Before we begin the meeting I remind members, witnesses and those in the Gallery to turn off their mobile telephones because they interfere with the transmission of the meeting. I advise witnesses that you are protected by absolute privilege in respect of the evidence you are to give this committee. If you are directed by the committee to cease giving evidence in respect of a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given and you are asked to respect the parliamentary practice to the effect that, where possible, you should not criticise nor make charges against a member of either House, a person outside the house or an official by name or in such a way as to make him or her identifiable. Members are reminded of the provisions within Standing Order 158 that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policies. I welcome Mr. Paul Kenny, the Pensions Ombudsman, and ask him to introduce the officials.
Annual Reports and Accounts 2010: Discussion with Pensions Ombudsman and Pensions Board
Mr. Paul Kenny
I thank the Chairman. With me are Mr. John O'Toole, director of the office, and Ms Joan Bray, senior investigator.
I welcome Mr. Brendan Kennedy, chief executive of the Pensions Board, and ask him to introduce the officials.
Mr. Brendan Kennedy
I am accompanied by Ms Mary Hutch, head of regulation, and Mr. Andrew Nugent, assistant head of policy.
I welcome the officials from the Department of Social Protection.
Dr. Orlaigh Quinn
I am the assistant secretary from the Department of Social Protection.
Mr. John Conlon
I am the principal officer.
I welcome the witnesses. I ask Mr. Buckley to introduce the Pensions Board annual report 2010 and the Pensions Ombudsman annual report 2010.
Mr. John Buckley
The Pensions Board, the Pensions Ombudsman have functions that relate to the protection of pension scheme members. The Pensions Board is mainly funded from fees from occupational pension schemes and personal retirement savings accounts. It also received €500,000 from the Department of Social Protection in 2010 in respect of a national pensions awareness campaign. Its overall costs for 2010 were €5.6 million. The Department provides all the funding to the Pensions Ombudsman at a cost of approximately €1 million in 2010. Other than a failure by the Pensions Board to get departmental approval in advance for certain consultancy work, there were no reporting matters arising out of the audit of the two accounts in 2010.
I thank Mr. Buckley.
Mr. Paul Kenny
I am grateful to the Committee of Public Accounts for the opportunity to address it on the role and function of the Office of the Pensions Ombudsman. The office has responsibility for the investigation of complaints involving financial loss and disputes of fact or law in regard to occupational pension schemes and personal retirement savings accounts. Legislation establishing the Office of the Pensions Ombudsman was passed in 2002. I was appointed in 2003 and re-appointed in 2009.
My office considers and investigates complaints from people who believe they have been treated unfairly or unreasonably in regard to their pensions, in both public and private sector employment, with the exception of State pensions. Our office is independent. There is no charge to the individual complainant for bringing a complaint to it. Our aim is to resolve complaints impartially, informally, and quickly. If we cannot assist with a particular complaint we will explain why and may suggest other avenues for resolving the matter, such as referral to the Financial Services Ombudsman or Financial Regulator.
The Office of the Pensions Ombudsman is a service-based and customer-oriented organisation. The Department of Social Protection provides a shared-services type arrangement whereby the functions of finance, payroll and ICT requirements for the office are provided by the Department. This is a cost effective arrangement which avoids the duplication of staff and resources. I acknowledge this support is given by the Department in a spirit which completely respects the independence of the office.
The 2010 budget allocation to the office was €986,000, of which about 70% was pay. The small size of the allocation does not, however, reduce the need to ensure cost effectiveness in our expenditure. Indeed, it heightens the need for maximum effectiveness and efficiency in every item of our expenditure and we rigorously examine every line of expenditure to ensure maximum value for money for the Exchequer.
The office was established in April 2003, under the terms of Part XI of the Pensions Act 1990, as amended by the Pensions (Amendment) Act 2002. The statutory instruments to enable me to begin my investigation work were signed on 2 September 2003. The purpose of the office is to investigate and decide complaints and disputes concerning occupational pension schemes, that is schemes sponsored by an employer, and personal retirement savings accounts, PRSAs, which were introduced by the Pensions (Amendment) Act in 2002.
The office is a statutory position. I am independent of the Minister for Social Protection in the performance of the duties of my office and I act as an impartial adjudicator. I can investigate pension schemes in the public and private sectors and my role has been expanded to include certain group schemes set up under trust for bodies comprising self-employed people.
I produce an annual report and my accounts are audited by the Comptroller and Auditor General. I am assisted by nine experienced and well-qualified staff who are all civil servants in the service of the State. They have authority to act on my behalf, but I am the only one who can sign a final determination.
We are extremely conscious of the overall current economic climate and the drive to make savings across the entire civil and public service. The Office of the Pensions Ombudsman has been continuously monitoring our financial expenditure. Our 2011 allocation was just over €1 million and expenditure is in line with our allocation for the end of September 2011. If we can achieve further savings by the end of the year I will be happy to give back as much as I can to the Exchequer, as I have been able to do over the last three years.
I call Mr. Kennedy, chief executive of the Pensions Board, to make his statement.
Mr. Brendan Kennedy
I thank the Chairman. I am pleased to have been invited to this hearing to assist the committee in its examination of the Pensions Board annual report and accounts for 2010. As requested, our written statement for the committee sets out the developments since the publication of our 2010 annual report. I would like to briefly set out the issues of most concern at the current time.
The committee will have seen in our briefing we currently have a large number of cases under investigation where we believe employers have not forwarded employee contributions to the construction workers pension scheme. There is obviously a considerable amount of work involved in investigating and, where necessary, prosecuting these cases, and this is absorbing a considerable proportion of our resources. However, this is very necessary work and in accordance with our priorities.
In regard to defined benefit schemes, the board's objective is to publish revised rules for them by the end of the year, taking account of the recent changes to the funding standard which were announced in late October by the Minister for Social Protection. The revised rules will allow trustees of defined benefit schemes to prepare funding proposals to deal with the deficits in their schemes. There is no doubt the process of agreeing these proposals between trustees, sponsoring employers and, in many cases, trade unions, will be a very difficult process for those concerned.
Pensions need stability and certainty, and the current uncertainty about the future taxation of pensions is creating difficulties for pension schemes. We hope the forthcoming budget will resolve this. In recent weeks the board has provided the Minister for Social Protection with an analysis of the various changes to the taxation of pensions which might be under consideration. The Pensions Board is also involved in the Department of Social Protection's project to analyse pension costs.
The European Commission plans to revise the 2003 pensions directive, and some of the changes under consideration have the potential to have significant impact on Irish pensions. The Pensions Board is heavily involved in the work at EU level of analysing the Commission's initial proposals and questions. We are happy to answer any questions the committee has.
I take it I have permission to publish both statements.
I welcome the Pensions Board and ombudsman. It is not very often we are so heavily outnumbered. We will try to be as nice as we can so the witnesses do not turn on us.
I want to get some general background on the current pension situation. With the unemployment level now at over 440,000, what percentage of the adult population will have to rely solely on the State pension in their old age?
Mr. Brendan Kennedy
We take the data for pension coverage from the Central Statistics Office national household survey. The most recent figures it produced are for the fourth quarter of 2009. The figures at that time showed 51% of those at work had a pension in addition to the State pension. Of those aged between 30 and 65, 58% had some form of supplementary pension in addition to the State pension. It is important to say two things about those figures. First, they say nothing about the amount of the pension. Even if somebody has quite a small pension, he or she would still count as somebody with a pension. Second, like all surveys the figures are subject to a certain amount of statistical variation.
I imagine one of the jobs of the Pensions Board is to encourage people to take out pensions at a much younger age, considering the age profile of the population. How much money does the board spend on a yearly basis on that?
Mr. Brendan Kennedy
We receive a grant from the Government to run our national pensions awareness campaign. In 2010 the amount in the budget was €500,000 and it was €400,000 for 2011. The Pensions Board has the responsibility, on behalf of the Government, of spending this money to encourage both pension knowledge and pension provision.
How is that money spent?
Mr. Brendan Kennedy
The money is spent in a variety of ways. We target those groups who are less likely to have pensions. For instance, women tend to have less pension coverage than men, and younger people are less likely to have pensions. We also target certain industries such as the hospitality industry where coverage is low. We engage in a variety of ways with stakeholders who may have access to such groupings, for instance, trade unions and professional organisations. We attend relevant seminars and trade shows. We engage with the media and we do a certain amount of advertising. There is no single route and we use whatever it takes to engage with people as much as possible.
How much of that figure of €500,000 is spent on the advertising side of the job as opposed to expenditure on consultants or people who carry out the work on behalf of the Pensions Board?
Mr. Brendan Kennedy
The expenditure for 2011 is €400,000. I can provide the committee with the following figures in written form after the meeting. Expenditure on online advertising is €110,000; expenditure on print advertising is €55,000; expenditure on awareness education in stakeholder programmes is €117,000; expenditure on project management is just under €94,000; and expenditure on consumer market research and administration is just under €28,000.
I ask Mr. Kennedy to explain further that figure of €94,000.
Mr. Brendan Kennedy
We employ a contract project manager to run the awareness campaign and it is primarily that cost. That person's job involves a lot of engagement with the groups, meeting with them and making presentations as well as managing our activities. We have what we call an impact national pensions awareness campaign project manager who manages this aspect.
Is the Pensions Board happy with the value for money for the €500,000?
Mr. Brendan Kennedy
We are happy with the effectiveness of it. I would distinguish between how well we spend the money and I am happy that we have a lot of experience in running this. We have a good mix in order to maximise the value of the money. Obviously, the fact that pension coverage is at 58% is not a satisfactory figure.
Has there been any noticeable uptake?
Mr. Brendan Kennedy
We have conducted various surveys over the years because we need to test how well the message is being noticed. Pension awareness has definitely increased over the years. For instance, we take a stand most years at the national ploughing championships. In earlier years, this could be a pretty lonely stand but in recent years we have noticed that activity has increased with people queuing to visit the stand. We have managed to increase awareness. The first step is to make people more aware of the need for pensions, step two is getting them to understand it and step three is getting them to do something about it. This is a very slow process and I have no illusion that simply running a campaign will effect a transformation. We play our part. In my view, one of the most important and successful aspects, which is not all down to the activity of the Pensions Board, is the greater awareness and coverage of pensions issues in the media. This means that the issue of pensions is much more in the ether than it was previously when these campaigns started a number of years ago.
I think Mr. Kennedy is correct in his view. Pensions are much more in the news at the moment but probably for all the wrong reasons.
Mr. Brendan Kennedy
At the moment they are in the media for the wrong reasons but even back before 2007 we noticed a strong increase in awareness of pensions and pension coverage. Among the many aspects of our work is engagement with the media so that where relevant, it will provide coverage of pension issues. It is important for us to deal with the areas of the media which are relevant to our target groups. For instance, The Financial Times is not our target media; we must deal with the media which our target groups are likely to read.
The world economic situation deteriorated quite rapidly between 2007 and 2009 and many employers and employees are finding it difficult to increase their contributions to meet their deficit. I note in the annual report that 75% of defined benefit schemes are in deficit which is described as substantial. What is meant by "substantial" in this context?
Mr. Brendan Kennedy
Many of the schemes we deal with would have a deficit of 20%, by which I mean they have only 80% of the assets they should have to meet the measure of their solvency. These figures are quite volatile. For instance, we measured the figures in April of this year and then the markets suffered very badly over the summer so the figures would be worse as a result. Each scheme has its own end-year figure so our figures are approximations for that reason. A 20% deficit would not be particularly unusual. In many cases, that is a very large shortfall to cover and definitely there will be instances when members and employers between them will not be able to find the contributions to make up those deficits.
I presume this is still regarded as a substantial figure.
Mr. Brendan Kennedy
It is substantial, yes.
The situation has changed rapidly and greatly over the past years. The funds took a hammering in 2007 and 2009 so I ask why there has been only a slow move away from equity.
Mr. Brendan Kennedy
I cannot be certain and part of me does not know. It is certainly disappointing. I would suggest there are a number of reasons. In my personal view, high equities investment has been a feature of the culture of Irish investment. Up to 2007 it was a widely and commonly held view that high equity investment was a good thing and to change that culture was quite a slow process. The second issue has been that although I am aware that many schemes will have taken the decision that they need to reduce the investment risk in their scheme, their implementation of it may only be beginning. This means they will be spreading their change over a number of years so the figures would not be coming through and there are instances of this.
Would Mr. Kennedy not agree that this is little solace to a person whose pension has deteriorated?
Mr. Brendan Kennedy
Absolutely.
The chief executive officer of the Pensions Board has just said that he is not even fully sure why that happened.
Mr. Brendan Kennedy
We have ongoing conversations with all stakeholders. In the case of defined benefit schemes, there are approximately 1,000 defined benefit schemes and potentially a thousand different views. In each scheme the investment decision is a matter for the trustees of that scheme. The figures we have compiled and the figures we see from other sources are actually surprising in that we hear more conversations about reducing equity exposure than we see. This is described in our annual report. The actual figures are lagging behind the talk among pension schemes. It is very disappointing and my view is that the switch should have been quicker. Markets first turned in 2007, more than four years ago.
Is that the view of the Pensions Board?
Mr. Brendan Kennedy
Yes, that is the view of the Pensions Board.
When was that view first expressed?
Mr. Brendan Kennedy
The Pensions Board has been expressing its view about too much investment risk since early 2007, in its 2006 annual report. That is the first time I remember it being put in print by the board. It has been a theme which we have expressed at every opportunity for a long time and not just in the annual report. However, it is the responsibility of scheme trustees to make their own investment decisions. The Pensions Board does not and should not decide the investment for each scheme.
