JOINT COMMITTEE ON SOCIAL AND FAMILY AFFAIRS debate -
Tuesday, 15 Nov 2005

Pension Provision: Presentations.

Chairman

I welcome Mr. Jerry Moriarty, head of investigation and compliance, Mr. Philip Dalton, head of PRSAs, and Mr. Brendan Kennedy, actuarial adviser, from the Pensions Board. I also welcome Mr. Paul Kenny, Pensions Ombudsman, and Mr. Kevin Lonergan, head of investigations with the Office of the Pensions Ombudsman, Mr. Joe Byrne, chairman, and Mr. Patrick Burke, vice chairman, of the Irish Association of Pension Funds, Mr. Liam Murphy and Mr. Eric Canning, principal officers with the Department of Finance, and Ms Anne Vaughan, principal officer, and Mr. Paul Cunningham, assistant principal officer, from the Department of Social and Family Affairs.

Before the witnesses begin their presentations, members are reminded of the parliamentary practice that they should not comment on, criticise or make charges against any person outside the Houses, or an official, either by name or in such a way as to make him or her identifiable. Members who wish to make a declaration concerning any matter being discussed may do so now or at the beginning of their contribution. Members are also reminded that if there is a possibility of there being a conflict of interest, they should make a declaration of interest now or at the start of their contribution. I draw witnesses' attention to the fact that members of the committee have absolute privilege but that the same privilege does not apply to witnesses appearing before it. While it is generally accepted that witnesses would have qualified privilege, the committee is not in a position to guarantee any level of privilege to witnesses appearing today. In general, no matters of concern arise in this regard but people must be made aware of the situation.

Senator Terry

I want to declare a possible conflict of interest. The Pensions Board has received a considerable amount of correspondence from me and my husband in respect of occupational pensions and frozen benefits.

Chairman

The Senator is like many people who make contact with the Pensions Board regarding issues of personal, and perhaps wider, concern.

We will begin the meeting with Mr. Jerry Moriarty, head of investigations and compliance with the Pensions Board.

Mr. Jerry Moriarty

I pass on the apologies of the chief executive of the Pensions Board, Ms Anne Maher, who had a prior commitment to speak at a pensions conference in Germany. We submitted some background details to the committee, prior to the meeting, which I will now summarise.

The Pensions Board is an independent statutory body. Its primary role is to regulate occupational pension schemes and personal retirement savings accounts, PRSAs. The board ensures compliance with the main legislation governing such schemes and accounts, namely the Pensions Act 1990. It also has a number of other functions and roles. In particular, it has an advisory role vis-à-vis the Minister for Social and Family Affairs. The board provides advice to the Minister, at his request or on its own initiative.

The current national pensions policy stems from a national pensions policy initiative dating from 1998. This initiative produced a report entitled Securing Retirement Income. The latter set some agreed targets in terms of national pensions policy, including the aim that everybody leaving the workforce would have a post-retirement income of 50% of pre-retirement income and that a minimum national amount of 34% of gross average industrial earnings be provided to keep people out of poverty in retirement. At present, the latter figure is at 32%, with the maximum amount for the contributory old age pension at €179.30 per week and gross average industrial earnings at €567.77 per week.

In order to achieve the two aforementioned targets, we must ensure that 70% of people over 30 have supplementary pension coverage, that is, pension coverage over and above what the State will provide. At present, approximately 1 million people have supplementary pension provision. Members have been provided with documentation giving a breakdown of where the membership of schemes lie, in terms of pension schemes, personal pensions — which tend to be for self-employed people — and PRSAs. This means that approximately 900,000 people in the workforce do not have supplementary pension provision and, therefore, will have no income, other than that provided by the State, in retirement.

Assets in occupational pension schemes are estimated to be worth €62 billion. The main issue of concern is the fact that pension coverage is too low, with 900,000 people who will have to rely solely on the State pension. The latter stands at €179 per week and for many people, that amount will not enable them to maintain the standard of living they currently enjoy. For people who do have supplementary pension coverage, there are concerns about adequacy and the fact that contributions may be too low. Pensions are becoming more expensive, mainly because people are living longer. There has been a considerable increase in the length of time people live in retirement. Therefore, it is more expensive to provide an income for the duration of retirement. The fact that people are living longer is not, in itself, a bad thing but it raises the issue of how people will pay for their period of retirement, which is now much longer than heretofore.

Other concerns about the future relate to defined benefit schemes. Such schemes tend to provide better benefits to people as they are linked to salary rates at retirement. However, defined benefit schemes have been coming under pressure lately due to poor investment returns in recent years, following the collapse of stock markets and also due to the fact that pensions are costing more.

The Pensions Board is required by legislation to review national pensions coverage by 2006. The Minister asked the board in February of this year to start working on that review. That was recently completed and the report has been presented to the Minister but it has not been published yet. I, therefore, cannot comment on its contents.

Deputy Stanton

I welcome the delegation to discuss this important issue. I recently read that the so-called pension timebomb will be a major issue in Ireland for some time because of our changing demographics. Does Mr. Moriarty agree with this report? Can he provide statistics in this regard? Has the Pensions Board examined successful pension schemes around the world, which Ireland could emulate? If so, could he describe them?

Mr. Moriarty

I will refer in general to the demographics and will refer the specific detail to our actuary. Ireland and other countries face two issues regarding demographics. The first is people are living longer and the time they are expected to live in retirement has increased significantly. Mr. Kennedy may supply figures in this regard. The second issue is that the ratio of workers to people in retirement is also projected to change dramatically. Currently, there are more than five workers for each person in retirement. That number will decrease significantly, particularly as our State system operates primarily on a "pay as you go" basis in that contributions of the current workforce pay for those in retirement. That will put a great deal of pressure on the contributions needed to sustain that.

As part of the review we recently completed, we examined many different systems around the world. Every country has a slightly different pension model, partly because their demographics vary. We have examined the best features of other models to see if they could make a difference in Ireland.

Deputy Boyle

The board's representatives may not be able to answer a number of questions relating to pensions. Government policy also includes the National Pensions Reserve Fund, which, in all likelihood, will cover only the public sector element of future pension bills. This issue concerns primarily people working in the private sector and those who are self-employed. The savings ratio in the economy has much to do with the pensions problem. The Minister for Finance said recently the ratio is quite high but that has been largely brought about by the SSIAs, which are an aberration. The board's review is supposed to have investigated the option of converting as much as possible of the SSIA money into a new fund with a longer investment period and a lower rate of return, which would still be substantially higher than the return on other investment products.

Despite all the talk about the £100 or €200 pension, State pensions are still lower than those paid by other European countries. Pensions policy must provide a larger pension, regardless of how many people avail it at the end of the day and that is a concern.

I refer to investment policy and the accumulation of funds for disbursal for future pensions. This lacks an ethical basis and nobody in State agencies or Departments considers whether the money is invested in armaments, dangerous chemicals or the production of goods through child labour and so on. If we gain improved pensions on the basis of other people's misery, we need to ask ourselves important ethical questions as a society.

Mr. Moriarty

The National Pensions Reserve Fund is intended to deal with the predicted increases as a result of changing demographics. The legislation does not specify how much will be allocated for pensions provided to public servants or for social welfare pensions. However, it was always intended that the fund would be split between the two in some form.

