JOINT COMMITTEE ON JOBS, SOCIAL PROTECTION AND EDUCATION debate -
Wednesday, 8 Feb 2012

Private Pensions: Discussion

Vice Chairman

I welcome the following: Mr. Ciaran Phelan, chief executive, Irish Brokers Association; Mr. Aidan McLoughlin, managing director of the Independent Trustee Company and chairman of the Irish Brokers Association's pensions committee; Ms Linda Gallagher, First Ireland; Mr. Tom Berrigan, Davy; Mr. Gavin Howlin, Willis; and Mr. Frank Lahiffe, Lahiffe & Associates Public Affairs & Political Communications. They are present to discuss issues and initiatives associated with private pensions.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses, or an official, either by name or in such a way as to make him or her identifiable.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they give to this committee. If they are directed by the committee to cease giving evidence in regard to a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should neither criticise nor make charges against any person or entity by name or in such a way as to make him, her or it identifiable.

Mr. Ciaran Phelan

I thank the committee for the opportunity afforded to the Irish Brokers Association to present its thinking on the issues confronting adequate pension provision and on some initiatives regarding the more positive role Irish pension funds could play in the fiscal recovery of the nation. My colleagues will make brief presentations on the circulated paper.

The Irish Brokers Association is the primary broker representative body in Ireland. It has been representing brokers in one guise or another for over 70 years. Over 5,000 staff are employed by our 500 members, which include the large international brokers, large national players and small and medium-sized brokers throughout the country. We feel we can present with some authority on pensions as our members are responsible for in excess of 70% of all private pension contributions in the State.

To put our presentations in context, while we understand the serious fiscal challenges the country faces, we contend it is important that the Government consider the impact of decisions made by it today on future generations. The pensions time bomb in 50 years, whereby the ratio of those working to those retired will move from 6:1 to 2:1, will place a significant burden on future Exchequer returns. Consequently, adequate private pension provision is a prerequisite to the future financial health of the nation and its citizens.

We will focus on the positive contribution pension funds can play in fuelling the recovery of the economy. Mr. Tom Berrigan will make a presentation on this. The importance of maintaining tax relief at the marginal rate to encourage long-term savings and make adequate pension funding affordable will be discussed by Mr. McLoughlin. Mr. Howlin will present the introduction of a recognised measurement to assess the costs associated with private pension plans and APR for pensions. Ms Gallagher will discuss how early access to pension funds in certain circumstances could be used to reduce debt and re-ignite the property market, which is a core element to recovery.

After our brief presentations we would be delighted to answer any questions members may have.

Mr. Tom Berrigan

Our basic case in regard to pension funds and infrastructure is that we are all agreed on the benefits of infrastructural investment in Ireland and the impact for the economy, in particular for jobs. Papers have been written ad nauseam about this. We are trying to plead the case, and have done so in other quarters, that rather than continue the current approach to pension funds, namely, to curb measures for people who invest in pension funds and to reduce tax reliefs and incentives, the Government would be better advised to harness the capital available in private sector pension funds for reinvestment in the economy.

As Mr. Phelan stated, we represent more than 500 members. We surveyed those members in January. People often see lip-service being paid to what their intentions might be but when we surveyed our members we got a 98% response rate stating they would support an initiative whereby private sector pension funds would invest in infrastructural funding within the Irish economy. The case we plead today is that before the Government introduces any further fiscal restraints on pension funds a proper consultative process should be undertaken with the pensions industry to see how we can harness - as we put it in our submission - the €80 billion odd of capital that is available in private sector pension funds and how some portion of that can be harnessed for the benefit of infrastructural investment in Ireland.

As members are probably aware, the Government has brought out a couple of initiatives in that regard. One is the structural investment fund of which the National Pensions Reserve Fund is the keeper. It is also an investor. The NPRF also invested in an infrastructural fund it established with one of the major insurance companies which is targeting €1 billion of capital. The NPRF has committed €250 million to that and is looking for €750 million of additional funding. We believe that with proper consultation the private sector pension funds in Ireland would support that initiative.

Mr. Aidan McLoughlin

The topic I wish to mention in brief is tax relief. This is perhaps more appropriately a matter for the finance committee but it is critical to the success of pension funds and in encouraging people to invest in these funds.