It is also important to add that investment is not just a matter for defined benefit schemes. Defined contribution arrangements have the same issues. There, decisions are being made by individuals for the most part. Defined benefit schemes get more attention because there is a process every year whereby one must do an actuarial valuation and calculate the gap. Defined contribution arrangements do not get the same level of attention because the individuals do not follow a formal process that draws attention to it. However, we are just as concerned about defined contribution schemes because, in general, our data suggest that their losses have been as great as those of defined benefit schemes.
In 2009, the OECD showed figures on how different countries' pension funds had done since the crisis. Irish pension funds had done considerably worse than anywhere else. They had suffered a loss 8% greater than that of the next country on the list and 15% lower than that of anywhere else. Why are the pension managers' performances so bad?
Mr. Brendan Kennedy
I do not know. I have theories, but it is a cultural issue. There is a dynamic in the Irish investment manager market whereby the person to whom managers pay the most attention is their competitor. During the 1990s in particular, it was a given that the more stocks and shares one had in one's portfolio, the better one's performance figures. There was a dynamic whereby the weighting of stocks and shares followed itself. This was the way to improve figures. There were instances in Ireland and the UK of managers trying to make calls on stock and share ratings being too high. Consequently, their performance figures suffered and they lost considerable amounts of business.
There is no definitive answer, but it is a problem that the discussion of investment tends to be simplistic. The most common report we all see in the media every month is about the preceding month's best and worst performing management companies. There is no discussion of how much risk each took to achieve those figures. I cannot be definitive, but it is my belief that group-think within the investment market played a significant role. How much difference there is between typical investment practices in countries throughout Europe is amazing This seems to relate more to what individual companies are comfortable with rather than international comparisons.
Given that we know the issues within the pension funds, anyone following this debate might find it unusual that the head of the Pensions Board does not have a strong opinion on why it went and is continuing to go wrong and why we have not seen the necessary changes.
Mr. Brendan Kennedy
The Pensions Board's responsibility is to supervise Irish pension schemes to ensure that they comply with the Pensions Act 1990. Investment is a significant influence on how Irish pensions turn out, but we do not supervise investment managers. It is a service that, in many cases, is bought by scheme trustees. We have been trying to make clear our concerns about investment practices so that we might persuade scheme trustees and individual scheme members to become aware of the important issues and to act appropriately but we have no role in making decisions for scheme trustees or in overseeing investment managers.
Mr. Kennedy stated, "act appropriately". For many bad reasons, the pensions problem has often been in the news recently. A recent television programme showed that 2.2% of funds were taken out by certain people in the pensions sector. Was this excessive?
Mr. Brendan Kennedy
A pension fund's costs should relate in some way to the services being provided. For example, the members of one scheme might be getting more direct advice than another's. Broadly speaking and unless there is a particular reason for a scheme receiving extra services, 2.2% is excessive.
Has the Pensions Board expressed that view to schemes?
Mr. Brendan Kennedy
We have expressed a number of times our strong view that it is the responsibility of scheme trustees to ensure that the costs to which their schemes are subject are appropriate. It is one of their direct responsibilities and one of the areas in which they can act. As this issue was raised in 2007 in the Government Green Paper, it is clearly a matter of concern for the Government.
Absolutely. It is also of concern to the public. How many people are on the Pensions Board?
Mr. Brendan Kennedy
It has 16 members.
The feeling I have got from the witnesses in the past ten or 15 minutes is that, while the board's job is to oversee the State's pensions industry, it has few teeth. Pensions have taken a hammering in recent years and excessive charges have been levied on them. Does the board have too many members and where does the strength to stop excessive charging lie? The Pensions Ombudsman might like to respond. I imagine he has received some complaints on this matter.
Mr. Paul Kenny
We have received complaints from scheme members whose investments have suffered in recent years. We have also received complaints about charges. The main problem with charges is that many charging structures are complex. In terms of visibility, it is sometimes difficult for members to figure out how much and for what they are being charged.
I often get complaints about how people have been left in old-fashioned insurance contracts, in that advisers may have done nothing to modernise the contracts in which people have invested. Inappropriate charging structures mean that large commission payments are made to intermediaries and so on. Since there is no incentive for an adviser to put his or her client on a lower commission structure, he or she is happy enough to take large commissions. Recently, a man complained that 45% of his first two years' premiums was being taken in charges.
Did Mr. Kenny say 45%?
Mr. Paul Kenny
Yes. Not only that, but 45% of every incremental premium was also being taken in charges. The system was changed by the employer in question in 2007. The man had been a member of the scheme since 1996. For 11 years, he suffered these charges on his contributions. There is no incentive for someone who is earning a commission to switch a client to something that, from the client's point of view, is more efficient.
In a defined contribution scheme, the cost of everything must come out of the member's pot. This includes, for example, communicating with the member and conveying all of the information that the member is supposed to receive. The more heavily we regulate, the more expensive it will be for the member. People do not appreciate this. No third party will pay the charges.
Although the number of pensions has reduced substantially and there will be a crisis in years to come unless something is done about it, is any member of the board or any person who used to be in charge of the schemes in question currently receiving a bonus?
Mr. Brendan Kennedy
No. To clarify, the Pensions Board comprises 16 members appointed under the Act. The staff of the board is separate. By the end of this year there will be 51 staff overall. No one among the staff or the board members is in receipt of a bonus.
Do the people in charge of the schemes receive bonuses?
Mr. Brendan Kennedy
I cannot speak for all the schemes throughout the country. In the majority of cases, however, scheme trustees work for no payment. They tend to operate the schemes as part of their day job and their work in this regard would be viewed as an additional responsibility. There are professional trustees but I am not aware of the remuneration arrangements for such individuals. The great majority of trustees operate the schemes as part of their daily job or as part of their overall employment.
I thank our guests for coming before us. Do the Pensions Board and the Pensions Ombudsman engage in any form of day-to-day contact?
Mr. Paul Kenny
Yes. We have a statutory right under the Pensions Act to exchange information. When we receive a complaint from an individual and investigate it and it seems to show up something that is systemic in the running of a scheme, the Pensions Board has a separate function to investigate what is called the "state and conduct" of the scheme. Although an individual may be suffering from maladministration in the way a scheme is run, if we believe that is flowing over and affecting all the members of the scheme we will alert the Pensions Board to that fact. We also exchange information on a daily basis regarding activities in the construction industry because that is probably the largest single area of activity in both our offices in terms of failure of employers to remit contributions. The latter are either contributions they have deducted from workers' pay, their own contributions or both. There is a legal requirement on employers to remit contributions within 21 days of the end of the month in which they are deducted. Unfortunately, in the construction industry in particular there has been a great deal of delinquency in this regard.
My office tends to receive complaints in respect of contributions that are more than three years old. This is because the Construction Industry Monitoring Agency which takes people to the Labour Court with regard to more recent contributions. The most frustrating aspect of this matter is that many of the contributions I am obliged to investigate were deducted from workers' pay during the boom, when everybody was making money, and not after everything went bust. Since the latter occurred, people have been stating that they cannot afford to pay.
Does the Pensions Ombudsman receive any complaints in respect of the Pensions Board or do such matters come under his remit?
Mr. Paul Kenny
No. We do not take complaints against the Pensions Board. If we receive such a complaint we simply send it to the board and alert it to the fact that someone is unhappy with what it is doing.
What happens then?
Mr. Brendan Kennedy
We have a procedure within the Pensions Board - a customer charter - where we respond formally to complaints. As one would expect, a complaint would not be dealt with by the person to whom it relates. The management team reviews all complaints every six months. In addition, there were plans to make the Pensions Board subject to the Ombudsman but that legislation has not yet been enacted.
Does the Pensions Board receive many complaints?
Mr. Brendan Kennedy
We get very few. We do not get a great number and obviously we would prefer to receive none. We get perhaps one per month.
On what sort of issues?
Mr. Brendan Kennedy
They tend to be to the effect that we did not respond properly to a complaint someone made about a scheme, that we did not resolve a particular issue or, occasionally though very rarely, that we were slow to respond to a request.
Okay.
Ms Mary Hutch
If I might intervene there, it is also reasonable to say that many of the complaints which may be referred to Mr. Kenny's office or to ourselves tend to be from people who are dissatisfied by the way the board dealt with a particular matter. It usually transpires that the matter in question was not one which came within the board's jurisdiction. It would not, therefore, be a complaint regarding the way the board dealt with a matter or in respect of the board's service provision, but dissatisfaction that the matter did not come within the remit of the board which, therefore, did not have the jurisdiction to deal with it.
I thank Ms Hutch. This meeting was convened because pensions have recently been the subject of some bad coverage. To some extent, the meeting also came about as a direct response to the television programme "Pension Shock", which was presented by George Lee and to which Deputy Connaughton referred. That programme painted a pretty grim picture of the pensions industry. I do not know if Mr. Kennedy would agree but "Pension Shock" seemed to indicate that 75% of pension funds are in deficit and that people in the industry are milking money out of pensioners. The Government has joined in and pillaged 0.6% of the pensions pot. The programme also showed that there is massive overcharging by and poor performance in the pensions industry. The picture painted could not have been any worse. What did Mr. Kennedy make of the programme?
Mr. Brendan Kennedy
I thought the programme identified a number of extremely serious issues in respect of pensions. I would not disagree with the overall view that Irish pensions are in a very bad way.
Is the industry a shambles?
Mr. Brendan Kennedy
My responsibility is to supervise not the industry, but rather occupational pension schemes and PRSAs. I certainly have criticisms with regard to the performance of the industry and also that of the advisers to scheme trustees in recent years. As stated earlier, the Department of Social Protection has commissioned a project to investigate the position in respect of charges. As Mr. Kenny's earlier example illustrates, there is no doubt that there are instances where very high - one could term these "unjustifiable" - charges are being imposed. The picture is extremely varied and that is why the Department of Social Protection is carrying out its project. Some of the larger schemes impose very low levels of charges. In some instances, employer, rather than members, pay those charges. Overall, the current situation in respect of pensions in Ireland is extremely bad. The programme to which the Deputy refers confirmed what many of us already knew and had been saying.
Does Mr. Kennedy agree that the industry is a complete mess?
Mr. Brendan Kennedy
I cannot speak about the industry because I do not have a remit in respect of that matter. However, I have strong criticisms-----
The Pensions Board represents pensioners and members and must, therefore, look after their interests. If these people are being overcharged, it is the responsibility of the board to say so.
Mr. Brendan Kennedy
It is our responsibility to respond to any issues which affect members. There are no question that there are instances - these appear to be quite frequent - of overcharging. I would not dispute that fact.
Is overcharging endemic?
Mr. Brendan Kennedy
Until the Department completes its project, it will not be possible to say.
Am I correct in stating that Mr. Kennedy has been in situ for six years?
Mr. Brendan Kennedy
It is five years.
And this has been a burning issue for that entire period. Not burning enough perhaps, particularly when one considers that those who run pension funds have been charging huge sums of money. Undoubtedly, this affects the performance of the funds.
Mr. Brendan Kennedy
Undoubtedly.
Undoubtedly, it also affects members' and pensioners' returns and what they obtain in their pensions. There is a view - this is strongly held by people both inside and outside the industry - that pension fund managers are ripping off members. Does Mr. Kennedy believe that to be the case or is he of the view that it is merely incidental?
Mr. Brendan Kennedy
I certainly do not believe it is incidental. I am not of the view that it is universal but I believe it to be quite common.
How much is paid in fees to pension fund managers in Ireland?
Mr. Brendan Kennedy
I do not know. I am not aware of that figure being known to anybody. I certainly do not know it.
But Mr. Kennedy represents the Pensions Board. This is a very relevant figure.
Mr. Brendan Kennedy
I know and, as already stated, our task is to oversee the behaviour of trustees and supervise PRSAs.
And to represent the interests of pension scheme members. A crucial matter for such individuals is the amount they are charged.
Ms Mary Hutch
It is the responsibility of trustees to administer schemes in the best interests of members. The trustees' duty, if they are not capable of carrying out the investment function of the schemes themselves, is to appoint investment managers. We give copious advice, support and guidance to trustees to enable them to discharge all their functions properly, including monitoring the performance of their investment managers. We set that out clearly in our trustee handbook, our e-learning facility for trustees and so forth.
We also convene meetings with trustees, bringing them into the boards' offices. We have more than 20 meetings per annum - sometimes as many as 50 - with trustees of these schemes, and on every occasion we ask them how they engage with their investment managers. What is the process of engagement and what is the push-back with the investment managers? How do they ensure the best value for money in the service they get not just from the investment managers, but from all of the providers they engage for the scheme? We remind them of this in our trustee handbook and in every support service and piece of guidance we provide to trustees. We go further than their duties under the Pensions Act. We talk to them about their duty under general trust law, which is to act in the best interests of the beneficiaries of the scheme, and we always explain to them that this means acting in the members' best financial interest. That support, information and guidance is provided by the board to trustees. I repeat that it is the trustees' responsibility to administer the schemes.
Yes, but they rely on the Pensions Board for advice, as Ms Hutch said, and it is the board's duty to advise them.
I am surprised that we do not have a global figure for how much fund managers are taking out of the industry. Do we have a ballpark figure?
Mr. Brendan Kennedy
When the Department's project is complete we will certainly have that information, or a good estimate of it.
You have no idea at the moment? They are bleeding the industry dry and there is no one to say "Stop".
Mr. Brendan Kennedy
We have no idea at the moment. Even if we had that information, the Pensions Board does not have the power to regulate the charges of pension schemes except in the very specific instance of standard PRSAs.
It does not have the power to regulate, but it has the power to solicit information.
Mr. Brendan Kennedy
We have the power to get information from scheme trustees and we are using that power to support the Department's project.
So you have no idea. Do you know whether it is €100 million, €400 million or €500 million? Have you any idea within the odd hundred million?