We have examined the issue of the savings ratio and the SSIAs, particularly because many of the people who have SSIAs are in the lower income ranges and they do not necessarily have pensions. We will try to work around that to convert those savings into pensions and the report addresses that issue in a number of ways.

The Department is better placed to deal with the position of the State pension relative to other European countries, as its officials have more knowledge. Many continental European countries do not have supplementary private systems, hence, their State pensions have been always higher because the State is the only provider. Ireland has tended to follow a model similar to that in the UK where the state pension is designed to keep people out of basic poverty together with a supplementary system on top of that to save.

The issue of vehicle investment policy is not relevant to the board as we do not deal with such policy.

Senator Terry

I thank the delegation for its presentation. Will Mr. Moriarty comment on the underfunding of defined benefit schemes because this is a major concern for many people who paid into such schemes throughout their working lives? Those who have retired as well as those who are about to retire have found that the fund was not sufficient to meet their pensions. How will the board address that? The media and the board constantly bombard us with campaigns to prepare for retirement by taking out a pension. Given that the defined benefit schemes have not worked out satisfactorily and that they will not provide the pensions people expected, how can the board continually encourage others to take out pension that are not guaranteed? What will the board do to ensure that when an employee pays into a pension scheme, a guarantee will be provided? It is almost robbery to encourage a person to pay into a scheme throughout his or her working life with no guarantee. The SSIAs were mentioned but it would be very wrong to encourage people to transfer those savings into a pension fund without a guarantee.

A complicated EU directive in this area was transposed recently. If an individual has a pension in a defined benefit scheme, which has not matured as he or she expected, could he or she sue the State following the transposition of the directive for not providing him or her with an adequate pension? If so, tens of thousands of people could sue the State for not providing them with the pensions they were led to believe they would receive.

A pension is a property right, which is protected under our Constitution. I thank Mr. Kenny for replying to a question I have asked several people but to which I had not previously received an answer. Perhaps Mr. Moriarty can attempt to say whether or not it was a breach of an individual's constitutional rights to force someone into a pension which turned out ultimately to be more or less worthless. It is the compulsory element which must be borne in mind. Some people continue to be forced into such schemes as a condition of their employment. Does the Pensions Board stand over current circumstances in which a person does not have a choice to opt out of a pension even where an employer seeks to make it a condition of an employee's contract? No one should be forced to buy something the value, if any, of which he or she cannot predict in future. It has been found in some cases that pensions have ultimately not been worth anything.

The Pensions Board stood over many instances in which companies forced individuals out of employment who were usually aged between 40 and 45, especially those on high salaries, as the cost of providing pensions for them was becoming a significant cost for employers. It was in a company's interests to make many workers redundant. I have asked the Pensions Board several times without being able to get an answer what number of people were made redundant in such circumstances. I ask again today. When these people were made redundant prior to 1993, their pensions were frozen. Why will Mr. Moriarty not recognise the poverty into which these people have been forced? While we are told constantly by the Pensions Board and others to prepare for the pensions of the future, the question of the pensions of people to whom I refer and who will retire in the next five to ten years remains open. They were made redundant purposefully and the Pensions Board stood over it. It is unacceptable. How many people have frozen benefits? Will the Pensions Board use some of the €60 million fund for private pensions to pay what those with frozen benefits have lost through the lack of indexation? How much would it cost if we were to index link the frozen benefits in question?

We should compare the position of a person with a frozen benefit who retires at 65 with a paltry pension with that of somebody in the public sector. Everyone here can sit back quite happily in the knowledge that they have guaranteed pensions which will keep pace with inflation. None of us has to worry, including, I am sure, the witnesses who should also be covered by public sector pensions. It should be noted that five years after retirement, the pension of the first retired person will be 30% worse than that of his public sector counterpart. He will be 40% worse off after ten years, 55% worse off after 15 years and 68% worse off after 20 years.

I met a man the other day who is 80 and retired at 65 on a pension which was not index linked. His pension at 80 is the same as it was 15 years ago. How can we talk about the pensions of the future while standing over the failure to index link the pensions of the elderly of today? We are putting away money to provide for the pensioners of the future when the pensioners of today are the people who gave us the Celtic tiger. It is these people who are in poverty. It should also be noted that a majority of pensioners are dependent on the social welfare pension on which we spend less than we forego in tax revenues. What does Mr. Moriarty think of that in the context of value for money? It is a question I will also put to the Department of Finance.

Has the board considered establishing a pensions protection scheme in the absence of any other provision and encouraging the pensions industry to fund it? It is about time a scheme was put in place. The cost of administering pension funds is enormous. It is cheaper for the Department of Social and Family Affairs to administer the social welfare pension than it is for the industry to manage their pensions. By the time everyone gets his or her cut, the costs are huge and they are taken out of people's pensions.

Mr. Moriarty

Quite a number of issues were raised and I will go through them in order. If Senator Terry wants me to come back to any, she is welcome to tell me.

As I said in my presentation, underfunding in defined benefits schemes is a significant issue. It is worth taking a couple of minutes to explain the workings of the defined benefits funding standard which is in place to protect scheme members. Prior to the Pensions Act 1990, there was no standard to which schemes had to be funded. In fact, the Pensions Board was established primarily as a result of the failure of a number of schemes from which members did not derive any benefits. It was felt as a result that a level of funding would have to be set out and put in place for schemes. A scheme must check every three years to ensure it is funded to such a level that if it were to wind up, it would have sufficient assets to cover all of its liabilities. While that was not an issue for schemes until two or three years ago, the decline in stock markets and the increase in liabilities on foot of the increasing cost of pensions, many schemes began to experience problems.

While approximately 50% of schemes which submit funding certificates to the pensions board are currently underfunded on a wind-up basis, that is not to say they cannot afford to pay their benefits. The schemes continue to pay pensioners the amounts they are due under the rules. However, they would not have sufficient assets to buy out all their liabilities if they were to wind up on the date of certification. Things have improved as the years have passed and in the last month, 66% of schemes which submitted funding certificates certified satisfied the funding standard. If a scheme does not satisfy the standard, it must put a plan in place to get back up to the required level. The Pensions Act allows a scheme to achieve that level by the time the next funding certificate is due in three years.

Senator Terry

They are now allowed ten years.

Mr. Moriarty

Sorry, I was about to come to that. Schemes are allowed three years without the approval of the Pensions Board. If required, they can apply for a longer period and the board will allow up to ten years, or longer in exceptional circumstances.

Senator Terry

That is disgraceful. Allowing them to do so is not management. Mr. Moriarty will be aware that many funds are closing down. He said that because they are underfunded, they are not able to meet their needs. However, they are actually closing down and people are being switched to defined contributions and must start all over again.

Mr. Moriarty

The majority of schemes are closing to new entrants. Our experience to date is that many schemes are not winding up and are switching, in their entirety, to defined contributions. As most members of these schemes have 20 years to go to retirement, if the scheme can put in place a plan, which is signed up to by the trustees of the scheme, and the employers, in order to get it back to full funding, the board must make the decision that it is in the interests of the members to continue the scheme on that basis. That is the basis on which we will grant a longer period. In many cases the alternative would be to wind up the scheme at its current funding level, therefore, the benefits of the active and deferred members of the scheme would be reduced. We think it is better to keep the scheme going and get it back to a better funding level. This is the basis on which we grant a longer period.

Senator Terry

There is no guarantee that they will return to full funding.