The four year plan envisages pension funds contributing €865 million to the national recovery, as it did last year alone. The Irish Association of Pension Funds, IAPF, recently estimated it will contribute a further €1 billion in 2012. Pension funds have therefore paid far more than they were originally envisaged to pay, even under the national recovery plan. That has a huge impact on people's confidence in pensions and their desire to support pensions. It is critical, for the benefit of both the State and individuals, that they continue to support pensions because the State will not be able to support people in years to come in retirement. They need to build up adequate funds for that purpose.

The average pension fund in Ireland is approximately €100,000. That is not sufficient to sustain people for 20 plus years in retirement, even with the retirement age going to 68. Longevity is pushing towards 90. One is looking at 20 years with €100,000 which does not represent an adequate income. People need to be able to save more. They need to have confidence that the tax relief is there, as it must be, and at an adequate rate. The benefits people receive are taxed at marginal rates and the tax relief must be granted at marginal rates. Otherwise one is punishing tax savings, tax savers and pension savers for bothering to provide for their retirement.

Mr. Gavin Howlin

In October, the Minister announced a review of pension charges and transparency. The IBA welcomed the initiative. Transparency will benefit both advisers and consumers. There exist real comparison issues for both at present. There is a lack of understanding and a perception of low value for money, all of which causes inefficient allocation of resources.

We are putting forward the concept of a total expense ratio, TER, and believe this is something that could help. TER is similar to the APR concept in lending. We are all aware of an APR on lending products and we know what it means. It is known to everybody and is easily understood. Although we all know this I reiterate there is a range of charges that apply to pension products at present of which I will mention only a few - bit offer spreads, contribution charges and annual management charges-unmanagement charges. The reality is the fund management charge is not the full cost on the fund and in many ways it is quite difficult to understand the full cost underlying the charging fund. For example, often an annual management charge of 1% is quoted but the actual effective rate underlying the fund might be up by 2%, depending on the charging structure.

We believe total expense ratio should encompass all charges, should be user friendly and transparent and should demonstrate the net cost to the consumer or pension saver. We believe it is important to retrieve confidence in the pensions industry and TER is something that could help with that.

Ms Linda Gallagher

I wish to present an idea in respect of access to a pension's tax-free lump sum. As members may know, currently people are able to access 25% of their fund as a tax-free lump sum. However, this is linked to their having to take their full retirement benefits. Every day I meet with clients that we have been calling the "new poor". This week, The Irish Times coined a new phrase, the “squeezed middle”. These are people who are severely indebted; they are stuck. They may have some credit card debt, negative equity on their mortgages, etc. The Personal Insolvency Bill exists and we very much welcome it. It will be very useful for some people. However, this measure has an effect on a person’s credit rating and may be a reason people might not wish to go down that road. As Mr. McLoughlin noted, if we take the example of somebody with a pension fund of €100,000, he or she would be able to access 25% of that sum tax-free, some €25,000. However, currently people may not access this until retirement age. Our view is that retirement age will possibly be too late for these people and if they were given access to that tax-free lump sum now, and the Revenue, the Government and Pensions Acts were to treat it as a lifetime limit rather than a limit at retirement, it would present these people with a significant way out.

There are a number of benefits. Obviously, it would protect a person's credit rating and we believe it would act as a jobs initiative. I meet clients every day who are being made redundant. They have no access to cash or seed capital. They might have some wonderful ideas in terms of creating their own business and creating jobs, but they are stuck because they have no cash.

There is another idea. There is a lot of negative press about pensions, some justified, some perhaps not, from previous times. The inability to access any money from one's pension fund until the age of 65 or, indeed, 68, is a major disincentive to the people I meet every day. We believe that if they had some access to tax-free cash this would act as a major incentive for people to invest further in their pension funds for retirement.

Mr. Ciaran Phelan

Those were our presentations.

Vice Chairman

I thank the delegates and I invite questions.

Deputy Mary Mitchell O’Connor

I am delighted to hear Ms Gallagher's proposal. I went to the Minister for Finance, Deputy Noonan, with that proposal about a month ago and I am delighted the delegates are on board.

Ms Linda Gallagher

I am delighted to hear that too. I thank Deputy Mitchell O'Connor.

Deputy Mary Mitchell O’Connor

Perhaps Ms Gallagher might send us the information in order that the Minister can act on it. I do not say he will but I would prefer-----

Ms Linda Gallagher

I appreciate that and would be delighted to take the offer up.