Mr. Brendan Kennedy
I do not think it would be appropriate for me to give an estimate because it would not be accurate enough.
Mr. Paul Kenny
Could I add something here about charges in general? In defined benefit schemes, charges are generally paid by the sponsoring employer, because the actuary will feed in an assumption about the running costs of the scheme, and whatever investment costs are associated with that will be factored into it. However, in a defined contribution scheme, the employers' and employees' contributions go into a pot which is the individual's own pot, and any charges made have to come out of that. The charges that are made will vary considerably depending, for example, on whether an intermediary is involved or the employer is dealing directly with a provider such as an insurance company. In the way things are structured, if the intermediary is taking a fairly hefty commission, the charges will reflect that commission. It boils down to looking at the whole structure, not just the investment manager's charges, but how all the people in the system are remunerated for their services. If an intermediary is happy to work for a fee that the employer will pay, for example, then the charge to the individual will be quite minimal.
The problem with all of this is that the charges are not very visible. For example, certain schemes are structured in such a way that the employer pays a certain percentage of the worker's salary, the worker pays another portion, and it all goes into a pot, but nobody tells the worker that the first charge on all of that is his or her death-in-service benefit. An insurance premium will be taken out of the money that is going into the pension scheme, and, as the person gets older, the cost of that insurance increases because the risk of death increases. I get complaints from people who say their funds are going down. They are not going down because of charges or anything else but because the cost of this insurance is going up and nobody has told them. They do not understand how the scheme is structured. Personally, I would outlaw schemes such as that, but it is not up to me to do that. There is a great deal of work to be done on elementary things such as designing pension schemes so that they are effective and efficiently structured for the benefit of members.
Mr. Kenny is making it sound worse than I thought it was, I must say. It is even worse because the lack of transparency is so appalling.
Mr. Paul Kenny
There is a lack of transparency.
We know the headline figure for the management of a fund and we know what fund managers charge one by one, if we ask individually. However, if there is a lack of transparency, it is actually higher. Do we have an idea of an average figure for what pension fund managers charge?
Mr. Brendan Kennedy
The charges in a defined contribution pension scheme include not just what the investment manager charges, but also charges for administration, recovery of commission and so on. They are structured, as Mr. Kenny said, in so many complicated ways. If one looks at a particular defined contribution scheme and sees a fund charge, say, of 2%, one cannot say that 2% consists entirely of investment charges. Obviously, a member does not care how the charge is divided; it is the headline figure that matters. Our concern and the members' concern is the total amount. Who gets what is irrelevant, and it is not information that is generally made available to members.
On the subject of transparency, one of the changes that was brought in at the initiative of the Pensions Board a number of years ago is that members of defined contribution schemes are provided every year with a projection of the benefits under their scheme, including a measure of the charges under the scheme, which is calculated as a reduction in yield, because it pulls together all the complicated possible levels of charging and expresses them as one single figure. That gives members, and, maybe more importantly, the trustees, a simple benchmark of the charges being applied to the scheme. It is the duty of trustees to take responsibility for the charges their schemes are bearing and, if they are too high, to do something about it.
That is all very well, but you and I know that trustees are amateurs in this business. Most trustees have no expertise at all.
Mr. Brendan Kennedy
There is also the involvement of intermediaries in many of these cases, and intermediaries are regulated by the Central Bank.
Dr. Orlaigh Quinn
It might be helpful to outline the study we have started, which will bring out some of the information the Deputy is seeking. The project is being undertaken by the Department of Social Protection, which is working closely with the Pensions Board and the Central Bank. We are examining all charges in all pensions schemes, whether defined benefit, defined contribution, personal pensions or PRSAs, and we are focusing on any charges that reduce either members' contributions or their investment returns. It is a comprehensive study which will examine things such as contribution charges, administration charges, fund transfer fees and exit charges - all charges will be included. We are hoping to have some preliminary results towards the end of the year. The Minister is keen for us to carry out this study, which will help inform future policy decisions.
I should add, however, that a couple of years back we did a major study on the annuities market. There was a lot of anecdotal evidence and comment that annuities were very expensive in Ireland compared to other countries. The results of that study showed that the charges in the annuities market were not unreasonable. I can give the committee more information on that if it would be helpful.
As I said, the pensions study is a comprehensive one, and we will be happy to share those results with the committee when we get them.
Will that be before the end of December?
Dr. Orlaigh Quinn
We hope to have preliminary results. I am not sure the study will be completely finished by the end of December but we certainly expect it to be completed in the first quarter of next year.
That it fine. It is about time. To be honest, it is staggering that a figure such as that, which is so significant, is not known to the Pensions Board, because it is so material in the performance of pensions, and it is also important from a social point of view because some people are getting very rich while pensioners are becoming very poor. Do the witnesses know what the average fund manager is paid?
Mr. Brendan Kennedy
No, we do not.
I would think it is even more than Mr. Kennedy. It is a very high amount, but we do not know what it is. Could Mr. Kennedy tell us about the performance of the funds? He responded already to Deputy Connaughton that it was to do with culture and group thinking. The figures are so staggeringly bad that I presume there is some reason for it; that the Pensions Board has done some analysis and is aware where the wrong investments have been made.
Mr. Brendan Kennedy
The simple analysis is that the level of equity holdings is way higher than any international benchmark. The issue is how much equities they are holding, not whether they have bought this equity rather than that equity.
Are they holding a disproportionate number of equities in Ireland?
Mr. Brendan Kennedy
Yes. There are two way to look at this. The first is to compare Irish practice with other countries and then perhaps more relevantly if we look at the investment mix of the typical Irish pension scheme in comparison to their liabilities because it is a fundamental of any investment that the investment should be appropriate to the obligations of the scheme. Members will have seen that in our briefing note for the committee that we would expect at the very least that Irish pension schemes, where they are paying pensions to those who have already retired directly from the pension fund, that at least those liabilities should be matched with bonds. In round numbers half of the liabilities of Irish defined benefit pension schemes are in respect of people who are already drawing their pension. I would expect to see that at least half of the liabilities of Irish pension schemes to be matched in bonds.
What about-----
Mr. Brendan Kennedy
No, far from it.
What is the big mistake they are making? It is too many equities. If one went to a UK, French, German or US fund would they have a completely different allocation of assets?
Mr. Brendan Kennedy
They would. The UK would have lower equities than us. A Dutch scheme would tend to have lower equities again. German schemes tend to have very low equities.
Yes, and ours has been consistently high and consistently invested in equities in this country as well.
Mr. Brendan Kennedy
Yes. During the 1990s our figures looked very good and part of the issue is that it became a self-reinforcing process, but that is a long time ago.
Yes, and we paid the price by being over-invested in Irish shares during the decline.
Mr. Brendan Kennedy
It is not just Irish shares. Irish shares have suffered huge losses but the problem is with equities in general.
Mr. Paul Kenny
If one looks at certain individual pension funds of companies, for example, that have shed a lot of workers over the years, if the trustees are on the ball one will find that those funds are almost completely invested in bonds because they have very little income in terms of contributions in respect of active members and they need the income to pay the pensions in payment. However, it is not universal as Mr. Brendan Kennedy says. There is a hangover from the period before 1990 because in the 1980s there was a barrier to investing abroad. There was an exchange control regulation in force and one could not export more than a certain small percentage of one's income to foreign investment, so what happened was that people got very heavily invested in Irish equities and there was an acceptance that equities were one of the things that would either match or beat inflation over the long term - we had very high inflation in those days. There was a tendency to invest in equities and then in Irish equities because one could not do anything else. The exchange control was so bad that if one invested legally in a UK share and one sold the share and took the money back, one could not get it back out again. A culture developed of investment in Irish equities. The investment management community has not shaken that off in the 21 years since the exchange controls were removed in 1990.
Yes, I accept that. It is a good point. There is also a danger of the kind of self-investment that was going on that was evident in this country. That was certainly the case with the banks. The Pensions Board would be aware of that. A lot of money was invested by AIBIB, Allied Irish Banks Investment Managers, and BIAM, Bank of Ireland Asset Management, in their parent company. I do not know whether the Pensions Board did anything about that at the time. That has been reduced significantly in recent times. Was Mr. Kennedy aware of that at the time?
Mr. Brendan Kennedy
Where Irish schemes were invested in the Irish stock market they tended to invest proportionately with the weightings of the Irish stock market and the banks at that stage made up a significant percentage of the Irish stock market. To an extent that may have been a self-reinforcing process.
Yes but was there any weighting by AIBIM in favour of AIB and BIAM in Bank of Ireland?
Mr. Brendan Kennedy
I could not answer that in detail. I am not aware that there was but I do not wish to be definitive.
Would Mr. Kennedy be aware of which stockbrokers they used for their pension fund transactions?
Mr. Brendan Kennedy
No, I am not.
It might be significant. It would be something worth finding out about, because they both owned stockbrokers.
Mr. Brendan Kennedy
Yes, they both owned stockbrokers.
Is Mr. Kennedy aware of what proportion they gave in commission to each one?
Mr. Brendan Kennedy
No.
Would that not be material as it could affect performance and charges? A conflict of interest issue arises.
Mr. Brendan Kennedy
I wish to make two points. Supervision of investment managers is a matter for the Central Bank not the Pensions Board.
If it is going to affect the performance of pensions it is a matter for the Pensions Board.
Mr. Brendan Kennedy
The trustees have a responsibility to make sure that when they engage investment managers that they supervise them appropriately. The Pensions Board does not have a direct role in monitoring or modifying the behaviour of investment managers.
Does the Pensions Board give advice to trustees?
Mr. Brendan Kennedy
We do.
The Pensions Board gives advice to trustees, most of whom are laymen. They are employees of the companies involved, very often they are part of the management. They do not understand how pensions work. It is very much a part-time unpaid role for them and the Pensions Board gives them advice. It would be useful if the board could give them advice on issues such as that. I have never been able to find out, but it has always been a matter which worries me, that at the time AIB and Bank of Ireland had such enormous firepower in the market, particularly through their investments and their management of pension funds, and whether they gave a huge amount of that vast commission to their own owned brokers. A huge conflict of interest arises in that regard which affects the performance of the fund. Did the banks take the advice of their own subsidiaries as well? That is an issue which I would have thought the Pensions Board would at least advise the trustees to look out for.
Mr. Brendan Kennedy
For the record, we did not advise the trustees on that matter. Although I accept the point Deputy Ross is making, our far bigger concern has been that the level of investment in stocks and shares and in general the pattern of investment was inappropriate and continues in many cases to be inappropriate to the liabilities of the scheme. That is the single biggest cause of problems in pension schemes.
Could we move on to talk about the board to which Deputy Connaughton referred? Are there 16 members and a chairman? Is it a case of 16 or 17 members?
Mr. Brendan Kennedy
It is 16 in total.
How often does the board meet?
Mr. Brendan Kennedy
It generally meets every four or five weeks. I believe last year it met nine or ten times. It has met more frequently this year. There have been a number of special meetings, but typically ten or so times a year and there are a number of sub-committees which hold meetings as well.
The board membership is peculiar, not in terms of personnel, but in its structure. It has got one person from consumer interests. Does that mean members' consumer interests?
Mr. Brendan Kennedy
A member of the board is appointed to represent consumer interests.
Is that to represent the members?
Mr. Brendan Kennedy
That is what the legislation states.
Who represents the members?
Mr. Brendan Kennedy
In the part of the Act that sets out which members are nominated by whom and so forth there is a number of different criteria. I do not believe members are mentioned specifically in any of those criteria in the legislation.
Nobody represents the members, therefore.
Mr. Brendan Kennedy
Nobody has the members' interests specifically named in the legislation. It would not be fair to say that nobody on the board believes the members' interests are not their responsibility.
That is staggering. There are 16 members of the board appointed by strange bodies and appointed by the Minister and nobody specifically is on it to represent the members. Is that not odd? This is a vast industry with 550,000 people on defined benefit schemes, DBs, and God knows how many others, yet there is nobody on the board representing them. There are people appointed by the Minister but there are two people appointed by IBEC, one person appointed by the Irish Congress of Trade Unions - God knows what they are doing now - and nobody representing the members.
Mr. Brendan Kennedy
The composition of the board is set down in legislation.
What does Mr. Kennedy think of it?
Mr. Brendan Kennedy
It is a matter of legislation, a matter of Government policy. I will not comment.
Mr. Kennedy has been there for six years working with the various boards. What does he think of the fact that there is nobody representing the members and there are many people from the social partners?
Mr. Brendan Kennedy
The composition of the board is a matter for the Government and the Oireachtas.
Of course, but let us have a comment on it. Does Mr. Kennedy set up board meetings?
Mr. Brendan Kennedy
I do.
How does Mr. Kennedy think it works to have 16 people around the table talking about these issues with nobody representing the interests of members?
Mr. Brendan Kennedy
I would disagree with the Deputy that nobody is representing the interests of members. The interests of members are a constant concern of all board members.
Dr. Quinn wishes to speak.
Sorry, Dr. Quinn.
Dr. Orlaigh Quinn
If I could confirm that the board is established to represent the members' interests and to advise the Minister on policy matters in regard to members' interests. From my previous experience having been a board member I can say that all of the members of the board are totally concerned with members' interests.
Mr. Paul Kenny
I have had dealings with the board in my past life as well as my present one since it was established in 1990 and my experience is that the board members do have members' interests at heart. There are three wild card members, as I describe them, appointed by the Minister who are what may be called civilians, who have nothing to do with any part of the industry. They have always voiced the point of view of the members. There are two nominees of the ICTU, as far as I remember, who also should have the members' interests at heart although there is a condition in the Act that one of the IBEC nominees and one of the ICTU nominees must be a pension scheme trustee. I believe there is also a person on the board to represent the interests of pensioners.