Mr. Moriarty

There is no guarantee but everyone has signed up to a plan that is designed to get them back to full funding. The contributions are pitched at a level to get them to that stage.

Senator Terry

They may not get there.

Mr. Moriarty

There is no guarantee in this regard.

Senator Terry

I do not know why anyone would pay into such a plan. This is why people are not paying into pension funds as they did in the past.

Mr. Moriarty

That may be true. However, the 900 people who have nothing are worse off than those who are paying into the scheme.

Senator Terry

How can they be worse off? At least they did not give their money to someone to misuse it.

Senator K. Walsh

I have a few important points to make. It is very important to run numerous campaigns to encourage people to make adequate pension provision. Poverty in old age is a serious problem and is a matter that is close to my heart. It is estimated that between 1991 and 2006 there will have been a 75% increase in the number of people aged 75 and over. Elderly people live on a day-to-day basis. Prior to retirement, they do not realise the pressures that can emerge as their income decreases. Much work has been done in this area, which I welcome, but there should be more emphasis on encouraging people to make provision for their retirement.

Deputy Callanan

I welcome the delegation. How can people be encouraged to join more private pension schemes? Is there a financial incentive such as the previous savings scheme?

Mr. Moriarty

There are a number of ways of dealing with the matter. I echo what Senator Kate Walsh said. It is important initially to make people aware of the problem. What is unfortunate about pensions is that too many people start thinking about them too late in life. When one is young, it is difficult to begin saving for something that will happen in 40 years' time. The majority of people nowadays who reach 65 years of age have 15 to 20 years in front of them during which time they will not be receiving a steady income, other than a State pension. Therefore, if they want to have the standard of living they envisaged for their retirement, it is important to make provision for it. Once people are aware of this fact, there should be appropriate financial incentives to encourage them to make these savings. Our report examines this issue and goes into detail on the incentives that should be in place.

Chairman

Why was the take-up of the PRSAs so abysmal?

Mr. Moriarty

I will refer that question to Mr. Dalton from our PRSA section.

Mr. Philip Dalton

One must put this in context. The Pensions (Amendment) Act 2002 created PRSAs. The process began with the NIPI report in 1998 and it took four years to introduce PRSAs. They were launched in February 2003 but, realistically, they were not marketed on the street until the summer of 2003. As Mr. Moriarty said earlier, we had to prepare a report that was designed to be prepared three years after mandatory employer access, which was introduced in September 2003, to see the level of coverage. However, the Minister has brought forward the report, which is the purpose of the current national pensions review.

PRSAs were not successful because the timeframe was very short. Prior to the introduction of PRSAs, prudential regulation and sales processes were the remit of the Central Bank, and then became the remit of IFSRA. It only came on stream in May 2003. The PRSAs were launched three months earlier. Fortunately or unfortunately, there is a timeline. The board and the Revenue Commissioners are responsible for the joint approval of the product to ensure that it is secure, transparent and portable. However, we have no jurisdiction over the sales process. As the old adage says, "pensions are sold and not bought". In the process of selling pensions, one had to buy volume. This involved a lot of leg work and ground work to sell pensions. Pensions were previously sold through personal pensions or voluntary occupational pension schemes. However, the PRSA is an individual contract. As it is portable and the individual is the owner, one must get to the source of where coverage is lacking. It is in the services industries, factories and so on. This work must be carried out en masse. We have been trying to encourage sales. We have had some concessions from IFSRA in regard to the sale of standard PRSAs in a group situation. One must ensure it is the right product and pricing structure for the people involved. It waived many of its requirements in that environment, which has helped somewhat.

Due to mandatory employer access, more than 70,000 employers have a designated PRSA provider. While the designation form is simple and cost-neutral, one must activate it. This comes back to the fundamental process. Intermediaries and sales people must visit these factories and offices and market the products on a large scale. I referred earlier to the advent of IFSRA and the arrival of PRSAs. One must also take into consideration the maturing of SSIAs. However, if one considers their profile, almost 45% of them will mature very close to the end. If there is an incentive in this regard, it is that people have been encouraged to save for five years. This is a good base from which to provide for one's pension. Obviously it will be targeted at those who opened SSIA accounts in order to save for the future.

The timing is a crucial factor in the advent of IFSRA. If the sales process was simplified, it would encourage people to sell savings schemes because the costing structure of a PRSA is very low and transparent. The maximum charge on a standard PRSA is 5% of every contribution and 1% of the assets under management. The maximum that any individual is charged for a PRSA is 6%. This is used to fund the investment managers, administrators, custodians and everyone involved in supporting the contract. It is a good portable and transparent product, yet the timing is limited.

Chairman

Is it the case that younger people are not prepared to take a chance with schemes because there are no guarantees? If one is into gambling, perhaps it would be better to be tied into property-related pension schemes. Many young people I meet say that a second property would give them as good a return, if not better. People have a fear of getting a very limited return on a pension scheme. It reminds me of the policies in place many years ago. When I was a child, my grandmother paid six pence or a shilling into a scheme every month but it was not worth collecting when people passed on. It may not have been the same in urban areas but people in country areas were poor and I remember hearing that collecting death benefit policies was not worth the price of a stamp. Perhaps those of us from the country were simple people. I developed an aversion to that type of scheme. I would rather stay above ground if I were to pay into such a scheme.

Are young people sharper and more acutely aware of the situation? They often tell me that one is better off investing in a house. I invest in pensions. I am too old to change but younger people may have a better chance. Perhaps the actuarial adviser knows more about it than I.

Mr. Dalton

My actuarial friend can comment on that. The Chairman makes a valid point. Somebody seeking a job 20 years ago wanted a job for life. Now, because of the education system and the free movement of people across Europe, people do not stay in a job for life. They stay in a job for five years and move on. Their priorities are day-to-day living and property. Property is recognised as having an extremely good investment return over time. However, like all cyclical economic movements, it has a downturn.

Occupation pension schemes are voluntary arrangements between employers and employees. The point of a PRSA is that it is an individual contract on a one-to-one basis and a person can take control of it. An individual has a choice to manage it or to let it sit, in which case it is reasonably, although not 100%, guaranteed. It is also portable and can be taken from job to job. However, nothing prevents people from putting money into a bank account to earn 0.01% over time. It is guaranteed but it does not have capital appreciation or investment return and it will not serve retirement needs.

The key concept of the PRSA is portability. A person takes ownership of it from the first day of his or her working career and gets into a habit of saving. By the time a person reaches the age of 30 or 35, he or she has earned more money, has become more astute and has more knowledge and possibly he or she can then take control of it. In that context, it should have grown and it is reasonably guaranteed if an individual manages it correctly. It is the only investment product in this country regulated from start to finish. It is not the service or the business firms that are regulated but the actual product. That can only be good for people and time will tell as to whether it will be. As I mentioned earlier, two and a half years is too short a time to have passed to evaluate it.

Senator Terry

The 70,000 people who have taken out PRSAs——

Mr. Dalton

Employers have designated a provider for that number and 59,000 PRSA contracts exist.

Senator Terry

That represents approximately 8% of the total number of workers in employment. Does Mr. Dalton know how many of the 59,000 people who took out PRSAs already had pensions? The PRSAs were introduced to target people who did not have pensions, generally lower paid, self-employed and atypical workers. Is Mr. Dalton satisfied that the target group of people took out PRSAs?