Deputy Seán Kyne

I thank the delegates for their short and snappy presentations. That is the way we like it and it gets work done. I have a question for Ms Gallagher. What is the international practice in terms of accessing pensions?

Ms Linda Gallagher

The international practice would be to wait until retirement.

Deputy Seán Kyne

Is there any precedent within the European Union?

Ms Linda Gallagher

Not that I am aware of.

Mr. Aidan McLoughlin

Not in the EU but some jurisdictions such as Australia and New Zealand which allow earlier access. This arrangement also exists in California and Canada. The critical point is that the State has already stated the 25% to a maximum of €200,000 is a lifetime limit. We argue this should give people the choice of when during their lifetime they can access it. Telling someone to wait until they are 68 years of age before they can access their pension is imposing artificial financial planning on them. Giving someone access at a point of time when it is needed is designed to allow financial flexibility. Once one goes with a lifetime limit, one does not need to link it to being an actual on-retirement lump sum.

Deputy Seán Kyne

What are the Minister's and other EU countries' views as to why such a system should not be considered?

Mr. Aidan McLoughlin

Traditionally, the benefit was a retirement lump sum and was designed to help a retiree discharge obligations at that point. The reason it is appropriate to change this is because as retirement ages everywhere are moving up further - in Ireland it is moving to 68 - the period of delay is longer. Another reason is because discharging liabilities now prevents people's debts becoming larger by the time they can access the tax-free cash. The State's need to keep it within the fund is lost. The absolute limit of 25% of the fund to a maximum of €200,000 leaves a substantial benefit that people have accumulated.

Deputy Seán Kyne

Has the delegation come across examples of people coming close to retirement looking for the lump sum to help their children, say, buy their first home?

Ms Linda Gallagher

Yes, in the past many people used equity from their homes for their children to buy their first home. People cannot do that now. I have had people in tears in the office saying all they want is to access €15,000 from their funds to give Joe and Catriona a start in buying a house. Many of them ask me to make representations to the Pensions Board, the Revenue and the Government. Many people are frustrated and do not understand why they cannot access a fund they spent 30 years building up when they need the cash now.

Deputy Seán Kyne

For the past several years, there have been no public private partnership infrastructure projects because access to funds internationally is closed. Does the pensions industry see a role for it in providing alternative funds for infrastructure projects? Has the delegation spoken to the Minister for Transport, Tourism and Sport, Deputy Varadkar, or the Minister for Finance, Deputy Noonan, about this?

Mr. Tom Berrigan

Yes, we have. A parliamentary question on 31 January 2012 stated the National Pensions Reserve Fund, NPRF, will seek matching commercial investments from private investors to target investment in areas of strategic significance in the future of the economy. When we met with the Department of Finance and the NPRF in November, we put forward the idea of having a range of sub-funds to target specific infrastructural projects. Our argument for doing that was, while one always hears about the call to invest in infrastructure, more specific projects would engender greater interest. NPRF has committed funding to the proposed Irish Water agency on strictly commercial terms. We believe private sector pension funds would be equally interested in investing in those types of projects once they see the return rather than building a bunch of schools that will just be there for 40 years.

The Government has established NewERA, the economic recovery authority, from which has come the new strategic investment fund, a precursor for the proposed strategic investment bank which will be under the auspices of the NPRF. There is a structure that has publicly stated it will seek investment from private investors along with the NPRF to support infrastructural projects. That is where we can feed these funds into if a consultative process was undertaken to do it.

Deputy Seán Kyne

It seems like an excellent idea. It is estimated the Galway city will cost up to €350 million which the State does not have. Until such time international investors are confident in the country, they are unlikely to get involved. I would support a proposal for private pension funds becoming involved in infrastructural projects.

Mr. Tom Berrigan

The initiative the NPRF is involved with in conjunction with Irish Life on the €1 billion infrastructural fund will target overseas sovereign wealth funds. As time progresses we will hear criticism over the sale of State assets as selling the family silver. This initiative is a means by which the Irish public can invest through their pension funds in these assets. On one hand the Government gives incentives to invest in pension funds while on the other it is harvesting some of the capital for reinvestment in the economy.

