It is now nearly four years since the Pensions Board reported to the Government on the need to introduce and provide a more flexible pension scheme so as to increase the level of pensions coverage in the wider society. This recommendation, along with many others, followed exhaustive research from the national pensions policy initiative, which took place from 1996 to 1998. It is a matter of concern that it has taken the Government four years to have this matter debated in the House. The first draft of the Pensions (Amendment) Bill, 2001 was published by the Minister for Social, Community and Family Affairs on 27 July last. While the Bill was considered by the Senate in some detail in recent months the timescale involved for a full debate in the Dáil and select committee is less than satisfactory. It is unfortunate that the Government has decided to railroad the legislation through during the dying days of the 28th Dáil. It is not good enough that a major piece of legislation such as this should only be afforded three or four hours of debate on Second Stage.
It was the intention of the Select Committee on Family, Community and Social Affairs that specific hearings would take place on the proposed Bill between Second and Committee Stage so that all members of the select committee could contribute in a constructive way. Unfortunately there are only 13 days between Second Stage and Committee Stage of the Bill. This is not the way to treat the Dáil or the select committee.
This is an important piece of legislation which will affect pension policy in this country for the next decade. We need to ensure the legislation is both watertight and workable. To this end, my party will contribute in a positive and constructive way to ensure the Bill obtains the scrutiny it deserves. The issue of providing long-term pension cover is now a critical issue for the development of our country. While the proportion of our population at work is much higher than in other EU countries, over the next 30 years that proportion will fall quite dramatically. At the moment there are five people working in the economy for every one person who is retired. I understand that after 2006 that proportion will fall and that it could reach a two to one ratio by 2050.
There are clearly demographic changes taking place in the country which must be provided for in terms of increasing funds for the national State pension and other occupational or personal pen sion schemes. Over the next 20 years, a 10% increase in life expectancy is projected which will increase pension costs and cover. The State has an obligation to provide sufficient funds to meet expected demand on the State pension provision while also providing an incentive for people to provide their own pension schemes in the years ahead. It is not only prudent for the State to put money aside for this increasing financial demand, but it is also prudent that individuals now at work would provide for their own future in respect of other pension schemes. While the latest information on the level of pension cover within the workforce will not be made available until later this year, I understand that approximately 50% of the workforce currently has private pension coverage. The key recommendation of the Pensions Board was that over the next five to ten years a target of 70% private pension coverage should be achieved.
This recommendation was made in 1998 and it is now 2002. It is unfortunate that we have lost four years in trying to reach the target set by the Pensions Board. Four years later we still have not seen a significant uptake in private pension cover. In fact it is considered that pension coverage has not kept pace with the additional number of people working in recent years. While the total number of people in pension schemes may have increased, that figure as a proportion of the total workforce is now expected to be less than the 50% indicated in the last official survey. This will make it even more difficult to reach the 70% target within five to ten years as set out in the original Pensions Board report and indicated in the Programme for Prosperity and Fairness.
One of the problems that may well affect the take-up rate of the new personal retirement savings accounts is that many people could confuse these new products with the savings scheme introduced by the Minister for Finance. From documents released under the Freedom of Information Act in March of last year, it is clear that the Minister, Deputy McCreevy, went against the advice of his officials when he introduced the savings scheme in the 2001 Finance Act. One of the concerns raised by officials in the Department of Finance at the time was that the savings scheme would reduce the incentive for people to put money into pension schemes. I am concerned at the possible negative affects the Government's savings scheme could have on the introduction of PRSAs. There is a good deal of confusion in the mind of Government on this issue. No one can predict with accuracy whether the heavily subsidised Government savings scheme will lead to a lower take-up rate in the new PRSAs. However, I would do the House a disservice if I did not highlight this issue at this particular time.
Many of the Bill's provisions will update and modernise existing pension legislation in this country. Despite these positive developments, one of the most obvious issues that is not confronted in the Bill is the issue of employer contributions. Employers who do not operate pension schemes are required to provide access to PRSAs but are not required to contribute to them. While I am aware of the consensus position arrived at in the 1998 Pensions Board report the fact is that, unless some contribution is made by employers, the take-up level of the new PRSAs and their long-term real value will be severely reduced. As the issue of employer contributions has not been addressed, the legislation will inevitably be reviewed within five or ten years. The Government has gone the voluntary route in attempting to increase pension cover. If this route is not successful then compulsion will have to be considered.