That is right. That is the man from Age Action Ireland but as far as I can see there is nobody to represent the paying members.
I see a Mr. Whelan attended three meetings out of nine. Do we know why?
Mr. Brendan Kennedy
I do not know why. The Deputy would have to ask him.
Is he paid?
Mr. Brendan Kennedy
Most members of the board are paid. I do not have the information to hand but there is a number of them who are not drawing a fee.
He missed six out of nine meetings. Is that correct?
Mr. Brendan Kennedy
Yes.
Was anything said to him about it?
Mr. Brendan Kennedy
That would be a matter for the chair.
Yes, but Mr. Kennedy would probably know.
Mr. Brendan Kennedy
I actually do not know.
What would Mr. Kennedy think? That is not normal, is it?
Mr. Brendan Kennedy
That is not normal. That is very unusual-----
He is the trade union representative.
Mr. Brendan Kennedy
He was for most of 2010.
Does that show a great concern for the interests of pensioners?
Mr. Brendan Kennedy
It would be fair to ask that question of the members. It would not be right for me to assume that his attendance pattern reflects a lack of concern.
I am not saying it reflects a pattern. It does not, and Mr. Kennedy is right. Many of them have very good attendance records but it is interesting to see how the board operates and whether these people's behaviour is tolerated or if they are pulled up on it.
I have another question. The board got a new chairman-----
Mr. Brendan Kennedy
Yes.
-----and she succeeded Tiernan O'Mahoney.
Mr. Brendan Kennedy
Yes.
What did Mr. O'Mahoney bring to the party?
Mr. Brendan Kennedy
The appointment of Mr. O'Mahoney was a matter for the Minister.
That is correct but what did he contribute to the board? Mr. Kennedy was there when he was on the board. He was appointed in 2005. Is that correct?
Mr. Brendan Kennedy
Yes.
He served until 2010. What did he contribute to the Pensions Board?
Mr. Brendan Kennedy
Mr. O'Mahoney was the chair of the board and actively participated in and chaired all board meetings during his time.
He brought with him a very interesting history of his outside interests and I wonder what the reaction of the board was to his appointment.
Mr. Brendan Kennedy
None of the board members, as I would expect, expressed any views to me on his appointment.
Did they express any at board meetings?
Mr. Brendan Kennedy
Not that I can remember, no. I would be surprised if they had. I cannot remember any and I would assume that there were none.
The point I am making is that, as everybody knows, Mr. Mahoney was a very senior person in Anglo Irish Bank at the time.
I must caution the Deputy in regard to-----
I want to know what the reaction of the board was to him. He then proceeded as chairman of the board to run a company called ISTC, which proceeded to lose €865 million. I will not comment on whether that makes him an appropriate or inappropriate person to be chairman of the board but he continued to be chairman of the board after that. Did the board at any time question his credentials to be chairman of the board with his particular record, particularly having been in charge of an organisation which lost €865 million?
Mr. Brendan Kennedy
The issue never came up at any board meeting that I attended. I would have attended all board meetings subsequent to the events the Deputy describes and the issue was never raised at a board meeting.
There was never a-----
Deputy Ross should move on from that issue.
I want to see how the board operates. I will not mention him again but I want to see if the board operates or just accepts whatever happens and does not believe it reflects one way or the other who is and who is not on the board and their record. It appears on this basis that it accepts that the record of board members does not matter. Whether it is in the interests of pensions is a matter which we judge and we leave it at that.
I raise a minor issue. I see the accounts appear to have been qualified for €532,000 last year.
Mr. Brendan Kennedy
It is important to say they were not qualified.
No, but the Comptroller and Auditor General said there was some breach in that regard. Could Mr. Kennedy elaborate on that?
Mr. Brendan Kennedy
Yes. The issue is section 12 of the Pensions Act which requires prior approval by the Minister of expenditure on consultants and advisers. The background to this is that in 2004 the Department of Social Protection approved a sanction that in the case of any expenditure of €55,000 before VAT per project, we could assume the expenditure and did not need to achieve prior approval. However, because that need for approval was relatively rare there were a number of instances where the question of getting prior approval for expenditure under section 12 was forgotten. This was noticed by the staff of the board in the summer of 2010. We brought it to the board's attention at the board meeting in August 2010 and to the Department's attention at that point. The figure of €532,000, which includes VAT, is the figure we compiled in respect of issues regarding which, on a maximalist reading, it is possible that section 12 approval should have been sought. In many of those projects, however, the Department would in any event have been involved with prior planning. In respect of all those issues, there is no question of procurement or the normal approval processes having been avoided. What we had failed to do was seek the section 12 sanction over and above the normal processes. This was an oversight by the board in its procedures that should not have happened.
I have one or two more questions. Is the Pensions Board not funded by members, pensioners themselves?
Mr. Brendan Kennedy
Members of pension schemes and also by fees from PRSA providers.
Was the charge approximately €8.80 per pensioner? Is that what it costs every pensioner, or every member of a scheme?
Mr. Brendan Kennedy
The charge for occupational pension members varies depending on the size of the scheme. The highest figure is €8 and it can be as low as €4, depending on the size of the scheme.
I got a figure of €8.80 from somewhere. Is that incorrect?
Mr. Brendan Kennedy
It was reduced since. The figure for 2011, with a scheme of 500 members or fewer, is €8 per active member of the scheme.
Could Mr. Kennedy refer to the pensions levy of 0.6%, which was the last straw? It was a case of the Government putting its paws into a pot that was pretty well plundered already by a lot of other people. What did Mr. Kennedy do about that? Did the Minister formally consult him on this?
Mr. Brendan Kennedy
No. I presume the Deputy means the Minister for Finance.
Yes.
Mr. Brendan Kennedy
No, the Minister for Finance did not.
He did not consult the board.
Mr. Brendan Kennedy
No.
What does Mr. Kennedy think that means? The Pensions Board is the adviser to the Minister on the pensions industry and he did not even consult it. Did the board protest about that?
Mr. Brendan Kennedy
No, we did not protest about it.
Why not?
Mr. Brendan Kennedy
The Minister for Finance will make his own decisions. Our responsibility in the Pensions Board is to advise our Minister. We did, as I am sure the Deputy is aware, write to the Government setting out the issues we felt should be taken into account in arriving at a decision on whether to impose a levy.
Does it not say something about the Pensions Board that the Minister did not even bother to consult it? The board represents the members, the pensioners, and their interests. It advises the Government on this kind of matter and the Minister proceeded without asking its opinion.
Mr. Brendan Kennedy
That is a question best addressed to the Minister.
How does Mr. Kennedy feel about it? The board was ignored in the most important decision on the pensions industry taken by the Government in a decade.
Mr. Brendan Kennedy
That last point is a matter of opinion.
A levy of 0.6%, or €400 million, is being taken out of the board members' pockets. It is not a matter of opinion; it is a matter of fact and it is a very important one.
Mr. Brendan Kennedy
It is a very considerable amount of money and I do not dispute its importance. There are many other important issues also but ultimately the Pensions Board's responsibility is to give advice. It is at the discretion of any Minister to seek our advice. That is the Minister's decision.
Did any of the board members consider resigning when they found that the Minister decided to do this?
Mr. Brendan Kennedy
I am unaware of anyone who considered resigning.
The board wrote to the Minister for Social Protection.
Mr. Brendan Kennedy
Yes.
After the decision was announced.
Mr. Brendan Kennedy
We gave our advice. We gave our views before the levy was finalised and that was our only advice on the matter.
If the Pensions Board were a body that carried some sort of clout and had some sort of expertise, the Minister would have at least asked it about the implications of his doing what he did. The figure was 0.6% and in my memory it represented the most important decision taken for the pensions industry and for pensioners. Instead of seeking advice, the Minister went ahead and made his decision. Nearly all the nominees on the board are Government nominees and there are a few people from IBEC and ICTU also. The Minister, therefore, is pretty happy that he can do what he likes because the board will not oppose him. In effect, that is what is occurring. The members are all still in situ and the pensioners, whom the Pensions Board is meant to be protecting, are crucified by the 0.6% levy. The Pensions Board is ignored. Is there a point in having a board at all if pensioners are not protected by it?
Mr. Brendan Kennedy
The decision on whether to impose a levy was a Government decision.
Correct.
Mr. Brendan Kennedy
The Pensions Board has, and should have, no role in making decisions on taxes and levies.
However, the board advises the Minister on all matters pertaining to pensions, particularly on matters involving the protection of pensioners. Its job is to protect pensioners.
Mr. Brendan Kennedy
It is our job to regulate pension schemes and advise the Minister on matters relating to pensions, and to provide information on pensions.
Okay.
Dr. Quinn wishes to comment.
Dr. Orlaigh Quinn
I confirm that the reporting relationship is between the Pensions Board and the Minister for Social Protection who advises her colleagues in Government, as required.
Yes, that is correct. The Pensions Board sets out its mission very clearly in its briefing document. It also states on page 10 that the board provides information and guidance to the public, and it does so through the media. Why did representatives of the board not appear on the George Lee programme, which I would have believed presented an ideal opportunity for the board to give its message to the media, considering it was the most high-profile opportunity the board had in a long time?
Mr. Brendan Kennedy
The Pensions Board gets hundreds of media queries every year. The makers of that programme contacted the board. We provided them with any information they sought. They asked us to do a pre-recorded interview for the programme. Given the issues that they were dealing with may have been policy issues, that we provided them with the information they sought and that not long before the interview invitation, we had engaged in extensive media coverage regarding our annual report, we decided not to do the pre-recorded media interview.
Is it that the board did not like the issues or believed they were outside its ambit?
Mr. Brendan Kennedy
As I stated, I believe the programme dealt with very important issues.
I did not understand it when I heard that the board did not go on the programme. It was a damning programme about the industry. There is no doubt that it was a story of higher charges and fund managers getting richer and pensioners and members getting poorer. It was also a story of appalling performance which presented the industry as a shambles. The head of the Pensions Board, knowing the programme was to be broadcast, said he was not appearing. If he is not prepared to defend his patch on what is the most high-profile broadcast on the pensions industry ever, I am not sure there is much point in having him or anybody else in the position. He is not prepared to defend his position and the Minister ignores him. The very justification of having a pensions board in its present form with its present board members has got to be called into question.
I thank the witnesses for appearing. My questions are based on the document they supplied to us, The Pensions Board Strategy 2011-2015. Let me refer to page 19, which pertains to pensions and the regulatory environment. The area the board focuses on is the issue of compliance with contribution expectations. There are two sentences to which I want to refer:
However, the ratio of the numbers of regulated entities to the resources of the Board mean that there are limits to the extent to which the Board can monitor this compliance, and so we must be cautious about drawing conclusions. The new data system, currently going live, will increase the Board's ability to track non-compliance.
Could the witnesses advise committee on this new data system? What is it expected to do and when will it be going live?
Mr. Brendan Kennedy
The Pensions Board is in the process of installing a new comprehensive data system. We have just finished going live; its live implementation has been ongoing since the beginning of the year. It pulls together the information supplied to us by administrators and trustees. We have a single common database, whereas previously, as is the way with older systems, we had fragmented and some ad hoc databases. Another important feature of the new system is that information is provided by administrators for us online, rather than on paper, which obviously reduces significantly the likelihood of errors being made.
As for how the system has improved compliance, it might be most efficient of me to ask Ms Hutch to update members on how it affects the conduct of regulation.
Ms Mary Hutch
Essentially, the system will facilitate direct engagement between the board and the entities it regulates. It will provide for more effective and efficient case management and, more importantly, risk profiling of these entities. We have adopted a proactive risk-based approach to supervising activity under the Pensions Act. We view this system as yet another important addition to our regulatory tools, particularly in risk profiling. For example, I draw members' attention to the same page of the strategy document which refers to the 190 pension administrators, what we call registered administrators. We sought to have an amendment made to the legislation, whereby trustees can now share some of the compliance burden with registered administrators whom they appoint to carry out certain core administrative functions. Again, this direct online engagement with entities such as the registered administrators will greatly enhance our ability to supervise the operation of the Act. For example, the data we collect on these entities can help us to identify, in accordance with a risk priority, which of them we should choose to carry out an on-site inspection in a given year.
Will the system specifically track non-remittance of contributions, or is it broader than this?
Ms Mary Hutch
It is much broader than that. Within the case management profiling section, we already have an investigations database that tracks such matters and which will be subsumed into the new system. That said, we also have a reliance on whistleblowing reports we receive on schemes in which there is an allegation of deductions being made and non-remittance of pension contributions. This would be particularly relevant, for example, in the construction sector in which, unfortunately, this is prevalent.
Does the Pensions Board have an estimated figure to hand for non-compliance?
Ms Mary Hutch
Non-compliance generally.
Ms Mary Hutch
While there is no concrete gross figure for non-compliance, I refer to the results of our on-site inspections of registered administrators. Again, I emphasise that, as members can see, there are 100,000 defined contribution schemes in Ireland. Realistically, we will not be able to interface directly with all of them. However, because 190 administrators have been appointed to these schemes, direct engagement with them means one is picking off thousands of schemes as part of an on-site inspections process. Thankfully, the results of these inspections thus far are pretty good in terms of overall administration. We are detecting instances of non-compliance, but it is mainly of a minor nature. That said, our goal is full compliance and we will police the findings of inspections with the particular administrators to ensure they remedy even the instances of minor non-compliance.
Is the system to which this strategy document refers live?
Ms Mary Hutch
It is not fully live but partially live. The funding module probably is the only module outstanding. However, for registration, data collection and so forth, the system is live.
Before it was introduced, how did the Pensions Board do this work?