Mr. Dalton

I do not know how many of the people already had pension schemes——

Senator Terry

If Mr. Dalton does not know that, then he cannot state that the scheme was successful. A certain group of people was targeted and if he does not know whether they took out pensions, he does not know if it was successful.

Mr Dalton

We can state that the board was charged with responsibility for a national pensions awareness scheme. During the three years of that campaign, we particularly and specifically focused on young people and the typical worker moving from job to job. The ten providers of PRSAs send us quarterly returns, which include high level aggregate details of the amount of contracts they sold and employer designations. We are provided with detailed analysis of the profile of the people who bought them on an annual basis. Due to the short period in which this has existed, we have only received two annual reports to date. We have been able to extrapolate data on economic status and age. The limited number sold show that it has worked because 68% of PRSAs have been sold in the 24 to 44 age bracket. That is one indicator.

Senator Terry

They already have pensions, which is doubling——

Mr. Dalton

We do not know that.

Senator Terry

Mr. Dalton should know that. Will he obtain that information for us? It is extremely important that we know.

Mr Dalton

Unfortunately, we cannot do so. There is no way to obtain that information. Short of identifying the names and addresses of the 59,000 who hold PRSAs and sending them a circular——

Senator Terry

The PRSA scheme was established to target a group. It is impossible to quantify how successful it has been if one does not know how many people in that group took out a PRSA. SSIAs have shown that many Irish people are savers. Do the same people save all of the time? The same people do not save because they cannot do so. By saving, I mean taking out a pension product. I suspect that a large percentage of the 70,000 probably took out a PRSA as an additional savings mechanism and many of the people who did not have a pension product prior to the introduction of PRSAs still do not have one today.

Mr. Dalton

I do not dispute that it is a definite possibility. We asked how many of the employer designated contracts were active and then asked how many employees within the contract contribute. More than 40% of the active 59,000 contracts belong in that category. That is one figure we can confirm, it suggests they are new people but that cannot be verified. I take Senator Terry's point.

Senator McDowell

I am not persuaded that this will ever work if it is done on a purely voluntary basis. The principle of portability it established has obvious merit. A large percentage of younger people and people on lower incomes will never see pensions as a priority, no matter how much encouragement they are given or how many PR contracts we enter into to encourage them. We are witnessing the prelude to a measure of compulsion. Time will tell whether it is on the basis of employees being compelled to make contributions or a broader measure.

I missed Mr. Dalton's presentation earlier and he may have answered my next questions. Does he have more information on the income levels and the level of contributions made to PRSAs? Pension funds can invest in property since the change in the Finance Act. Is it possible to gauge whether that change has impacted on the assets of pension funds? I know it is in its early days.

Mr. Dalton

I will respond to the question on income levels and PRSAs first. As part of the expanded return that providers send us, we have indications of what PRSA holders earn. I do not have details to hand. Regarding the question on property and the Finance Act, we certainly have not seen, and we do not have a mechanism for gathering, data on where funds are invested. We do not have an investment function for assets of pensions schemes.

On the occupational pension side, we have a right to examine the trustee rules which can and should contain proper mandates of investment. On the PRSA side, we can examine the investments of each product as part of the approval process, including the specifications of a product, how it is made, where it is invested and that it meets the stipulations in the legislation. I will pass the question on mandatory pensions back to Mr. Moriarty.

Mr. Moriarty

As I mentioned earlier, the board has just completed a review for the Minister for Social and Family Affairs. That review examines the issue of voluntary and mandatory pension coverage. Unfortunately, because the review has not yet been published, I cannot go into detail on what exactly it contains in that regard. However, the matter is examined in great detail in the review, which looks not only at the question of mandatory pension systems but also at different types of systems and what has been done in other countries in that regard.

On the matter of property, anecdotal evidence suggest that there has been a lot of activity in that area, particularly one-man schemes to purchase property through pension funds. However, such activity tends to be among those on higher incomes, who are likely to already have supplementary pension provision.

Senator McDowell

Does Mr. Moriarty have a view on it? It is something that makes me somewhat queasy.

Mr. Moriarty

It would not be appropriate for me to give my personal view on the matter. The Pensions Board does not have a view on the issue. The board wants more people to save more money for pensions. How they choose to do that, as long as it is done legally, is up to them.

Senator McDowell

Does Mr. Moriarty believe that it is mostly higher income earners who are investing, tax free, in property and basically speculating?

Mr. Moriarty

As long as they are not doing anything illegal, it is their choice as to how they wish fund their retirement.

Senator Terry

Could Mr. Moriarty answer my questions on how many people have frozen benefits, how much it would cost to index-link pensions or to give indexation to old age pensioners and whether the €62 billion fund could be used to right the wrong that was done to people with frozen benefits?

Mr. Moriarty

I was not deliberately avoiding the question, I simply did not get through the list of queries.

The board does not have statistical information on the number of people who have frozen benefits in schemes. We do not keep records on that, although we may seek that information in the future. However, there is currently no requirement for people to give the board such information.

As Mr. Dalton pointed out earlier, the pension system in this country is voluntary. The board does not, therefore, lay down rules on the types of benefits that people must provide. It is up to an employer who is choosing, on a voluntary basis, to put a scheme in place to decide whether he or she wants to have indexation in retirement for employees. The issue of what benefits should be put in place falls into the industrial relations field. At present, there is no legal requirement to provide indexation and I cannot speculate on the cost of doing so.

Senator Terry

The board wants to ensure that people will have 50% of their pre-retirement income on retirement. Therefore, it is up to the board to ensure that people are not in poverty and will get at least 50% of their income, in order to maintain their standard of living. If indexation is not implemented, people's pensions will be way below the 50% target in ten or 20 years' time. Surely, therefore, the board has a responsibility to ensure that indexation is put in place. I do not accept the answer given in that regard. This is nothing personal, I am asking questions of the Pensions Board and not of Mr. Moriarty himself. Indexation is something about which this committee should be very concerned. If the Pensions Board——

Chairman

If the legislation does not place an onus on the Pensions Board to do such a thing, then it is a matter that must be dealt with by the Legislature.

Senator Terry

I would like to see the Pensions Board taking the matter on board.

Chairman

In fairness to the Pensions Board, it is acting within the terms of the current legislation. Obviously, if this is a significant lacuna——

Senator Terry

The board advises the Minister on——

Chairman

The Senator has made a number of points that are of crucial importance and I hope the Pensions Board will take them on board, as matters of concern to the wider committee and not just to Senator Terry. The board has an advisory role vis-à-vis the Minister for Social and Family Affairs, which will be exercised in the coming days. I am somewhat amused about the recent review because, thanks to the media, we all know what it contains. At the same time, here we are, at an Oireachtas committee meeting, and the representatives of the Pensions Board are afraid to tell us that, for example, the 42% tax relief will be available to everybody, irrespective of income. We all know what is in the review and that the board did not recommend mandatory pensions. People outside the House would not be happy if they realised that although Members of the Oireachtas are elected by thousands of people, they must depend on the media to tell them what is going on.

Senator Terry

If the Government introduces mandatory pensions, I will take it to court and will go all the way to Europe, if necessary, because I believe it would be an absolute breach of my constitutional rights. That is the question that Mr. Moriarty did not answer.