My party will bring forward amendments on Committee Stage setting out targets for the take-up of the new PRSAs. If these targets are not matched, an automatic review of the entire legislation should be initiated. While I am aware that the Minister has brought forward many amendments to the Bill on Committee and Report Stage in the Senate, I believe the tax provisions attached to these new pension products are unnecessarily complicated. When this Bill is enacted we will, in effect, have three different tax regimes applying to different forms of pensions, one for occupational pension schemes, one for retirement annuity contracts and one for PRSAs. There is likely to be huge public confusion on the various tax provisions that apply to all of these pension schemes. We need to move to a more unified tax code for the provision of pension policy in this country. The more confusion that exists, the lower the take-up rate of pension cover will be. We have to make the procedures as simple and understandable as possible for all concerned.
One of the key recommendations of the national pensions policy initiative was to simplify pensions into two distinct pension regimes. One set of rules will apply to occupational pension schemes and another to PRSAs. As currently drafted, the Bill is still unnecessarily complex. I hope we can look at improving the provisions that exist, particularly in the area of the PRSAs.
The tax rules that apply are not only confusing but also highlight an underlying inequality in respect of private pensions. Tax relief is greatest for those top income earners who can afford to put away substantial amounts of income for the purpose of savings. Many organisations have already highlighted the underlying inequality in the tax treatment of pensions. While it is perfectly sensible that tax relief should exist as a form of incentivising pension cover, it should also apply that the tax relief itself is fair and directed towards those who need it most. We should not forget that the objective of this Bill is to encourage those who currently have no pension cover to take up such cover in the form of the new PRSAs. While the new PRSAs may sell well, they may increase pension cover for people with existing policies rather than reaching the majority of workers who are uncovered. This point should not be forgotten.
The ESRI quantified the cost of tax expenditure on occupational pensions in 1997 and it estimated that the cost of tax relief on the net income of approved schemes was €822 million or almost 1.5% of GNP. This tax expenditure amounted to two thirds of direct expenditure on social welfare provision in that year and is projected to exceed direct expenditure in a few years time if present trends continue. The introduction of PRSAs is clearly an attempt to increase pension cover amongst people who have not made adequate provision for their future. However, it is very important that the tax relief measures attached to these new pension products are progressive in nature in the effort to attract low income earners into new pension schemes.
What are we looking for in the new PRSAs? We want a clear set of rules governing the operation of these new products, the application of less complicated tax rules to these products, clear obligations on employers to comply with the wishes of their employees in respect of pension cover, honest assessment as to the amount of funding that will be provided in 20 or 30 years and minimal red tape for employers who participate in these new products. The idea of a flexible, portable form of pension cover, covering both part-time and full-time work, should be seen as a reliable product for workers who wish to put money aside for their retirement years.
We should always be fully aware of the experience of other countries which have attempted to reform pension provision. A similar initiative in the UK, the stakeholder pension, has proved a colossal flop in terms of the number of workers availing of it. We should learn from the mistakes of other countries in which the promotion of new, flexible products has taken place.
One of the most important parts of the Bill is the proposal to establish a pensions ombudsman who would adjudicate on complaints received from members of the public. I welcome this initiative. It is high time the pensions industry was supervised by an independent office backed by the force of law so that binding adjudications can be given where there is conflict between parties. The new ombudsman must be given the financial and administrative resources to deal quickly with complaints received in his or her office. There are considerable numbers of schemes in which conflict still exists. Many pensioners feel a huge sense of loss in relation to their own pension schemes. It is essential that we put in place, on a statutory and mandatory basis, full powers for this new ombudsman so that he or she can investigate existing complaints about pension cover.
It is vitally important that the new pensions ombudsman as referred to in Part 3 of the Bill is given full statutory powers to investigate all complaints made by members of the public. We have a special responsibility, in establishing the office of the ombudsman, to ensure that maximum powers are vested in his office so that complaints may be vigorously investigated and appropriate sanctions may be brought to bear when it is found that pension schemes are not operating for the benefit of those who contributed to them. Unfortunately, because of past experience, many people in the workforce refuse to contribute to pension schemes because they have little or no trust in some elements of the pensions industry to safeguard their funds in the years ahead. There are a number of well-documented cases in Ireland involving companies and individuals who have betrayed the trust of those who contributed substantial amounts of funds for a long time. We must ensure that the mandate given to the pensions ombudsman is flexible enough that he or she can investigate all complaints made against companies or individuals.