Ms Mary Hutch
Since the Act became law in 1990, there has been a requirement on all schemes to register with the board. Since its inception, we have maintained the register of schemes. Not only are schemes required to register at the outset, but they also are statutorily obliged to update the board regularly on any changes to scheme details or the composition of the trustees and so forth. Moreover, as the registration process also requires schemes to pay fees on an annual basis, we are constantly interacting with entities. In addition, complementary to the register we have a number of databases, including, as I mentioned, the investigations database, as well as a database by which we monitor the funding standard. However, the good thing about the new system is that we can consolidate the register and those databases under the umbrella of one system.
My single observation in this regard is that I would have thought this was something that already would have been done and would have been working for some time, as opposed to it being a new system. Given that the Pensions Board is dealing with a pool of 190 administrators who cover a large proportion of the schemes in question, the benefits of putting in place a single database that has the ability to track compliance across the industry seem evident. How would the witnesses respond to the observation that something like this should have been in place a long time ago?
Mr. Brendan Kennedy
The first point is that the system has consolidated data and it is not that we now have information that was not available beforehand. This is more about how we manage the information. To be honest, particularly with hindsight, I would have liked to have had this system in place a number of years ago. However, it has been in gestation for three or four years. Obviously, when we were spending reasonably significant amounts of money, we wanted to ensure we were getting good value for money and that the system would do what it was intended to do. Moreover, there is always a natural tendency to be cautious about spending public money. One gets to the point where, although one wishes to make the best use of the existing system, one must change.
I accept that. What strikes me is that if one considers some of the points on which Deputy Ross touched in respect of knowledge of the performance level of the industry, had a system such as this been in place for a longer period, it would have increased the Pensions Board's ability to understand what was happening within the industry and respond to some of the challenges facing it.
Mr. Brendan Kennedy
Ultimately, the crucial point is that the data are available to us and that this system has not given us new data. If one takes the question of non-compliance within the construction industry, where employers fail to pass on contributions from their employees, that information is not available in our system. It never was and never will be because it involves a monthly payment and is information pertaining to a scheme. This system has enabled us to use information we have available more efficiently, pull it together and engage in much better case management. However, it has not added to the data we have available which are provided for us on a statutory basis.
I will move to a point Ms Hutch made on on-site inspections. Page 23, paragraph 4, of the on-site inspections document states: "The Pensions Board does not yet have enough experience of on-site investigations of registered administrators to provide a detailed assessment of administration standards". Why not?
Ms Mary Hutch
With regard to the on-site inspections of registered administrators, the whole regime of registered administrators only came into law in the last couple of years. Until that happened we would not have had the jurisdiction to go on site to the premises of those entities and check on their compliance with the discharge of the core functions that are given to them under the Act. Before the regime came into law we would have brought the administrators in to meet us on our own premises but that did not facilitate us going through their systems and processes to investigate more forensically their level of compliance with the Act.
The first tranche of inspections happened in 2010 and we did five at that point. This year we expect to carry out 14 such inspections and we will then accelerate that process from next year onwards. On the basis of that level of inspections, it is not enough to get a definitive trend. However, as I said earlier, the standards of administration that we have encountered are generally good. That does not mean there is no scope for improvement and we always advise the administrators concerned where they need to improve. After every five or seven inspections, we produce a report for our website on our general findings of the inspections so that the industry as a whole can benefit from them. There may be matters of practice there that other administrators can learn from and improve in their own entity. From next year on we would expect to accelerate the level of inspections up to about 30 per annum and will then be able to identify more discernible trends.
What happens if the board detects issues after it makes an on-site inspection?
Ms Mary Hutch
We have a closing out meeting before we leave the premises where we meet with the senior management of the entity concerned. We present the main headings of our findings orally. We then follow that with a detailed report citing all the instances that we came across. We give them a specific timeframe by which the matters should be rectified. During that timeframe we liaise with their compliance managers. Until we receive a final report from them to identify all the measures they have taken to rectify matters, we would also - depending on what we have uncovered - send some of our inspection team back into the premises of the RA concerned to physically check that everything is as it should be.
Ms Hutch says that the board did five visits, which are mentioned elsewhere in the statement.
Ms Mary Hutch
That was in 2010. This year we have done eight so far and we have another five scheduled to occur between now and year's end.
I wish to ask Dr. Quinn about the project she referenced earlier to determine the level of charge already in place. Will it be regularly updated or will it be one-off work that will say where things stand at the moment?
Dr. Orlaigh Quinn
Yes, we see it as establishing a benchmark for us. We would see it as a survey that we would repeat over time to keep a close eye on charges. We see it as an initial one. There will be a lot of learning in it but it will establish a benchmark and we would repeat it.
For how long has work on the project been ongoing?
Dr. Orlaigh Quinn
The initial identification of the problem was set out in the Green Paper on pensions. We have an implementation group on pensions, which I chair. We have had a series of different pieces of work we have been doing. Earlier in the year we started looking at this problem in depth, trying to tease out what information was already available - there is little or nothing - and trying to sort out terms of reference.
When was the Green Paper on pensions published?
Dr. Orlaigh Quinn
It was published in 2007.
It is staggering that we do not know the level of charges. While this report is to be welcomed, it follows on from an identification of the problem in 2007, yet we still do not know the level of charge that is applied.
Dr. Orlaigh Quinn
There has been a significant amount of work done on pensions in the last several years, including significant legislative change. Of course, we would like to have seen this earlier. I fully accept that.
What kind of response is the Pensions Board getting from the industry to the delivery of this project?
Dr. Orlaigh Quinn
The response is still at an early stage because it is based on a survey. I should say, however, that this is not a voluntary survey, it is mandatory. We will be using all the powers in the Pensions Act, and the Central Bank's powers, to ensure that we get full compliance with the survey. It is in the early stages, as yet.
Have they provided information back to the Pensions Board?
Dr. Orlaigh Quinn
No. Work on the study has only started in the past number of weeks.
Weeks?
Dr. Orlaigh Quinn
Yes, so it is too early to say that. We would expect full compliance with it, however.
Given that the collection of the information has only started in the last couple of weeks and given that we have already been able to identify that there is an opaque nature about parts of the industry, is Dr. Quinn confident of getting in the information by the end of the year and having a read as to where the levels of charging stand?
Dr. Orlaigh Quinn
We are confident that we will get the information.
Will it be retrospective? Are people being asked to say what the levels of charges were in the past and what they are now?
Dr. Orlaigh Quinn
Yes. There is a detailed exercise being done in terms of what exactly will be included in the survey but we will be trying to get every possible piece of information that will allow us to assess the impact on a person's overall investment fund.
Will the board be able to see trends that have occurred over time?
Dr. Orlaigh Quinn
It is a hugely complex piece of work and is a very big study but our aim is to get all the information.
Is the expectation that the information will be available on a regular basis?
Dr. Orlaigh Quinn
We would hope so, yes.
Dr. Quinn made a point about mandating the company administrators in question to participate in that. Is that a recent power that has been in operation or was it already available?
Dr. Orlaigh Quinn
My understanding is that we have had that power for quite some time. Mr. Kennedy might wish to comment on that.
Mr. Brendan Kennedy
The Pensions Board has the power to seek information relevant to the running of a scheme. It is part of the Pensions Act. The Central Bank has equivalent powers. This survey covers not just occupational pension schemes but also personal pensions which are supervised by the Central Bank.
Okay but I feel the need to ask again, why did this not happen before?
Mr. Brendan Kennedy
As Dr. Quinn has said, there has been an enormous amount of activity in pensions.
We have covered that point, so I will move on. Page 26 of the document concerns the annual monitoring indicators. It is a helpful table that goes through performance in a number of different areas. There are various pieces of information here. The first line refers to the number of level 1 and level 2 meetings with DB and public sector schemes. I presume that "DB" means defined benefit.
Mr. Brendan Kennedy
Yes.
It states that four such meetings happened last year. That appears a very low figure.
Ms Mary Hutch
Yes.
Is that a fair assessment, given than in 2010 it went from four to 12? Am I correct that four is a low figure there?
Ms Mary Hutch
There is something of a moveable feast going on there. I know we are not discussing 2009 but if we were I could point out that over 50 such meetings took place during that period. Perhaps I should explain what a level 1 and a level 2 meeting means. A level 1 meeting is one where the board convenes a meeting with trustees of schemes or administrators of public sector schemes. We bring them in and set a very full agenda that covers the full spectrum of compliance issues under the Pensions Act. A level 2 meeting is issue specific. In other words, it would tend to be mainly about the funding status of particular schemes. In 2009, we had 20 level 1 meetings with trustees of the largest defined benefit schemes, where we covered the full spectrum of compliance issues, but in the same year we had 37 level 2 meetings with trustees of schemes, all to help and support them through their deliberations on how they were going to meet the funding standard. When we had a hiatus with the funding standard deadline, that resulted in there being a lower number of schemes required for 2010.
Fine, that explains it. In row 3, where the figure goes from 5 to 14, are they the figures the witness alluded to earlier?
Ms Mary Hutch
They are. Again, that comes down to jurisdiction kicking in during 2009, developing our procedures in 2010 for carrying out the inspections in the first place, getting the first tranche in and now, because we have those procedures under our belt, we are gradually accelerating our numbers there.
I understand. Row 9 refers to the number of inquiries handled. Why is there not a target for 2011?
Mr. Brendan Kennedy
The reason we do not have a target is that it is not under our control. Obviously, it is part of our job to position the Pensions Board as a source of information, so we would welcome high numbers. It will depend-----
The demand is basically outside the board's control.
Mr. Brendan Kennedy
Yes. I would expect that figure to be quite high next year, for example, because many schemes will be going through reconstructions and I presume members will come to us with queries.
Okay. I will move to table 2, the key performance indicators, on page 28 of the document. Row 2 refers to information and guidance, the percentage of stakeholders satisfied and very satisfied with the quality of board information and guidance material. The document says the board wished to establish through a survey of the e-mail alerts database what the baseline position is. Was that established?
Mr. Brendan Kennedy
That survey is ongoing at present.
Does that relate to 2010?
Mr. Brendan Kennedy
Yes. In order to measure our progress over the five years, we must establish a baseline.
Would the stakeholders include the engagement the board would have with trustees?
Mr. Brendan Kennedy
There are different aspects here. There is a reference in row 2 to an e-mail alerts database. We have a system whereby people can register with the Pensions Board on the website and they will be automatically told about any new material through an e-mail. That database we are using is those who are aware of the Pensions Board and are connected to us.
Is that ongoing at present?
Mr. Brendan Kennedy
Yes.
With regard to row 3, the percentage of respondents satisfied or very satisfied with the board's response to inquiries, where does that stand at present?
Mr. Brendan Kennedy
Again, that survey is ongoing at present. In fact, if the Deputy went onto our website, he might be asked to participate.
I might do so.
Mr. Brendan Kennedy
Please do.
That concludes my questions. I thank the witnesses for responding.
To go back to the George Lee programme and the issues raised in it, would you have been aware of those issues? Would you have had knowledge and concerns that these issues existed in the industry?
Mr. Brendan Kennedy
Absolutely. It was a very important programme. It helps to publicise issues for people who might not be aware of them. However, they were issues of which all of us who are involved in pensions were already aware.
Arising from that, if you had knowledge about all of these, did you ever make recommendations to the Minister for a change in legislation regarding the work the board or the Pensions Ombudsman must undertake to expand their remit to deal with some of the issues that were raised in the last five years?
Mr. Brendan Kennedy
Yes, and I can give a number of examples. Before I do so, however, we have a constant dialogue with our parent Department. It is a very good relationship whereby we bring proposals to it where we identify the need for additional powers or legislative change.
You have brought proposals?
Mr. Brendan Kennedy
Yes. It is also in the Government's national pensions framework that further review of the powers of the Pensions Board will be considered.
Have those proposals been acted on?
Mr. Brendan Kennedy
We have brought forward a series of proposals and they have been acted on. Obviously, the Department, the Government and the Oireachtas are constrained by the legislative capacity. In other words, our list of legislation requests would be longer than can actually be dealt with in a given year.
There is a social welfare Bill every year.
Mr. Brendan Kennedy
Yes, and perhaps Dr. Quinn can expand on this, but there is only so much that can be fitted into the social welfare Bill given the resources needed to write the legislation and also constraints on what can be put in the social welfare Bill as distinct from being put through under a separate pensions Act.
For we who are outside the industry, the programme was frightening to watch and to understand that these charges exist, there is little or no transparency and little or no regulation. You do not contend with much in the programme; you said that generally it was accurate. Given the accuracy of the programme and what it revealed and the fact that we hear today the board is undertaking certain analysis and has projects under way, it would appear that we are behind the curve regarding what is happening in the industry. For me as an onlooker, in terms of public accounts and how the interest of the public is being protected, there is no speed in change on the part of the board and the Department, whether that is through legislation or otherwise, to effect the type of protection that is required in what appears to be a fairly sharp market. Has the board considered within its current remit issuing guidelines, for example, to take out some of the jargon and to give a better understanding to the ordinary punter who is considering pensions so they will have some type of indicator as to the percentage cost? Has anybody considered that?
Mr. Brendan Kennedy
We have considered it, and information is a very important part of what we do. On the issue of fees and charges, for example, we produced a guideline and checklist in early 2010 that trustees and ordinary members who might be considering personal pensions would find useful to help them when making decisions about pensions. We do not see it as simply a regulatory road. There are many alternative ways in which this can be tackled.
Does the board have general guidelines for the industry, to outline what might be expected from the industry based on the board's understanding of what is happening within the industry, just to set the matter straight for the consumer?
Mr. Brendan Kennedy
We do not have guidelines for the industry. We have the advice for the buyers not for the sellers, if I could call them that.
Would it be worthwhile to have that?