Senator Michael Mullins

I join in welcoming the delegation from the Irish Brokers Association, IBA. I support the idea of encouraging the Government to leverage moneys from pension funds for investment in infrastructural projects. It must be a difficult task for brokers to sell the idea of investing in private pensions given the dismal performance of pension funds over the past several years. Many have seen their pension funds disappear before their eyes. How does the IBA propose to turn this around to get people thinking differently about investing in pension funds? Fees charged for private pensions are often quite controversial and act as a disincentive to investing in private pensions. Has the delegation any comments on this?

Many people in the private sector retire earlier than 65. I assume one can still withdraw a lump sum from one's pension scheme if one retires at 58. There are provisions in many private pension schemes for retirement after 50. In such cases, people could take one and a half times their final salary but the delegation spoke about 25% of the fund in such cases. Can the delegation clarify this for me?

Mr. Aidan McLoughlin

The one and a half times final salary is an alternative calculation but there is an overall limit of 25% of the fund to a maximum of €200,000.

The Senator's point about investing in pension schemes is correct. There is a lack of confidence in pension structures and a range of matters have affected that. Poor fund performance is certainly one of them. The fact they have been subjected to additional taxation and the fact the future of those funds is uncertain means people will not have the faith they will receive the treatment they had in the past. They therefore doubt it is a good idea.

The length of time their money is locked away is an equally important issue. They may not want to risk putting it away for 30 years in case they need it during the intervening period. It is possible for early retirees to access the tax-free lump sum but people want to access it before retirement. They may need to continue working in order to build the funds that will allow them to enjoy their retirement.

We are dealing with a range of these issues to give confidence on charges, offer alternative investment opportunities and create certainty in respect of the tax treatment of funds. It is a question of creating consumer confidence in pensions.

Mr. Tom Berrigan

I would be more confident to invest in an infrastructure asset offering a yield of 6% or 7% if I was assured I would get a return of X euro over a ten year period than in something which is less certain and more open to market variance.

Deputy Tom Fleming

What percentage of the value of a pension is taken by the pension management companies for management purposes? Are fees linked to fluctuations in the value of pensions? What is the impact of the job creation levy introduced last year? I understand it is having an effect on pensions.

Mr. Aidan McLoughlin

In regard to the impact of charges, a series of charges apply which are complex to follow, even for practitioners in the industry. IBA members spend considerable time explaining the true cost of pensions to their clients and members of the public. People understand simple measures like the APR that applies to mortgages, however, and we are proposing the use of similar measures, such as total expense ratios, TER, to capture all the charges applied.

An annual charge of, perhaps, 1% of the fund would fluctuate with the value of the fund. Such a charge does not reflect the total expenses charged. International studies indicate that an annual management charge of 1% could mean that the overall fund has an expense charge of 2% per annum. This is a guesstimate of what applies in respect of Irish funds but we do not know the precise amounts charged. We are proposing that the transparency review should consider a measure such as a TER to allow everybody dealing with the fund to know the charges involved.

Senator Deirdre Clune

The witnesses commented on the level of confidence among investors. In light of the direction funds have gone, I imagine that people would be slow to invest at present. In regard to infrastructure investment, we are establishing the Irish water authority, we will need to invest in broadband and the benefits of toll roads can be measured. I believe people will have more confidence in investing in these types of infrastructure. This is a positive issue which we can raise with the Minister, alongside the need to realise the value of lifetime investments now rather than on retirement. I support the witnesses in respect of these proposals.

Vice Chairman

Is there not an inherent contradiction in what the witnesses are saying? They indicated that the average fund is €100,000, which is insufficient over a longer retirement period, yet they also advocate the reduction of restrictions on access to funds. The result may be a reduction in the safeguards on funds which they have already accepted is not sufficient for retirement.

Mr. Aidan McLoughlin

The Vice Chairman is correct. This issue was the subject of considerable debate within our organisation. Ultimately, however, any financial planning requires a balance to be struck between long and short-term objectives. The State, for example, created a reserve fund which it did not intend to touch before 2025 but short-term financial constraints required more immediate access to the fund. The proposal comes with a constraint in that only a proportion of the fund could be accessed. We believe the increased confidence among people to invest in pensions would more than offset what would be taken out, which is a positive development. Furthermore, funds would be accessed in the context of debts which might otherwise mean the pension is of little consequence. There is little point in a pension fund that is used to pay off debts that have accumulated through one's working life. They need to be addressed while they are small.