I am aware that the time limit of three years during which complaints may be made in the original proposal has been changed to six years by the Minister. This was brought about by an amendment in the Seanad. However, I do not believe that any restriction should be placed on the pensions ombudsman in investigating and adjudicating on cases that may come before his or her office. It is the job of legislators to give the ombudsman a completely free hand in whatever work he or she wishes to undertake. Part 3 of the Bill, which deals with the establishment of the pensions ombudsman, needs to be re-drafted so that maximum independence and flexibility is given to the holder of this new office. I am fundamentally opposed to a proposed power within the Bill which would allow the Minister to appoint the new pensions ombudsman. Furthermore, a provision in the Bill which allows the Minister to remove the ombudsman from office at any time if it seems necessary could severely compromise and interfere with the independence of the office.
I am fundamentally opposed to the provisions of section 5(129) of the Bill which would allow the Minister of the day to terminate or remove the pensions ombudsman from his or her position. This power should rest with a committee of the House and that committee should vet the appointment of the ombudsman. I am taking into account the comments made by a former UK pensions ombudsman who has already highlighted this issue and has argued for an independent ombudsman whose office would be entirely separate from the Executive. It is also suggested that the legislation should allow the ombudsman to delegate his or her responsibilities. This would avoid unnecessary interruptions caused by holidays or breaks and would also lead to a smoother operation of the new office. Two other suggestions were made by the former UK ombudsman when he spoke at a conference hosted by the Association of Pension Lawyers in Ireland last year, at which I understand the Minister also spoke. One relates to the restrictions in the Bill on the amount of redress that could be made if a complaint succeeded. The other suggestion was to clarify the extent of the new ombudsman's jurisdiction to ensure that decisions made by his or her office would be final and binding.
It is crucial that the new office of the pensions ombudsman acts as a watchdog for the pensions industry. Unfortunately, the establishment of an insurance ombudsman has not had the outcome originally intended. It is very important that mistakes made in the legislation on the insurance ombudsman are not repeated in this Bill. Some progress was made in the Seanad in allowing the Pensions Board and the Revenue Commissioners to vet new PRSA providers. A single regulator would have the advantage of providing greater consumer protection to those who wish to purchase these products and to subscribe to them over a considerable period of time. Although the original McDowell report argued that the Pensions Board should continue with its regulatory role, I believe that it would make sense for one financial regulator to scrutinise all pension products. That regulator could then report to the Houses of the Oireachtas and that would lead to greater transparency and independence and would also result in public support for the vetted pension schemes.
This makes sense from the point of view of the consumer, but also for the many companies who operate these pension schemes. It is accepted by all that the level of compliance as proposed in the Bill will put considerable pressure on PRSA providers to comply with the regulations. While it is critical that all these regulations are in place, we do not want a system to develop where many potential PRSA providers could be priced out of the market because of over-zealous compliance or excessive costs. While it is essential that those who provide PRSAs fully conform with the new regulations as set out in the Bill, it is equally important that the minimum amount of duplication and regulation is brought to bear on the industry to ensure development of a competitive PRSA market.
Our objective is to encourage people currently without pension cover to start to pay into pension schemes so that they will later have additional income on top of the national State pension. When I was younger than I am now, at 23 and after only two years in the workforce, I was approached by a company about contributing to pension schemes. The company drew comparisons between itself and other companies in relation to performance. As Senator Ross said in the Seanad, there seems to be no independent verification, over a period of years, of companies' performances in the funds in which they invest. Frequently the companies, many of them well-known in the House, compare their performance and results to those of other companies. However, in many respects, that is not a fair comparison. We should, in some part of the Bill, introduce objective performance criteria for pension cover or for any of the PRSA providers. We can do this and it would be useful. Otherwise the companies will compare themselves for marketing and propaganda purposes. We should have an independent office to verify how well these companies are doing. I ask the Minister to consider this.
It is also important to investigate what happens to the substantial sums of money to which the Minister referred in his contribution to the House. Huge sums of money are invested, but how are they used? So much of this money is salted away for a considerable number of years. Nobody assesses the performance of these companies in an independent, verifiable way. What happens to the money invested? That is another critical question.