Mr. Brendan Kennedy
When the first results of the study are available, that will be one of the issues that will have to be considered, particularly, I suppose, between ourselves, the Department and the Central Bank. The relevant bits of the industry where the problems probably mostly lie are intermediaries and insurance companies. That is a debate we need to have with the Central Bank. It is not within our remit.
Does Mr. Kennedy understand that the public generally, and those with or without pensions who are looking in, want to see clarity and transparency around the issues that were raised and around the industry itself? The promise for that type of guideline would be fine if there was a tight timeframe on it. My point is there does not seem to be an urgency about it on Mr. Kennedy's side.
Dr. Orlaigh Quinn
Maybe I could comment on that. As I mentioned earlier, the study has already commenced. I take the points made that it should have been done at an earlier stage. I would also mention we have had significant pensions legislation over the last two to three years. We have brought in major changes every year. With the Social Welfare Bill, we have had a pensions Bill. For example, we brought in the pensions insolvency payments scheme, we brought in legislation to allow trustees restructure their schemes if they are in difficulty, we have given additional powers to the Pensions Board for stronger regulation in the construction sector where there was a very significant problem identified and we have the disclosure regulations.
We are working every year on a programme of legislation. As Mr. Kennedy stated, we work closely with the board and the Pensions Ombudsman also works very closely with us in bringing forward both issues and problems that they recognise. However, it is, I suppose, a very structured legislative programme.
In regard to the charges in particular, the Minister herself is on record that she awaits a report and she intends to look very closely at the results. This is on the Government's agenda.
It would seem, arising from the programme, that in spite of the Department's best efforts and the legislation that it has been putting in place, the industry still appears, as far as the ordinary layperson is concerned, out of control and in total charge of its own affairs.
I will put a question to Mr. Kenny on charges. Did Mr. Kenny mention 45% as a figure?
Mr. Paul Kenny
In the case one complaint that I got, it turned out that 45% of the first two years' premiums were being charged.
Would that be an unusual figure?
Mr. Paul Kenny
It would be now.
What would be the most usual?
Mr. Paul Kenny
What happened was that 15 or 20 years ago there used to be what was called a commission agreement in the insurance industry and that was deemed to be unlawful. What the then Minister did not appreciate, I think, was that it was actually a maximum commission agreement and by turning it off, the door was opened to virtually unlimited commissions. The old agreement that had existed in the industry limited the commission that any intermediary could take, and that was no longer the case.
The modern contracts which have now been introduced do not have the sort of commission charges that are found in the older contracts but they persist on those that date from the 1980s. I would fault intermediaries for not modernising them. They still have very high commission charges built in to them. The problem is a lack of transparency.
The Pensions Act is probably the most amended legislation ever. The only year in which it was not amended since it was first passed was 1995. Every year since then it has been amended. I have to say that I, personally, have found the Department very responsive when I have looked for any extension of my powers or any flexibility that I felt I needed to deal with complaints from scheme members and their dependants. I have found the Department very responsive in implementing the changes that I have asked for.
The one matter that I have spoken of several times today was the question of the lack of transparency. We are very heavily regulated in one area. With the best will in the world, we want to give a lot of information to scheme members. I have spoken on a few occasions recently in public about the need for members themselves to participate in the process and to take responsibility. Often members are given a choice as to how their money is invested and many of them either do not tick the box at all or go into a default mode because they do not feel able to make up their minds on how their money is invested. They are supposed to get, and by and large do get, annual statements of their benefits. They can monitor their funds, etc. Many scheme members choose not to do anything about that.
However, one of the big problems, I believe, is the quality of communication. In any kind of specialised area, there is a tendency to fall into jargon and to issue statements which are absolutely legally correct, totally complete, compliant with the regulations and utterly incomprehensible to the ordinary individual. That is an area that needs much work from the industry in terms of getting clarity communications.
That can be deliberate. It keeps everyone in the dark and one can work away under the radar.
Mr. Paul Kenny
One finds that these communications will tend to be vetted by the legal department. They are looking at their professional indemnity insurance. Their concern is whether it is all legal and it is correct, not necessarily whether their mothers would understand it.
I have one final question before I go to Deputy McDonald. According to the statistics available, 58% of the workforce is involved in some sort of pension scheme or other. Of that 58%, is Mr. Kennedy able to state, for example, how many would have pension pots of €6 million?
Mr. Brendan Kennedy
No, we do not have it. As I said earlier, that 58% includes everybody who has a pension, be it large or small. When the standard fund threshold was brought in and reduced, the Revenue Commissioners had this process whereby those who exceeded the threshold at that time had to register with them. One would find from the Revenue's statistics how many persons would have exceeded the standard fund threshold at the time it was introduced and at the time it was changed subsequently. I do not have that information to hand but it would be available.
In his opening statement, Mr. Kennedy made the observation of the need for stability in respect of the taxation of pensions. He further stated that the board "has recently provided the Minister for Social Protection with an analysis of the various changes to the taxation of pensions which might be under consideration". Would he tell us the content of that? For instance, did it address the issue of the standardisation of tax reliefs on pensions?
Mr. Brendan Kennedy
The approach adopted by the board was to identify all possible changes that we could think of to the tax treatment of pensions, including the one Deputy McDonald mentioned, and then to analyse each of them in terms of how it might achieve the objective of the Government with regard to revenue raising and, at the same time, its effect, unintended or otherwise, on the pensions system. That was the approach we adopted.
Is it the Pensions Board's view that there is considerable inequity in respect of the reliefs system?
Mr. Brendan Kennedy
There is a range of views on this. There is certainly a view held by many that there is an inequity in the current system. In particular, the board would be of the view that the objective of the taxation supports for pensions should be focused on lower and middle income earners and it should not be the objective of the pensions system to provide large pensions for high net worth individuals.
As I understand it, reports estimate that approximately 82% of those reliefs have gone to the top 20% of earners. Is that not deeply inequitable?
Mr. Brendan Kennedy
I do not have the aforementioned report to hand but those are the kind of figures I have seen.
In the analysis the Pensions Board has offered, does it offer a recommendation to the Minister? I am focusing on the specific issue of the reliefs. Mr. Kennedy mentioned the issue of raising revenue for the State. The yield from standardisation of reliefs has been estimated at between €500 million and, in an analysis conducted by the ESRI, more than €1 billion. This is a significant amount of money. What has the board said to the Minister? Has this alternative been recommended as a positive course of action?
Mr. Brendan Kennedy
As our report to the Minister is still subject to the deliberative process, I do not feel able to share the recommendations with the Deputy. Every possibility was analysed, including the potential revenue and the effects of it.
Quite aside from its advice to the Minister, does the board, independent of that, have a view in respect of these reliefs and their standardisation?
Mr. Brendan Kennedy
There are different views among the 16 members of the Pensions Board. There is no one single view of the board on a preferred approach to this.
So the board does not have a collective view on this.
Mr. Brendan Kennedy
We do not have a collective or unanimous view.
While I can appreciate that there would be a multiplicity of individual views, I find it strange that the board would not have an agreed position.
Mr. Brendan Kennedy
This report -----
When the board wrote to the Minister, it hardly set out that multiplicity of views. It must have arrived at something to give a view of the measure.
Mr. Brendan Kennedy
Yes, and this report is an agreed report by the entire board. I apologise; I am maybe not being clear. I think there were 15 different possible changes to pensions identified in this report and different members would have had different views as to the impact of these measures and how they could be combined. It is not only a question of what changes one should introduce but also how much the changes could be. Different members of the board would have had different views and preferences among them, but the advice to the Minister in recent weeks is an agreed report by the Pensions Board.
On a very relevant issue of incentivising pension funds to invest in Ireland, Mr. Kennedy will know that very many bodies, including the trade unions and others, have been arguing for this. The Minister for Finance has said that there is engagement on the issue. What is the Pensions Board's view of the proposal and has it offered any advice on this matter?
Mr. Brendan Kennedy
This was one of the issues covered in our report. As the Deputy said, there are many who believe it should be possible to ally the needs of pension funds for appropriate investment with the needs of Ireland to receive appropriate investment and would like to see some means of achieving it. Two constraints have to be taken into account. The first is that, under EU law, Irish pensions law would not be allowed to favour investment in Ireland over investment in other countries. Also, going back to earlier discussions here, it is obviously important that the form of the investment be appropriate to the liabilities that pension schemes are investing to meet. That is a question of structuring it. Therefore, it is going to have to be a case of constructing investments that are attractive to pension funds rather than obliging them to invest. I do not believe it would be possible under EU law to oblige pension schemes to invest in Ireland.
Dr. Orlaigh Quinn
The Government did bring in legislation last year to enable sovereign annuities to be purchased in Ireland. We have worked closely with the NTMA, the Pensions Board and the Departments of Finance and Public Expenditure and Reform to establish guidelines to facilitate that. All the indications are that it will happen in the near future and that everything is in place to facilitate that to allow pension fund trustees to purchase sovereign annuities to facilitate them with their funds.
What would the timeline be on that?
Dr. Orlaigh Quinn
We have heard that it could be before Christmas but certainly in the early part of next year.
To return to the pension levy, it is reckoned it will raise €470 million a year over the next four years. There is a widespread view that this also is a deeply inequitable provision. Mr. Kennedy said in response to Deputy Ross that the board advised on the levy. What was the advice? Was it not to do this?
Mr. Brendan Kennedy
Our advice was not for or against it. What we wrote to our Minister is in the public domain at this stage. Our advice was that if one was going to consider a levy, one needed to be aware of certain issues.
The board gave non-directive advice. It is like a non-directive counselling service.
Mr. Brendan Kennedy
In this particular instance, it was non-directive advice. Our objective was to make sure that before any Government decision was made, the implications of the levy were fully understood.
Particularly in this instance, why was the advice non-directive? By Mr. Kennedy's own knowledge, pension funds are under massive pressure. Given the economic outlook, that will continue to be the case. Why is it that piece of advice would have been non-directive and simply a commentary rather than a view?
Mr. Brendan Kennedy
The reason for that was the levy on pensions was part of a wider policy incorporating job creation initiatives, so that the-----
That is debatable, but how and ever.
Mr. Brendan Kennedy
I choose my words as accurately as possible. The Government's intention, as we understood it, was that the levy would be used for various other non-pension purposes. The final policy decision obviously encompassed a wider range than the pension area. Our expertise and remit is purely about pensions.
That I appreciate, so why would the board feel obligated to take on board that wider issue, whether it was jobs focused or anything else? Surely the board's role, as it states it, is to safeguard the interests of occupational pension scheme members, and it talks about the sustainability of the pension system. To take that quantity of revenue annually from funds represents a haemorrhage and a threat to funds that are already under pressure. I think that would be a fair thing to say. I do not understand, given the remit and concerns of the board, how it is that it did not simply state to the Minister that the levy should not be introduced on its watch. I say this purely in respect of the pension funds, leaving aside entirely why the Government was doing it and looking exclusively at the board's job of work.
Mr. Brendan Kennedy
There is no question and no dispute by anybody that taking €470 million a year out of pension funds leaves them considerably worse off. It is a great deal of money. The policy decision made by Government was whether taking that money from pension funds and using it for different purposes was in total an appropriate decision. That is something-----
That is a call for Government. That is taken as read. That was not the Pension Board's call, whose watch is the pension funds.
Mr. Brendan Kennedy
Yes. It was our obligation to make sure that the Government understood that taking this money out of pensions was going to have repercussions and one of the many repercussions we have pointed out is that many defined benefit schemes have deficits. This is going to make things worse and more difficult, so that was among the things stated in our response. In order for us to say, "Therefore, don't do it", we would have to take the view that the damage to defined benefit pension schemes is not worth the potential benefit elsewhere.
That is where I disagree with Mr. Kennedy. I do not see in the remit of the Pensions Board anything other than a requirement to watch the money and watch the pension funds to ensure there is sustainability.
Mr. Brendan Kennedy
I believe the Government element-----
I do not see any broader involvement. I am not fully au fait with the fine details of the Pensions Acts, but if Mr. Kennedy can direct me somewhere that I can find that broader remit for the board, I will happily go and read it.
Mr. Brendan Kennedy
No, the Deputy is absolutely right; we do not have that broader remit, which is exactly the point I am trying to make. We did not advise against the levy because we do not have that broader remit. There is no doubt that when our Minister looked at what we communicated about the levy, we made it clear that the levy was going to have negative repercussions for pension schemes. I have no doubt but that we made that clear.
Is the board precluded from strongly advising the Minister that this is not a wise course of action, and that in its view with its statutory function it does not favour it and opposes it?
Mr. Brendan Kennedy
In this particular instance the board - and it was discussed obviously by the full board - took the view that our advice should be limited in the way that I have described.
Many people with money in pension funds will not be happy to hear that. If the board is to be true to its mission as stated here, obviously it cannot usurp the function of Government. The political reality is that Government and Ministers will take their decisions as they see fit, which is entirely proper, but it does not relieve Mr. Kennedy of a responsibility to give the clear opinion of and decision from his board. If the board is not doing that, one must wonder about the value of its advice. Anybody can write to the Minister outlining that on the one hand this is the case and on the other hand that is the case. However, the job of the Pensions Board is to watch the pension funds on behalf of those paying into pension funds. The public must have every confidence that the board's views and advice are not compromised by some sense that collectively it has a responsibility in respect of broader Government policy. I do not believe that is a proper way for the board to proceed.
Mr. Brendan Kennedy
I accept that there are people who disagree with the approach adopted by the board, but just on a point of detail, I would emphasise that the approach the board was taking was not because the board felt it had a wider brief, but absolutely the opposite, that the board felt it did not have a broader brief. However, on the Deputy's fundamental point about people disagreeing with the board's view, I recognise that.