Vice Chairman

How will investors be protected against making short-term decisions that have long-term consequences? Is 25% too much?

Mr. Aidan McLoughlin

The personal insolvency legislation will provide for a personal insolvency trustee, which is a useful mechanism. Nobody should make a decision on the matter without proper advice. The concept of allowing the fund to be released is aimed at dealing with the structural issue but the circumstances in which it is used should be managed to maximise the financial benefit to the individual concerned in terms of moving out of a debt scenario rather than simply dissipating a portion of the fund.

Vice Chairman

What kind of restrictions does Mr. McLoughlin envisage?

Mr. Aidan McLoughlin

Independent advice should be provided. Our main concern was in respect of unwelcome pressure brought by lending institutions against individuals. There should be a sign-off process with an appropriate independent financial adviser or authority, such as MABS.

Vice Chairman

In what way would the advice be independent?

Mr. Aidan McLoughlin

The advice would be independent of the bank or lending institution. There should not be pressure form the lender to deal with the matter. The individuals concerned should be able to resolve their difficulties while maintaining their credit rating and building up assets for retirement.

Deputy Michael Conaghan

The witnesses indicated that international experience is contrary to what they are suggesting. There must be a strong reason for that international perspective. Why are they arguing for something that is not internationally accepted?

Ms Linda Gallagher

New Zealand and Australia have introduced a number of ways to access retirement lump sums in advance, such as providing equity for children or paying for a marriage. The experience of these countries demonstrates that the possibility of accessing funds has significantly increased the desire to save for pensions. In Europe there is currently no precedent for early access to one's fund, so in a European context it is a novel idea but one that is very important to consider now.

Mr. Aidan McLoughlin

It is also worth saying that there is a different structure to funds in other European countries. Typically they do not have the same types of privately-funded schemes and they tend to be more state-based schemes. They tend to have access to state pensions and the scheme at an age earlier than the 68 that is being proposed in Ireland. Members may recall the riots in the streets in France because of a proposal to increase the age from 60 to 62. They are operating from a much earlier age than we are here.

Senator Feargal Quinn

I feel guilty about having missed the presentation as I was attending another committee meeting. Are brokers able to act in the best interests of their customers, the pensioners, or are they under pressure to act in different ways - perhaps in an ethical way, by buying Irish or whatever it might be? Do they feel under pressure to act in a way that may not be in the best interest of the pensioner?

Mr. Aidan McLoughlin

We always act in the best interest of the client as we are obliged to do for both commercial and regulatory reasons. The regulator that regulates the industry requires us to do so and so that is inherent in everything we do. No client is ever obliged to deal with one of our members and always has the choice of dealing elsewhere. In order to get clients to come and then to stay, a broker must act in their best interests otherwise he or she will not have clients. Commercially and from a regulatory perspective that is inherent in the structure.

Senator Feargal Quinn

My question is probably regulatory. Have regulations been introduced which do not act in the best interests of the customer, the pensioner, but act in the best interests perhaps of some State viewpoint, which might be to buy Irish, act in an ethical or green way, or whatever?

Mr. Aidan McLoughlin

Not that I would know of. For example, our proposal on investment in infrastructure would always be a choice. We would never insist that someone must invest 5%. We believe many members of the public would welcome that and our members would be happy to discuss that with them and present it to them. However, it should always be a choice and should never be compulsory. There are compulsory elements of pensions that are not appropriate to the financial needs of the clients, for example, the requirement for a person to draw down 5% of his or her fund every year from the age of 61 onwards. The person might not be retiring until 68 and have half of his or her fund gone before needing it. That is being driven by the need for the State to generate an income that it can tax rather than satisfying the need for the person to have an adequate retirement. It is not so much of an investment decision, but it forces onto clients financial planning that is inappropriate to their financial needs.

Vice Chairman

I thank Mr. Phelan and his colleagues for appearing before the committee today. One Deputy has already indicated her intention to follow this up by means of a parliamentary question and other members might do likewise in order to ascertain the Minister's thoughts on the matter. I thank the witnesses for their contribution. I am sure we will return to the subject again.

The joint committee adjourned at 10.25 a.m. until 9.30 a.m. on Wednesday, 15 February 2012.