One of the issues regularly brought to my attention by constituents is the excessive costs charged by companies to clients who transfer their pensions or attempt to cash them in. Recently a constituent whose husband's firm had been liquidated came to see me. Her husband had been paying into a pension scheme for a considerable time but when he attempted to transfer that scheme to another company, the charge placed by the provider was appalling. It represented about 15% of the total funds accumulated over a period of years. We need to look at this issue in relation to the transferability and the costs that many of these providers are charging to members of the public where they are attempting to transfer or encash their funds.
Another issue that must be looked at on Committee Stage is the length of time it is taking for people to get money from these companies. Some companies perform well but I am aware of many cases where the efforts of the general public are stymied over a period of months, sometimes years, before they obtain the money to which they are entitled.
I turn to an issue to which the Minister did not refer today although he did refer to it in his Second Stage speech to the Seanad, namely the changing nature of work. Some 20 to 30 years ago, the number of people who stayed in a permanent, pensionable job for their working life was much greater than it is now. Members will recognise that the new, flexible workforce regularly sees people change their jobs three, four or five times during their working lives and that people are working less and retiring earlier. The idea of a job for life has come to an end as people move in and out of the workforce. When this Bill is closely scrutinised on Committee Stage, we must ensure that protection is given to those people who will move in and out of work and change their jobs during their working lives. We must ensure they have protection when they want to transfer their pension cover from one company to another or to change the nature of their cover.
I realise that there is a debate in the industry as to the current level of products under the defined benefit mode, which is about 71%. Increasingly, most of the products coming onto the market are defined contributions. In other words, the employer is not underwriting the funds over a period of years and the liability is taken up by the employee rather than the employer. There has been a fundamental shift in cover from defined benefit to defined contributions. It is a real issue and, irrespective of what scheme is put in place, people need to know that the money they put away over their working life is guaranteed.
However, we also need to tell people that they should be saving more than they are. In good economic times, and particularly in recent years when the economy has been in good condition, people should have been saving more money for difficult times ahead. People are encouraged to save about 15% of their gross income every year. We need to use this Bill, and the opportunities presented therein, as a way to highlight the need to encourage more workers to put money away and to do it in a way that will give maximum return. When PRSAs are in place, if people are contributing small amounts of money they will not get much money in return, particularly if there are no employer contributions. We must be honest and recognise this issue to which we must return on Committee Stage.
Over the past year, and particularly since 11 September, the funds markets throughout the world have dipped substantially, particularly when investment in Europe and the revenue lost by many companies is considered. This scheme is being launched at a time when there has been a major hit on the global economic market. We are trying to sell the message of encouraging more people to put money aside at a time when pension funds and the real asset value of global markets has been severely reduced. It will be a difficult message to sell when there has been such bad news about investments and savings and share prices in recent years.
We should also look at initiatives taking place in other parts of the world. The British Labour Government has mooted a proposal which would give all newborn children a lump sum savings bond which could then be contributed to by that person as that person grows older. It is a novel idea and if the PRSAs do not take off and we do not get an increase in the numbers of people saving, the State will have to look at a new savings scheme to encourage people to put money aside throughout their lives. If a part of that is a direct incentive at the time of birth, we will have to look at it. The nest egg proposal that has come from the British Government is one we should at least consider in this jurisdiction.
I made the point yesterday on Committee Stage of the Social Welfare Bill that many pensioners who do not have occupational pension schemes are asked to live on the non-contributory pension. That is not a huge sum of money today although we have seen welcome increases in recent years. However, the real income power of many pensioners who do not have private pension cover has been reducing as a proportion of the general increase in income in other parts of the economy. We need to look at providing a pension supplement for people who are solely dependent on the State pension. We may discuss this on Report Stage.
I thank the Minister's officials and all interested parties from industry, the Pensions Board and the Revenue Commissioners who spent time with me and others going through this Bill. I am approaching it in as constructive a way as possible in the very short time available. We have an obligation to scrutinise this, give it the best possible hearing and, if possible, improve it in the weeks ahead. I look forward to working with the Minister and his officials in the weeks ahead to improve this Bill and to get the maximum cover for those who do not currently have any pension cover.