My fundamental point is that when something is in the ether or is proposed and is injurious to the funds in respect of which the board has oversight, the pension holders to whom it has a duty of care should be the board's sole focus. Its sole call is whether €470 million a year off the top is good or bad for the pension funds. It is clear is that it is bad. I believe that the board should be independently in a position to state that quite clearly to the Minister. I would regard that as one of the board's critical roles.
Mr. Brendan Kennedy
I recognise what the Deputy is saying. The board took the decision it took.
I find that alarming, and that is not to criticise any individual personally. For the average person who is paying into a pension fund, that is highly unacceptable. If we have independent bodies set up specifically to oversee and champion the sustainability of schemes and the rights of those paying into those schemes, that must be the Pension Board's function.
Before the Deputy moves on, I wish to ask Mr Kennedy a question. In 2009 the cost of expenses for board members was €131,000 - the board fees.
Mr. Brendan Kennedy
Yes.
In 2010 it was €119,700. What does Mr. Kennedy estimate it will be for the current year?
Mr. Brendan Kennedy
I am afraid I do not have that information to hand. It will be no higher than last year, but I would have to come back to the Chairman with that figure. I do not have that budget figure to hand.
Let us say it will be the same as 2010, €120,000. For that kind of fee the expectation of the type of advice outlined by Deputy McDonald is not fulfilled. This morning's exchange leads me to believe the board does not offer value for money, which is within the remit of the Committee of Public Accounts. I wonder about the sense and value for money of having 16 members on a board that cannot reach a conclusion on one of the most important decisions affecting pension funds the Government took in recent times. As the same board oversees the non-availability of statistics, information or guidelines, it is shocking that its members would be paid that amount of money for so little output. That is the point that needs to be made in the context of what Deputy McDonald is saying, on which I support her. Paying such fees to members of a board which cannot make up its mind or advise the Minister on a particular issue with one voice raises serious questions about the value of the board at all.
I agree. I wish to move on to the board's key performance indicators as outlined on page 28. Point 4 states: "Effectiveness of the policy advice function will be assessed via feedback from the Department of Social Protection and other relevant departments." It states that the data will be qualitative in nature and will be assessed on the basis of interviews and so forth. This is an extension of my concern. The board will gauge the effectiveness of its advice by taking the view of its principal Department and other Departments. That goes to the heart of its independence. It should have a view as to whether its advice is being listened to, valued in any way or implemented in the best interests of the pension schemes and those paying into them. I find it astonishing that it would ask the Departments and form a view on the success of its policy advice based on what the Departments think. Clearly the Department is entitled to have a view and if the Pensions Board is giving muddled or, heaven forbid, misleading advice, the Department is legitimately within its rights to call it on it. However, I find it very troubling that the board would assess the quality or effectiveness of its policy advice on the basis of what the Department thinks. I am astonished this is a key performance indicator. I would take more as a performance indicator the fact that, although it is not explicitly stated by the board, the 0.6% pension levy was bad news for pensions in Ireland. However gently it may have phrased them, any reservations it had were ignored. This is a key performance indicator. I ask Mr. Kennedy why he measures his policy advice on the basis of what the Department thinks. Does this not entirely undermine the board's independence?
Mr. Brendan Kennedy
My response has a number of aspects. There is no question that we always have a view on the quality of our advice, the extent to which it is listened to and its usefulness and relevance. However, it seems that a self-assessment of how we perform would not be as useful as a third party assessment. The legal obligation and function of the board in terms of policy advice is to provide information to the Minister for Social Protection and the Department. Therefore, in preparing a strategy where we provide a service to a Department, it is sensible to involve it in assessing how well we fulfil our legal remit.
The pension levy was the decision of the Oireachtas. Personally, I do not agree the performance of the board should be subject to a decision of the Oireachtas in which the Pensions Board quite obviously and properly has no part.
No, but this comes back to how the board understands and exercises its function at a fundamental level. All of the signals I pick up from Mr. Kennedy suggest he does not give definitive advice, backed up with analysis, on whether something is a good or bad idea. What is on offer seems to be general commentary. I also pick up a clear signal that considerations far outside the protection of pensions are factored into his thinking. By way of assessment of the quality of his policy advice he asks the Department, and it is not just that this is an element of the board's key performance indicator, it is its key performance indicator.
What does this say about what it is in the mind of the average person who struggles to read the impenetrable language of pensions? What confidence does this give in respect of the board's core function which is to support a sustainable pensions system providing adequate and reliable pensions for retired and older people? Whatever about the board's relationship with the Department and the Minister, which is necessary, when one cuts to the chase, this is its core position. Given the way I understand the board went about the pension levy, the board collectively failed to fulfil this core function. I understand it did not introduce the levy but this is not the issue. What I am calling into question is its advice and actions in respect of defending pension funds because as I see it, this is its baby. Leave the politics and this type of decision making to the Government and politicians.
Mr. Brendan Kennedy
I disagree with the Deputy about our advice to the Department. I cannot remember the exact phrase she used but it was along the lines that it was very high level and vague. We give advice formally and informally to the Department on a very regular basis and I believe it is of high quality and leaves the Department in no doubt as to what our views are and what it needs to know.
My interpretation of the core function of the board is what is written in legislation. This legislation states we have an obligation to advise the Minister. I will repeat that therefore I think the people best placed to assess our performance of this statutory function are those to whom we give the advice.
I disagree profoundly with Mr. Kennedy. I was concerned by the revelations made in a programme presented by Charlie Bird. I will come away from this meeting-----
George Lee presented it.
Yes, George Lee.
He will be very upset.
It was a programme by a famous RTE guy. I will come away from this meeting even more concerned.
I wish to ask about the composition of the board. Who is on the board, how were they appointed and by whom?
Mr. Brendan Kennedy
The composition of the board is set out in legislation and at present it has 16 members.
Will Mr. Kennedy tell us who they are?
Mr. Brendan Kennedy
The chairperson, Jane Williams, was nominated by the Minister for Social Protection; Kevin Finucane was nominated by the Association of Pension Lawyers in Ireland; Patricia Murphy, from the Department of Social Protection, was nominated by the Minister; Don O'Higgins was nominated by IBEC; Rachael Ryan of SIPTU was nominated by ICTU; Robin Webster of Age Action Ireland was nominated by the Minister; Rosalind Briggs of Mercer was nominated by the Society of Actuaries in Ireland; Brendan Johnston was nominated by the Irish Insurance Federation; Terence Noone was nominated by the Minister; Phelim O'Reilly was nominated by the Irish Association of Pension Funds; Mary Walsh was nominated by the Minister; Noreen Deegan was nominated by IBEC; Professor John McHale was nominated by the Minister; Emer O'Flanagan was nominated by the Minister; David Owens is a representative of the Minister for Finance; and Niall Walsh was nominated by the Consultative Committee of Accountancy Bodies - Ireland. They are listed on page 7 of our annual report.
Noticeably, there is an absence of any consumer or user interest on the board. I thank Mr. Kennedy for his answers.
On the same theme, board members are paid for attending meetings, and regardless of the number of meetings attended it is a set fee for the year. Is this correct?
Mr. Brendan Kennedy
That is correct.
A number of the board members are from within the system and are associated with social partnership.
Mr. Brendan Kennedy
Sorry?
Are they or are they not?
Mr. Brendan Kennedy
From the system?
Are they people from SIPTU and IBEC?
Mr. Brendan Kennedy
Yes.
Did you ever recommend to the Minister that perhaps those people who are that close to the system generally or full-time paid officials should not be paid the fee for being a board member because they are already being paid?
Mr. Brendan Kennedy
The payment of fees to board members is a matter for the Minister and the Department so it does not fall under my personal remit.
I understand that, but did the delegates ever make a recommendation in this regard?
Mr. Brendan Kennedy
I personally did not.
Dr. Orlaigh Quinn
To clarify, the representatives of the Minister for Finance and the Minister for Social Protection are not paid as board members. There is no fee involved.
I accept that, but I am referring to all of the others. I hope that any such persons would make their contribution to this and other boards without accepting a fee. My point is that they are paid officials who already receive a salary. It comes back to the same theme - without getting back into the argument - that the Pensions Board does not seem to make any firm recommendations on these types of issues, including the universal social charge. There are issues in regard to the make-up of the board and how it reaches decisions in terms of some of the advices it gives. Yet members of the board continue to be paid €120,000 or €130,000 in fees. That is what concerns people, against the backdrop of the programme we have all mentioned this morning and the other issues that are being discussed in the public domain regarding the pensions industry.
Dr. Orlaigh Quinn
I wish to comment briefly on that. I will not comment on the levy because it is a policy matter and thus a matter for the Government. It is true to say that the board gives policy advice on a range of areas and it is valued for that. In my years of working on pensions, I have seen that it is a very contested space and that people have very different views across the spectrum. It does not surprise me that among any grouping of people talking about pensions, one would get different views. The value of the Pensions Board is in bringing together that disparity of opinions and offering a representative view. It means the Minister gets the value of all of the views that pertain in each area of pensions policy.
However, my point is that the board does not come down in favour of one single view, whether by a majority decision or by consensus. One could acquire a multiplicity of views simply by writing to people, without charging them €7,600 per year.
Its balance sheet shows that at the end of 2010 the Pensions Board had €7.3 million in the bank, which seems a very large amount. Will Mr. Kennedy comment on that and indicate the current balance?
Mr. Brendan Kennedy
This issue was raised by the Comptroller and Auditor General some years ago. It is not the objective of the Pensions Board to accumulate assets of this nature; on the contrary, it is our active policy to run that figure down considerably. We charge a fee per employee member of a pension scheme. The sum accrued has accumulated over a period of years, particularly since about 2005 as the workforce expanded and pension coverage kept pace with that.
What happened was that over several years where we budgeted for small surpluses, break even or even deficits, a combination of increased fee income and lower than expected costs, particularly in staffing and professional fees, meant that we ended up with a series of underspends. For the past two years, at the beginning of 2009 and 2010, we recommended to the Minister that our fees, which are set by regulation, be cut in order to reduce this surplus. At this stage our budgeted projections is that we will have a deficit for 2011 of €300,000, which will reduce the accumulated surplus to approximately €6.9 million. Our budget for 2012 anticipates a deficit of approximately €1 million.
The board is going from a situation of profit-making to loss-making. How many years will it be before the accumulated surplus is eliminated?
Mr. Brendan Kennedy
It is difficult to say but maintaining what we plan to do next year, which will give us a deficit of some €1 million, for five years would reduce the accumulated balance to approximately €2 million. That is around the level we would like to maintain.
Would the board propose to increase the charges to pension funds thereafter?
Mr. Brendan Kennedy
We would, in order to bring us back to a break-even position.
That amounts to the Pensions Board setting charges to accommodate its own priorities. In the current financial climate, having €7 million sitting on a balance sheet, making a return of approximately 2%, seems bad value for the public purse. I am concerned that there are these sums of money in various public bodies while for ordinary people the cupboard is bare. The committee, in conjunction with the Minister for Social Protection, should examine whether we are getting value for money for the taxpayer in this regard. There is nothing personal in this; it is not unique to the Pensions Board and is replicated across other State boards. It is the role of this committee to examine such practices. It is an issue that has been raised by the Chairman and we should deal with it proactively in these difficult times, perhaps by way of an audit of all public boards and State bodies with large accumulations of cash on their balance sheets.
Does the Pensions Board have a role in terms of examining pension funds where the pension levy is absorbed into the management fee rather than being passed on to the pension recipient? The board effectively takes policy direction from the Government and the clear policy direction of this Government is that the pension levy should be absorbed by the management fees of the pension fund itself. Will Mr. Kennedy indicate whether the board has a role in this regard, given that its mission statement is to promote the security and protection of members?
The chairperson of the board, Ms Williams, has conveyed her apologies to the committee for her absence. We like to see chairpersons appearing before the committee.
Mr. Brendan Kennedy
The chairperson had an unavoidable prior commitment. The invitation from the committee was to me as Accounting Officer and not to the chairperson.
Mr. Kennedy is very welcome.
Mr. Brendan Kennedy
I appreciate that. I wanted to make that clear, for the chairperson's sake.
In regard to the levy and who absorbs it, the legislation giving effect to the levy, which is Finance Act legislation rather than Pensions Act legislation, gives scheme trustees the right to reduce benefits in order to reflect the effect of the levy. It is a decision that the trustees, usually in consultation with the employer, will make as to whether benefits should be reduced. If the advisers to the schemes reduce their charges in order to absorb the levy, that is a discussion and decision between the trustees and those people. We do not have a role or involvement in that; it is a scheme-by-scheme discussion and decision. We have no powers in that area.
Does the Pensions Board have a supervisory role in respect of pension schemes?
Mr. Brendan Kennedy
It has a supervisory role in respect of trustees of pension schemes in so far as they are relevant to the Pensions Act. We have no legal powers in terms of operation of the levy.
Would security and protection of members' interests not fall within that role? I was not here earlier and I am sure Members addressed the issue of management fees. Also, Mr. Kenny referred earlier to the inconsistency in respect of management fees. Does the Pensions Board have a role in respect of management fees charged through various schemes, which are inconsistent?
Mr. Brendan Kennedy
No, it does not. We do not under current legislation have any control over fees.
Has the Pensions Board board discussed the issue and formed a view on it? Have views on this issue been expressed to it?
Mr. Brendan Kennedy
The board has a general view that in particular cases fees are high.
It is all very well saying fees are high. The Pensions Board is a State board and a highly representative group. Does Mr. Kennedy believe that the Pensions Board has an obligation, in terms of members' interests, to express a view in regard to management fees?
Mr. Brendan Kennedy
The Deputy will be aware that the Pensions Board is part of a project being run by the Department.
I am speaking about the board, as a representative group.