Chairman

That is a matter——

Senator Terry

It is very important. A pension is a property right, protected under the Constitution. Can I sue the State if it fails to look after my pension? Is mandatory pension provision contained in the EU directive and was it transposed into Irish law?

Chairman

Some of the questions Senator Terry has asked are legal in nature.

Senator Terry

I appreciate that.

Chairman

Those are matters on which she must seek her own legal advice. It is not the responsibility of those attending this meeting to offer legal advice on these issues.

Senator Terry

This is in the interests of the many thousands of people whose pensions have not being looked after.

Deputy Stanton

Senator Terry obviously has done a great deal of work in this area and has raised some serious questions. Mr. Moriarty stated earlier that pensioners should be at 32% of the gross average industrial earnings in order to avoid poverty. He also mentioned that 900,000 people have no supplementary pension provision. Is he, therefore, saying that 900,000 are at risk of poverty? How much will it cost to bring the pension fund up to the recommended level of 34% of gross average industrial earnings, to keep people out of the poverty trap?

People who are working have a certain amount of disposable income. Perhaps Ms Kyne can tell us how much has been saved through the SSIA scheme. Does Mr. Dalton believe that the SSIA scheme has had an impact on PRSA uptake? It appears that many people are saving a certain amount every month by investing in a guaranteed SSIA, rather than in a PRSA. It would be useful to know the income levels of those who have opened PRSAs.

Mr. Moriarty

The current position is that the old age pension is at 32% of gross average industrial earnings. The recommendation in the national pensions policy initiative is that it reach 34%. That recommendation was never accepted by the Government. The current Government policy is to reach €200 per week by 2007. I do not know what it would cost to get from 32% to34%. Perhaps the Department of Finance has costings in that regard.

Mr. Dalton

There will be approximately €16 billion in the SSIA pot when the accounts mature. As to whether SSIAs have had an impact on PRSAs, if one takes the issue of timing, then I believe they have, categorically, had an impact. I hope the impact will ultimately be positive because the savings habit has now been created and can be fostered. The structure of PRSAs is important, the fact that they are regulated products, conducted in a certain manner, with material reports or statements every six months, annual projections going forward and so on. All of that is creating personal profiles of individual PRSAs and I hope that the impetus generated by the SSIA scheme can be projected into the PRSA scheme. Then perhaps five years from now people will say that the SSIA scheme worked well. It has provided a base but it is up to people to transpose that base into action.

Deputy Stanton

Mr. Dalton is saying the existence of the SSIAs had a definite impact on the take-up of PRSAs.

Mr. Dalton

Yes. Personally I think so and that would also be the board's view, particularly when one looks at the timing of the SSIAs, when they came on stream and when the pensions board came on stream. The board came on stream in February 2003, while the window for the SSIAs closed in 2002. Therefore, we lost the income that was available for pension investment and savings to the SSIA scheme.

Deputy Callanan

As the Chairman said earlier, returns on investment in insurance policies are quite low. Are pension funds limited in where they can invest money? In the past ten years, for example, property was the most thriving investment area of all. Are pension funds precluded from investment in that area?

Mr. Moriarty

There are no legislative restrictions on where pension funds can invest. Trustees of pension funds have an obligation under trust law to invest on what is known as the "prudent man" basis. This has regard to the fact that they are investing other people's money and, therefore, they must be prudent. Otherwise there are no detailed restrictions on how people invest.

Mr. Brendan Kennedy

There are some additional restrictions. The EU pensions directive was implemented with effect from September 2005. While it does not place further restrictions on pension funds, it places a general duty on them to be suitably diversified, taking account of the liability to the scheme. It puts a restriction on pension funds investing too much in unregulated markets. These are high level restrictions. While it does not specify investments or ban other investments, it puts an emphasis on general restrictions of care and diversification.

Mr. Dalton

There are restrictions on where a standard PRSA can be invested. It must only be invested in pool funds, which is a relatively safe instrument. It has regulated pricing and it is on regulated markets. It is also well diversified. There are restrictions for PRSAs, which is a help.

Deputy Boyle

I would like some clarity on the PRSA figures, including the 70,000 employers registered as agents for the promotion of PRSAs.

Mr. Dalton

There has been a mandatory employer access requirement since 15 September 2003.

Deputy Boyle

It appears that 59,000 people have taken up PRSAs. If these individuals are working part-time, it is safe to say that the vast majority of those who are registered for access have no employees who have taken up PRSAs.

Mr. Dalton

It is a high number.

Deputy Boyle

What proportion of these people made the employers' contribution where that option exists? I presume it is a lower proportion.

Mr. Dalton

Yes.

Deputy Boyle

My second question relates to the capacity to save. The Central Bank published a report which states that personal debt currently runs at 160% of average incomes. That indicates that for the majority of citizens the ability to save depends on the ability to borrow further. What impact will this have on our pensions policy?

Mr. Moriarty

I will address that issue and Mr. Dalton can address the PRSA question.

On the capacity to save, our focus is on the 900,000 people who are currently not saving for pensions. On the other hand, approximately 1 million people are doing so, and approximately 1.1 million are saving through SSIA schemes. Despite the fact that we appear to have a high level of debt, we have high levels of savings compared to other countries. As I am not an economist, I do not know how this works but these are the statistics. Various studies are being carried out in this regard. As a nation, we appear to have a high capacity to save, irrespective of the fact that we have high debt levels. Our focus is on considering the 900,000 people who do not have supplementary pension provision.

Mr. Dalton

In respect of the breakdown of employer contributions to PRSAs, we add in the annual return. It there is a request for it, we also supply the income breakdown.

Chairman

I thank the representatives for their contributions. Mr. Kenny is next.

Mr. Paul Kenny

My job is to give financial redress to people who have lost out as a result of maladministration of pension schemes. I am concerned about what happened in the past rather than what might happen in the future. My input to policy is limited to the extent that I tend to confine myself to lessons that can be learned from the complaints brought to my office.

I have a limited look-back period. I can look back to sometime in 1996 but anything that happened before that is outside my remit, which I was given by the Oireachtas. Apart from the limited ability to look back, I am also constrained in that I cannot make determinations that would have the effect of changing the rules of a scheme. I cannot second-guess employers who settled the rules of the scheme in the first instance. I cannot run counter to the original intentions of employers in making determinations.

In my written submission to the committee I mentioned a couple of the macro issues that were dealt with in the Pensions Board's presentation. The first of these is the so-called demographic time bomb. Since the original ESRI report in 1997, the demographics have moved on. In the meantime, there has been a great deal of immigration to the country and an increase in the birth rate. The detonation of the bomb, so to speak, may be slightly deferred from the original projection. The National Pensions Reserve Fund, which is designed to help the effects of the demographic time bomb, is timed to kick-in in terms of drawdown from 2025 onwards. As a result, it may be possible to defer drawdown from the National Pensions Reserve Fund.

I have become aware of another bulge, about which I am sure the Department of Finance knows much more. This is the bulge that will be created by retiring public servants. There was much recruitment in the late 1960s and early 1970s of people of my age who will be coming towards, or have already reached, retirement. These individuals are public servants, not people who will be entitled to social welfare pensions. Their pensions must be paid for in the meantime before any drawdown from the National Pensions Reserve Fund becomes available.

In the context of the National Pensions Reserve Fund, last week the OECD said that it could see uncertainty in the evolution of reserve funds because the need to finance social security pensions in the future is uncertain. At a policy level, we must address the possibility that instead of starting to drawdown in 2025, we may need to continue to finance the National Pensions Reserve Fund beyond that or find money, if there is extra funding available, to invest in it in the shorter term.

