22 or over not already in a pension scheme. Employees earning above a certain income threshold will be automatically enrolled in this new scheme.
Contributions to the new scheme will be made within a band of earnings, employees will be required to make a fixed percentage contribution and there will be matching State and employer contributions. The State contribution will equal 33% tax relief however the delivery mechanism for this is yet to be decided.
The proposed auto enrolment system is likely to go some way towards addressing low retirement saving levels among non-pensionable employees and while this is a matter of public policy, IFG Corporate Pensions would have some concern to the employer’s likely reaction to their future obligations.
For auto enrolment to work effectively, employee pension contributions would have to be compulsory, as with the Australian model. Evidence would support the assumption that it will always be those on lower incomes who will “opt out” which could potentially undermine this particular initiative.
Tax Relief
It is rather unfortunate that the Government continues to propose a limitation of tax relief on individual pension contributions to 33%. Individuals paying the higher rate of income tax in retirement will effectively be subject to double taxation when they take their pension benefits. This move is highly inconsistent with the overall aim of encouraging saving for retirement and is inconsistent with the overall objectives of the Framework document.
Imposing new limits on pension tax relief will effectively reduce the impact of any contribution made by employees, leading to lower incomes now and lower retirement incomes in the future and as such we do not support this initiative.
Defined Benefit Schemes
The framework is vague in relation to proposed changes to existing DB schemes many of which are in crisis. To address the current funding volatility the framework suggests an alternative DB model of fixed contribution rates for employers. Such changes are time sensitive and unfortunately too late for many schemes. While addressing the issue of underfunded DB schemes is welcome, much work is still required on this Framework matter.
ARFs & Pension Flexibility
The Government has decided to streamline the current system and provide that all defined contribution (‘DC’) arrangements will have access to similar options at retirement. As a result, from 2011, those in a DC pension scheme will now have access to Approved Retirement Funds (ARF). Currently a guaranteed or “specified income” limit (€12,700) is required before you can access an ARF. An increase in this limit to 1.5 times the State Pension (Contributory) (which would amount to approximately €18,000 per year) will be examined in the course of implementing this framework.
We welcome the opening of the ARF option to members of DC pension schemes. This will, unlike the limitation on tax relief, act as an incentive towards retirement saving. A significant benefit of an ARF (that is not a feature of the existing annuity system), is that it allows the holder of the option to pass on their wealth to their spouse, children or estate.
Public Sector Pensions
A new scheme for new public sector employees will be based on career average earnings rather than the current system of final salary. This is a welcomed move and somewhat recognises the existing disparity between private and public sector workers.
Conclusion
It is fair to say that there has been a mixed reaction to the Framework, but nevertheless it is reassuring that some of the key critical industry issues are under review. There is an urgent requirement for further transparency across the entire industry and it is promising to see evidence that the Framework will work towards achieving this.
Implementation of the policies set forward in the National Pensions Framework will require significant work going forward, especially the new proposals for dealing with DB schemes. The proposed milestones however must proceed in a timely manner, given the current and pressing difficulties faced by pension schemes, contributing employers and most importantly scheme members looking towards retirement.
National Pensions Framework - Key Milestones
2010 • Publish National Pensions Framework.
• Establish Framework implementation group.
• New Public Service pension scheme to be introduced.
2011 • Extend New ARF rules to DC schemes.
2012 • Increase contribution for State Pension to 520 paid contributions (as planned in line with Legislation in place since 1997).
• Replace homemakers’ disregard with credits for new pension claimants.
2013 • Review Pension Insolvency Payments Scheme.
2014 • Abolish State Pension (Transition) - increasing state pension age to 66.
• Introduce auto-enrolment system.
2020 • Introduce a “total contributions approach” for State Pension (contributory).
2021 • Increase State Pension age to 67.
2028 • Increase State Pension age to 68.
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