Mr. Brendan Kennedy
The board, as a representative group - which comprises 16 members - has not made a public statement on this matter. However, its general view is that there are cases where fees are too high. The issue for all of us is, if fees are too high, what should be done?
Does the Pensions Board have the wherewithal within its terms of reference and structure to issue such a statement?
Mr. Brendan Kennedy
We can issue any statement we so choose. We have the remit to do so.
Is it not surprising then that the Pensions Board has not done so in order to protect members' and board members' interests and of fairness? While some pension funds are charging a particular percentage of a management fee others are charging much higher levels of fees. I would have thought that as a board the Pensions Board would take comfort in making such a statement.
Mr. Brendan Kennedy
I would distinguish between the various steps the board can take. Making a public statement is one such step. However, it is not the only one. The view of the Pensions Board is that charges are a concern. However, we first need more data in this regard following which policy decisions will need to be made.
Can I take it that the Pensions Board will examine the data in this regard, which should be available to it, and will as a board make a pronouncement on this issue?
Mr. Brendan Kennedy
The preliminary data will be available before Christmas. There is no question but that the board will be examining it. We are part of the oversight group. I cannot speak on behalf of the board and say whether it will make a public statement. However, there is no question but that the board will form a view as to what steps should be taken in response to this matter. That may well include a public statement but I am not in a position on behalf of the board to say that.
It is very important it does. There is a danger of it being perceived that within the Pensions Board are Chinese walls. What is required is a statement of fact. Pensions are being charged at different rates. I ask that the board make a statement. It is hoped such statement will be made prior to Christmas.
Mr. Brendan Kennedy
I will convey the Deputy's strong views to the board.
And the urgency of doing so.
Mr. Brendan Kennedy
Yes. Clearly all of this is dependant on the timing of the output. Subject to that I will convey the Deputy's views to the board.
On the 45% charge referred to earlier, did the Pensions Board ever, on foot of complaint and so on, instruct repayment of those charges?
Mr. Paul Kenny
Yes. In one particular case a man had entered into an agreement with an intermediary that there would be no commission paid and the insurance company concerned included arrangements for no commission to be paid. Somewhere along the line the system failed and the intermediary was paid a renewal commission every year. The intermediary said nothing about this. The man only discovered after a number of years that commission was being deducted and paid to the intermediary. I hope he sacked the intermediary. We arranged with the insurance company that the matter would be rectified for him.
In another case, a man objected to the level of charges being made. Following much involvement with the insurance company concerned we arranged for a refund of the charges to him.
Has the Pensions Board received any individual complaints from pensioners arising from a reduction in their pension of 10% as a result of the pension levy?
Mr. Paul Kenny
So far, no one has complained to us about their pensions being reduced. The levy is only working its way through in terms of reduction in benefits. There has been no immediate reduction in benefits. Trustees are stepping back and trying to work out what they can do in the face of the levy. The levy has only commenced deduction and trustees are trying to figure out how they will apply it. There has been no major-----
It is now even more critical that the Pensions Board gives direction and guidance on this issue. It is a critical issue, which as stated by Mr. Kenny, involves timing.
Mr. Paul Kenny
The levy has already been taken. It represents a reduction in people's pension funds. I have received correspondence - I can do nothing about the levy, it is a statutory obligation - from a man complaining that he had not been told the levy would apply and that had he retired before 30 June he could have avoided paying the levy. The timeframe was so tight that there was no way he could have exited by 30 June. Nevertheless that was his complaint. He believed that he could have avoided the levy had he retired and bought his annuity. People are definitely concerned. The extent to which employers will be able to bear the levy is another matter. Some employers may well be able to pay all or part of the levy from their own resources and thus avoid a hit on the pension fund but a great many others will not be.
I would like to take up Deputy O'Donnell's point of what happens after that. I understand that the levy has to be paid but this will hit individual pensioners. It would appear from the correspondence which some of us are receiving that the figure of 10% is being mentioned. Given the levy will be 10% can the Pensions Board issue a guideline in that regard or will it be a matter for individual schemes?
Mr. Paul Kenny
It will be a matter for individual schemes. Trustees will have to engage with the sponsoring employer in each case to figure out how best this can be tackled. Unfortunately, if the employer is not able or willing to meet the cost of the levy, benefits will be reduced.
Does 10% appear to Mr. Kenny to be too high?
Mr. Paul Kenny
That is the impact which the Society of Actuaries has worked out as being likely. Also, the levy does not fall equally on everyone. A person who is 35 with a relatively small accumulated fund would see a small absolute amount coming out, and that person would have 30 odd years to make it up. With a person who is 64, it is a different matter, and if the levy hits immediately before retirement, it has a greater impact.
This matter has been raised by affected constituents and goes right across the country and the industry. The 10% figure has been mentioned by the industry, and it can be expected. Did Mr. Kennedy alert the Minister to this through correspondence, particularly the knock-on effect of the pension levy? Was it missed in consideration of the issue?
Mr. Brendan Kennedy
As far as I recall, we did not specifically mention 10% but it was certainly part of our communication that the benefits would be reduced. There are two ways of reducing benefits in respect of the levy charged this year of 0.6%. For a person already receiving a pension and who has retired, there could be a reduction of 0.6% from now until the end of life. The alternative approach is to make a deduction from the pension received this year in respect of this year's levy, and that is where the 10% figure comes in. For every euro that a pensioner is currently getting per annum in a pension, there would typically be €13 or €14 of assets in the pension scheme. That is how a 0.6% levy changes to a 10% deduction in a given year. There would have been a good all-round understanding of the physical effects of the levy. When we engaged with our Minister about the possible effects of the levy, at that stage the levy amount was not known.
It would be 10% each year.
Mr. Brendan Kennedy
It would be 10% for each year the levy is charged. If the levy is charged for four years, it will be 10% for those years before the income reverts to the original amount.
I know the witness mentioned this already but I want to be clear. There is nothing which can be done with regard to the application of that 10% or how it is applied. That is the way it is, although there can be differences depending on the scheme.
Mr. Brendan Kennedy
The trustees in each scheme must make a decision. As Mr. Kenny mentioned, there will be discussions with the sponsoring employer and trustees will also make the decision if the benefits of the member are to be reduced on whether to make a one-off reduction for each year the levy is charged or whether to spread it over the longer period.
It could be less than 10%.
Mr. Brendan Kennedy
Yes, but the financial effect will be the same.
The 10% figure seems to be the one being used.
Mr. Brendan Kennedy
That is the number I have heard in a number of cases.
With regard to the cash aspect of an individual pensioner, the deduction could be spread over a longer period. For example, the pension levy is for four years but that could be spread-----
Mr. Paul Kenny
It could be spread over the rest of the pensioner's life. If that was the case, the impact per annum would be far less.
As an entity, the board might consider that issue.
The Pensions Board should make that point generally known. It is the trustees of the scheme who will make the decision on whether the 10% figure will be applied or the smaller figure over a lifetime. That is a valid point.
It is very important that the board get proactive on the issue. From the perspective of the ordinary pensioner, he or she is not interested in the semantics. Such people are interested in how this will hit their pension in a particular year. The variables are the management fee, which is primary, and the option of spreading it over a period. The issue is operating in a vacuum and there is a worry that the balloon will have fallen from the sky without all the elements being considered.
This concern is beginning to surface. The knock-on effects of the pension levy should be generally known to people and the request is that the Pensions Board should make the options generally known so that people involved in these schemes can at least talk about the options, have an influence on decisions and understand that there are options other than the 10% figure. That is an important choice for the scheme members. These people have turned to us as public representatives to in some way seek direction and guidance but the Pensions Board can now give such guidance, direction and information that would help members understand what the trustees or the scheme might be doing generally. Could that be done?
Mr. Paul Kenny
Incidentally, the example of a 64-year-old I mentioned, who would pay a levy in the year before retirement, would see the cost defrayed over the rest of that person's life. It would have reduced the pot of money that exists to buy the pension. In that case it is a defined contribution scheme, where a pot of money would be applied to buy a pension. If the levy is paid before the person retires, the pension is reduced for the rest of life.
The witnesses have said they use the media from time to time. Can what I outlined be done and will the board undertake to do so?
Mr. Brendan Kennedy
We will definitely be engaging with the media and making public statements on the issue. As Mr. Kenny indicated, in many schemes trustees have not yet decided what to do with regard to the levy. In 2012, most defined benefit schemes with deficits will in any event have to produce a plan to tackle those shortfalls. The feedback we received from those involved in pensions is that many trustees are folding those decisions together and placing the levy in the context of bigger deficits. We already have plans to ensure that we are out there so that trustees and members can be aware of what is going on.
Surely it should be the first item on the agenda of the next board meeting? It is currently the biggest single issue for pensions out there for the short term.
If information on options - what can be done with regard to the pension levy - is not out there, the 10% figure would become set in stone as an easy option. It is possible that the member would be penalised or suffer ultimately. If the information is put out there, it will cause conversation between members in these schemes and that will allow people to actively pursue what may be a better option than what is being proposed by trustees. At the least, there could be some influence on the decision if people understand the background better.
In all the discussion this morning, what is clear is not so much a lack of information but rather a lack of information to be understood by the lay person. There is a big deficit in that regard and this information must be provided. The issue is being raised now but I would like to hear the Pensions Board representatives comment on this clearly as soon as possible in the public domain or through advertising, etc. It should not be left on the long finger as the issue is currently being discussed by members who are writing to us and who have serious concerns about the 0.6% figure being turned into 10% on their side. That is the reality and the matter must be addressed. If we cannot turn to the board and ask it to address the problem quickly, to whom can we turn? That is the reason I am asking the direct question. As Deputy O'Donnell has mentioned, will the board place this as a priority item on the board's agenda and get the message into the domain?
Mr. Brendan Kennedy
We can undertake to do so.
Dr. Quinn referred to the sovereign bonds but has the analysis indicated what percentage of a pension fund can be invested in sovereign bonds and the type of bonds it could take when it is envisaged this process is up and running? That would be a proactive action from the pensions industry in supporting Ireland Inc.
Dr. Orlaigh Quinn
I mentioned that the guidelines are now in place and the legislation has been brought through. The National Treasury Management Agency, NTMA, is actively working on this and I know some of the companies involved are also considering developing products. There is a chicken and egg situation here in that we have to see what the demand from the market is before the NTMA can make the bonds available, and considerable discussions are taking place there. The idea is that there would be long-term bonds involved which would allow pension schemes longer------
Long-term bonds?
Dr. Orlaigh Quinn
They could be for a term of 20 to 30 years to allow pension schemes to match their liabilities over the long term. That is of interest to trustees of pension schemes.
Does Dr. Quinn envisage that will go live early in the new year?
Dr. Orlaigh Quinn
I said it could possibly happen before Christmas but we will certainly see it in the new year.
That is a welcome development and we want to hear a pronouncement on that as well.
We receive many queries concerning the offices of various ombudsman, particularly the Pensions Ombudsman. Is there a backlog of work in the office as the workload of many of its staff members appears to indicate? What is the average time involved in dealing with a case?
Mr. Paul Kenny
The average time is approximately 30 weeks but it depends very much on the case. The fastest case I ever closed was by way of a telephone call that took three minutes but there are cases that have gone on for years. We are very often dependent upon the responses of the people involved in the administration schemes and, unfortunately, sometimes those responses are very slow. In other cases, they are non-existent and we have been obliged to take people to the District Court and prosecute them for failure to respond to requests for information.
Does the ombudsman need any further tools? When people come to us they are invariably at their wits' end, having explored every avenue with whomever they have dealt regarding their pension. Is there anything further the ombudsman needs to expedite some of these cases?
Mr. Paul Kenny
I do not believe there is anything in particular from the point of view of legislation that we need to expedite some of the cases. There are powers I would like to have in terms of the redress that I can award but apart from that, the industry, as such, is very co-operative and has responded very well to our requests. I regret to say that parts of the public service are not so good.
Mr. Kenny might elaborate on that.
Mr. Paul Kenny
There are areas where we have had difficulties with the public service in terms of it reacting to our requests for information. There is perhaps too great a dependence in some areas of the public service on the Department of Finance or the Department of Public Expenditure and Reform, including the need to refer back to the Department at all times because the expertise may not be available locally in particular Departments or organisations. The Department of Finance probably has a bottleneck in terms of this work.
It does. It also has one with this committee.
Has the ombudsman done anything to find a methodology whereby that process can be speeded up?
Mr. Paul Kenny
We have engaged directly with a great many of the Departments and agencies and we hold meetings with the various agencies from time to time to try to get things speeded up. There have been difficulties in the public service in recent times because there has been a number of severance schemes, voluntary early retirement schemes and so on and, unfortunately, the number of pensions administrators available on the ground to prepare illustrations for all the people who want to consider whether they want to retire is small. It is not the sort of area into which one can parachute personnel because they do not have the requisite expertise. A great deal of pressure has been placed on those administrative staff by these severance schemes. We have received complaints from ordinary members of schemes coming up to normal retirement age who have not been able to get retirements processed because other work had interfered with the normal process of dealing with retirements.
I presume the ombudsman has made those views known in writing to the relevant people.
Mr. Paul Kenny
Yes, we have. In some areas, people have been put to the pin of their collar. In the HSE, for example, pensions administrators have been working literally up to midnight to get illustrations out because of very tight deadlines for people to opt for voluntary severance or voluntary retirement.
Does Mr. Buckley want to add a further comment?
Mr. John Buckley
No, Chairman.
Does the committee agree to note the 2010 Annual Report and Accounts of The Pensions Board and note the 2009 Annual Report and Accounts of the Pensions Ombudsman? Agreed. I thank the witnesses for attending. The meeting is now adjourned.
The witnesses withdrew.