The other area which has already been dealt with is poor coverage. This is something I am learning about as I go along. The complaints being made draw my attention to the reasons behind the poor coverage. Much of it has to do with the effects of public policy in the past. For a long period, women were kept out of pension schemes if they got married. We also stopped them from working if they got married. The effects of this policy are still being felt. Our attitudes were wrong. Women did not see themselves as being in the pensionable frame of the workforce. Many of them opted out of pension schemes when they had the opportunity to do so and they are not now being allowed to opt back in when there might be an opportunity even for future service to allow them to change the option they chose a long time ago. It is an attitude to which I can relate because I am old enough to have stood 30 years ago in a works canteen and seen 20 year old girls trying to stifle their laughter as I told them about the new pension scheme. The idea that they would ever reach pension age, or be in the same place when they did so, was so ludicrous that they had no interest.

The PRSA initiative has, to a degree, failed to take off. This may be partly due to the existence of SSIAs and because people do not give sufficient thought to the way tax reliefs work. The SSIA is a very simple product, something is added on. Everyone can add something on. They can understand what happens when something is added. However, if I contribute €100 out of my salary to a pension scheme today, it will only cost me €56 but I do not tie the two figures. As it is not very transparent, people do not do the arithmetic.

Tax reliefs are better for PRSAs and pensions than the incentive for the SSIAs. However, the latter are easier to understand. This may be why the SSIA scheme has been so successful. It has been suggested that mandatory pension contributions may be a solution. It appears that they have been successful in Australia, for example, but they were given impetus in a trade-off under which the unions agreed to forgo a general pay increase to get the mandatory contributions kick-started. Whether people would be prepared to buy into a similar arrangement in this country remains to be seen. Objections are likely to come from lower paid people, not necessarily because they will get so little out of it but because they can ill-afford to pay pension contributions. The other danger is that the mandatory minimum may become the norm or maximum and people will not contribute more.

Senator Terry raised concerns about constitutional issues. Some people view an obligation to save as an attack on property rights. It is a change in the distribution of income rather than transferring income from one sector of the population to another. In fact, there is quite a transfer from the taxpayer to the pensions saver in terms of the tax reliefs given to pensions.

I expressed reservations on the amount of regulation in this area. We are not over-regulated in this country but I am nervous about interventions from the European Union at a macro level. I am not sure it understands how we operate pensions. Some of what arose from the recent directive is not logical. I am concerned that regulation has contributed the problems of defined benefit schemes.

The micro issues that arise in the complaints I receive include people, some of whom are in the public sector, without pensions. The received wisdom that the public sector is well catered for is not necessarily true. Nothing has been done to address the obligations under recent legislation to provide pensions to part-time staff in areas in the university sector with large numbers of such staff. People who opted out of schemes in the past do not have the opportunity to reverse that decision because of public policy. That is the case even in terms of future service. One example is the non-teaching staff of primary schools. A scheme was introduced in 1987 and many people, particularly women, opted out and cannot now opt in, even though they regret their decision.

I discovered another case where the wife of a man who works in a semi-State company complained bitterly that he does not have a pension. I was told with a straight face that the man was employed on a temporary basis for 30 years and was not entitled to membership of a pension scheme. That is nothing short of disgraceful. I also found that where people are excluded from pension schemes, their employers have an obligation to offer PRSAs. The Department of Finance recently had to inform Departments to remind their agencies of their obligations in that area because it is not certain that all of these agencies offer PRSAs. Even when they do, there is no obligation for the employer to contribute to them.

Overprotective legislation also exists. We have preserved benefits for everybody after two years. It used to be five years and it was changed in the Pensions (Amendment) Act 2002. I am approached by people returning to the Philippines and India who where employed here as nurses for a few years. When they arrived, they were told they must enter a pension scheme because they worked in the public sector and it was mandatory. They get less tax back when they return home because the rules were changed halfway through the game. After three years in the job, they were told that preservation was mandatory after two years and they would get a pension, paid to them in India in euro, in 30 years' time. We do not have a double taxation agreement with India. How clever is that? Those people could benefit from being able to export what, in our terms, is an extremely small amount of capital. It could make a difference to them when they return home. It can be done for someone who permanently emigrates to Australia. I do not see why we cannot do it here.

Outside the PRSA regime, which is open to employed and self-employed alike, retirement annuity contracts are the old-fashioned contracts self-employed people have taken out since 1958. There is no transferability between those contracts and mainstream pension schemes. If a person was self-employed at some stage, he or she cannot transfer the assets into the pension scheme of an employer. Legislation could easily fix that and there is no reason, in principle, that it should not be done.

Deputy Stanton

I thank Mr. Kenny for that clear and concise contribution. He answered most of the questions I wished to ask. Does Mr. Kenny agree that most people's eyes glaze over when pensions are discussed. They switch off, become confused and cannot follow it. Is there a way of making it easier to understand? Mr. Kenny stated that the tax benefits of PRSAs is greater than what people earn on SSIAs and yet people do not seem to understand that. Do we need to examine the pensions issue and make it easier to understand? Why must it be surrounded by so much gobbledygook and terminology?

Mr. Kenny

The Deputy is correct. The message seems to be understandable in reverse. People know what they will get when something is added on. People do not always see what they are saving when it is taken away.

I find that pension providers are subject to a great deal of regulation. Codes of conduct and practice must be followed and various standards must be met. The provider is always tempted to issue documentation that covers his back, without the information being clear to the person buying the product. Pension providers ask whether they are covered legally, have they stated anything they should not and have they ticked all the boxes, without necessarily asking if the person understood or is likely to be able to understand the small or larger print in the document.

Deputy Stanton

I will follow up on that. Is there a need for all the terminology used? I am relatively well educated and I find it extremely difficult to understand. How can it be made easier for people to understand? This area and that of life assurance is shrouded in terminology that people do not understand.

Mr. Kenny

I can recommend a publication entitled Understanding Pensions.

Deputy Stanton

Is it in English?

Mr. Kenny

It is a wonderful publication, which I wrote myself. It includes a glossary that helps people to understand the jargon. Like any profession, it is difficult to get away from jargon. Jargon is appropriate in its place. Two doctors can speak together in Latin to their hearts content but if they are speaking to a patient, it is extremely inappropriate. Some financial institutions make a brave effort to use plain English. The Minister for Social and Family Affairs has endorsed a number of recent campaigns to cut through the jargon. It is important that people understand this subject.

I have also come across issues of literacy when dealing with complaints. This is a more difficult problem because what we consider to be plain English may be impenetrable to people who have literacy problems. We need to reconsider the position. We also need to be able to communicate with people with hearing or sight difficulties. Enough thought is not given to any of that.

Senator McDowell

Mr. Kenny has identified an interesting point regarding the effect of immigration, which has not been taken on board sufficiently in our assessment of the macro policy issues.

Since the National Pensions Reserve Fund was set up, there has been an increase of approximately 250,000 in the number of people in employment. All the indications are that this trend will continue for at least another few years. This has dramatically changed our demographics and our dependency ratio. Mr. Kenny is quite correct when he says that it effectively means that the pensions time bomb due to detonate in 2025 will not do so if trends continue as they are at present. In fact, the bomb may not detonate for quite some time after 2025. Therefore, the basis on which the fund was set up is redundant or at least drastically altered.

In this context, the question posed earlier by Senator Terry is valid. Why are we taking approximately €1.5 billion of taxpayer's money out of the system this year and investing it in the stock markets of the world, for the benefit of people like me who will retire in 20 years' time, while asking our parents, current pensioners, to live in poverty? We are asking our parents to live on €9,000 per annum, the current social welfare pension. That is crazy and demonstrates an extraordinary assessment of priorities that I do not understand. While I agree with Mr. Kenny's reasoning, the notion that we should simply defer drawing down the fund is not the conclusion I would reach. I would conclude that making it compulsory for people to make a 1% contribution every year should be examined. I am not saying that we should stop the reserve fund. We should, however, examine it year on year in terms of priorities. The priority now is to get away from the notion that people must live on €9,000 per year because that is crazy.

Mr. Kenny

I do not know that I agree with the idea that we will never need to draw on the National Pensions Reserve Fund. Perhaps we will be able to postpone drawdown but we will eventually face a situation where there will be a smaller working population, supporting a larger dependent population. We do not know what the lifespan of those dependents——

Senator McDowell

The fact is that the trend is moving in the opposite direction at present.

Mr. Kenny

The trend is moving in the opposite direction but that will not be a permanent feature of the system. Ultimately, things will stabilise but, then again, who knows? Ten years ago none of us would ever have predicted net immigration.

Senator McDowell

I started by making a point, which I did not develop fully, about immigration. Some immigrants are likely to leave the country in the future. They are making contributions to public service pensions, as well as PRSI payments, which they may never draw down. They are literally making a net contribution to our pension system.

Mr. Kenny

Yes, that is true. When one complainant from the Indian sub-continent was told that he would get a pension at 60, he said that people where he came from did not live to that age. Then he was told his wife would get a pension when he died, to which he replied that his wife was older than him.

Deputy Boyle

This may be outside the remit of Mr. Kenny but, in his work as Pensions Ombudsman, has he noticed a distinction in the quality of service between Irish-based pension funds and those operated outside the State? I ask because one of the beneficial effects of pension funds, outside of providing funds for participants, is that they can act as an engine of economic change in their own right. Where pension funds are invested is as important as any other issue in this regard. This is a criticism of the National Pensions Reserve Fund. I am interested in the types of complaints received by the Ombudsman from individuals about pension funds and the companies with which they are dealing. I am also interested to know if any direction can be given in terms of how pension funds can be best used as an engine of economic change.

Mr. Kenny

We have not had restrictions on investment by Irish pensions funds since the exchange controls were removed in 1990. One of the negative effects of those controls was that once money was taken out of the country legally, people were most reluctant to bring it back in because they could never get permission to take it out again. There were, therefore, major restrictions on freedom of investment and on the capacity of funds to diversify.

One of the problems is that we have a relatively small market for investment. We may have to invest more in infrastructure because the number of companies in which to invest is not as large as in other economies. The initial idea of restricting the National Pensions Reserve Fund was to ensure that it would not end up like the fund that backs social security in the United States, which is now almost exclusively invested in Government paper. That fund means nothing in reality and one might as well not have a fund at all if it is completely in Government paper.

The people who run the National Pensions Reserve Fund are now looking at infrastructural projects here as a means of investing in the Irish economy rather than investing all of the money abroad.

Deputy Boyle

That was one element of the issues I raised. I also referred to quality of service in terms of the nature of the complaints with which the Ombudsman deals and how individual users of pension funds are affected.

Mr. Kenny

I have had very little experience of dealing with pension schemes from outside Ireland. There are a number of schemes about which we have had complaints and which are administered from the United Kingdom. My only comment on the matter is that those who administer Irish pension funds are generally more flexible in their approach to problems than their counterparts in the United Kingdom. The latter group are much more inclined to read the rules and stick rigidly to them. There tends to be more of a spirit of trying to fix problems in Ireland rather than strictly adhering to the rules. Having said that, there are also some bad examples in Ireland.

Deputy Boyle

Mr. Kenny referred to the United Kingdom. Its Government-backed pension scheme seems to have had more success than our PRSA schemes, although it has encountered some problems. Does Mr. Kenny have any opinion on why that is so?

Mr. Kenny

I am not well acquainted with the numbers regarding the success rate of the British scheme but one interesting phenomenon in the United Kingdom is that it is possible to buy a pension for a child. There has been a certain amount of transfer of capital downwards, through the generations, as a result of allowing for that option.

Senator Terry

I will try not to comment on pensions for children.

I wish to ask Mr. Kenny about competition in the pensions market. I am concerned that said market is very limited. We constantly hear advertisements on the radio and in other media from various pension companies, many of which have the same owner. Is that an area of concern for the Office of the Pensions Ombudsman? I am interested, in this context, in fund managers as well as the pensions industry in general. I believe that there is insufficient competition in the market because the industry is controlled by one or two large companies. That being the case, we are not getting a good deal.

Every year, particularly before the end of October, companies advertise heavily in an effort to persuade people to take out a pension so that when they retire, they can sit on a beach with a glass of champagne. I am concerned that there may be a conflict of interest in the media because of the amount of revenue that radio stations, newspapers and so forth earn from pensions industry advertising. While I have seen numerous articles on why everybody should have a pension, I have not seen too many articles outlining the potential pitfalls of pensions. Is there a conflict of interest there?

Mr. Kenny

The area of competition is outside my remit. Competition is the responsibility of the regulator. However, it is true that we have a relatively small number of providers. Mr. Dalton mentioned that there are only ten providers of PRSAs in the Irish market and there are probably no more than ten providers in the mainstream pensions market.

One must be careful with regard to the advertisements on the radio because they are actually directed at people who will be taking out self-employed pension contracts or individual contracts, although that may not be immediately clear. They are not aimed at people who will be going into group schemes, occupational pension schemes or employer sponsored schemes. Those advertisements are very much directed at a particular segment of the market, although one might not initially think so.

I would be concerned that there is not a great deal of competition. It is a small market and it is probably not very tempting to outside providers to enter it. Anyone in the EU can enter the market and sell pensions to people in Ireland. The main source of competition, because of the type of products on offer and the regime in place, would be in the United Kingdom. The currency differential is one of the issues that inhibits a company in the United Kingdom from selling pensions across borders because it deals in sterling and we deal in euro and there is a currency risk that people may not be prepared to take. We also speak approximately the same language, which should be an advantage but it does not seem to work that way.

Senator Terry

What about the media?

Mr. Kenny

The media will take the money wherever it is and there is obviously a demand to advertise the pension products as the October deadline approaches. I sometimes wonder if this artificial October deadline is a good thing, in that it pushes people into deferring their pension provision until the last minute and then there is a spate of advertisements and some people miss the boat. I have received complaints from people who have been denied tax relief because they missed the boat, not in terms of paying the money but in the context of making the application for the tax relief. They did not realise that not only should the money be paid but also that the application for relief should be made before 31 October in respect of relief for the previous year. Issues such as that need to be examined more urgently than that relating to the involvement of the media. The media will simply advertise whatever it is given to advertise. The media does not care whether it is asked to advertise pensions or soap suds.

Chairman

I thank Mr. Kenny. I call on Mr. Joe Byrne, chairman of the Irish Association of Pension Funds.

Mr. Joe Byrne

Mr. Burke will deal with our submission first and we will take answer questions afterwards.

Mr. Patrick Burke

I welcome Mr. Byrne back from honeymoon. Perhaps that will explain my intervention.

Chairman

And Mr. Byrne's prolonged term pension.

Mr. Patrick Burke

He has to double it now. To explain, the Irish Association of Pension Funds serves a large number of pension funds and members of occupational pension schemes — typically, the larger group schemes run by employers for the benefit of members. We run trustee training courses and try to think of ourselves as a think-tank in regard to policy issues and how the system can best achieve the objectives which most people would have for saving for their retirement. In that context, we are anxious to receive confirmation of the press releases on the information in the media in regard to the Minister's review and its outcome. We have made a number of submissions which, it is hoped, the joint committee received during the course of that review.

Senators Terry and McDowell raised some issues that are of concern to the Irish Association of Pension Funds. We believe there is a funding crisis in defined benefit schemes. This is not unique to Ireland. It is also the experience in the US and the UK. The trend in those jurisdictions has been away from defined benefit towards defined contribution. We believe the trend is continuing in Ireland, albeit later than elsewhere. It is probably a trend that is most populated by multinational companies whose parents are domiciled in countries other than Ireland because they have seen the trend elsewhere. We are concerned because it is being replaced by defined contribution schemes. Surveys we have prepared and undertaken show rather low contributions. We have had conversations on this issue previously with Senator McDowell. Typically, an average contribution is 10% or 5% from the employer and 5% from the employee. This is not adequate to achieve the post-retirement objectives that people are entitled to expect. Defined benefit has many advantages for the individuals who receive benefits under that arrangement and, of course, they are secure in the public sector. In the private sector, however, they appear much less secure.

The funding standard is having a significant impact and is not on its own in that regard. International accounting standards are also driving employers away from defined benefit pension schemes. The impact of the funding standard — and a strengthened one at that — is effectively to require the employer to invest more money or reduce benefits to members or to require employees to contribute more. That is the impact of a strengthened funding standard. There is a delicate balance which the Department has been trying to manage for some time. If one causes that deficit, essentially one causes employers to flee further and faster from defined benefit or it results in a reduction of benefits. One must examine the causes of the deficits and see why they occurred. As outlined earlier, there has been a long period of poor investment market returns and significantly, and more recently, low long-term interest rates which make pensions more expensive. If one is going to pay a person an annual amount, it is derived from the amount of interest one earns on the asset that one puts aside to pay that pension.

That the actuaries are telling us how much longer people will live has a significant impact. There is cause for the Oireachtas and the State to support the defined benefit system. We have made some recommendations in that regard, which the joint committee will see in the material provided, one of which relates to the State annuity fund.

When a pension comes to be paid to an individual, one must go to the marketplace and find an insurance company that will sell the amount of pension and give it the capital it requires to pay that pension to the individual for the rest of his or her life. The insurance company must satisfy regulations that require it to remain solvent and pay all its liabilities. It is, therefore, obliged to take that money and invest it in a cautious and conservative way. We estimate that the cost of this conservatism is approximately 30% of its value, that is, value lost to consumers. We estimate that not against a radically aggressive asset allocation or alternative asset but broadly against a 50% equity as 50% non-equities, safer products such as bonds, cash and so on.

It is our view that the State is not obliged to address short-term solvency issues. The Minister may disagree but in certain respects it does not have to face those issues as closely as do individuals or, by regulation, the life assurance companies. There are two infrastructures in place already, through the National Pensions Reserve Fund, to take and invest moneys, and through the social welfare system, to pay benefits. This is related to a compulsory pension system.

We have a compulsory pension system in Ireland through PRSI. What one can achieve with the State annuity fund is to support defined benefit pension schemes and encourage employers to continue to provide those benefits or not to reduce benefits or not to close them further by reducing the cost of achieving the standard. There is considerable detail in that regard in the report the joint committee will have received. If such intervention is not possible, the funding standard ought to be changed. Senator Terry may find that our view of the funding standard is different from hers. Our view is based on the fact that if it remains as it is, employers cannot accept it because the cost becomes too high due to the fact that the period for volatility to smooth out is not granted. That is not just our view, it has been confirmed by a large number of employers. It is, in fact, confirmed each day by the activities of employers. We believe this may be the last chance for intervention to support defined benefit in order to continue to keep benefits at the level where post-retirement is appropriate.

There are issues regarding the adequacy of defined contribution. There are many different means of compulsion — forcing people to save for their retirement. We already have one, as I have said, and perhaps there is room for extension of those systems. We would be very concerned about second-pillar compulsion, which would set the floor. This relates to comments made previously. Typically, the surveys undertaken on benefit provision approximately ten years ago were taken by employers setting up in this country. They considered the average benefit design and decided that this would be put in place in their companies. They might have altered it slightly if they did not have an overall global policy on benefit design. We believe that a mandatory second-pillar system would result in a new average which is lower than the old defined benefit and lower than the current defined contribution, which we regard as completely inadequate. It would just build up a bigger problem.

In much of what we say about defined contribution, we also point out to employers that the change from a paternal role, where the employer provides for pension in retirement, to an individual role, where it is the individual's responsibility to determine how he will save for his retirement, causes difficulties for those employers when such retirements come about because many of their employees will be unable to retire due to inadequate savings. We believe the issues are as important to employers as they are to individuals. That is our view on the compulsory perspective.

Members may have seen a report in the newspapers following research we commissioned from Professor Shane Whelan, an academic actuary — as if there is an actuary who is not an academic. He investigated the position to which the Deputy referred regarding the capacity of the State to provide greater pensions to those currently in receipt of State pensions. The output of that research essentially shows that the cost of providing current State pensions is considerably below that of our European counterparts and is likely to remain so. There is additional scope relative to our European counterparts. This does not mean that other budgetary considerations of the Department of Finance might not take priority. In that context, however, the scope exists.

There are two issues post-retirement regarding whether people will live in poverty and whether they will get an awful shock on receiving greatly reduced incomes relative to those received before retirement. The first issue can be substantially addressed by the State system. This impacts on how many people should be covered by the second pillar, the voluntary element of retirement. It may be that 70% is an irrelevant target if we are satisfied that a significant proportion of people will never fear poverty because of the State system. We believe the two are closely intertwined.

We believe the mandatory side is crude. Reflecting comments made earlier, people at a different age will not want to pay make pension contributions and will not want to be forced to do so or will not be capable of doing so. If they are capable of doing so, it switches somewhere else.

In our opinion, SSIAs have been an enormous success, although we might not have initially expected this to be the case. Senator Kate Walsh and Deputy Callanan spoke about educating and encouraging people. The SSIAs have achieved simplicity. People now understand where their money goes and how they can get free money, which is how people view SSIAs. I do not believe that many people set up SSIAs because they had a plan to save a certain amount of money so that in five years they could do a certain thing.

Chairman

If the Government wants to promote a savings culture, particularly among those on low incomes, should it not do something similar with PRSAs? Rather than giving tax relief, it should pay a similar amount into the fund

Mr. Burke

We would agree.

Chairman

This would result in an increase. Would a similar scheme of €1 for every €4 not work and represent an added attraction? Mr. Murphy and Ms Kyne will shortly tell us how much the scheme will cost. When people get tax relief, they do not realise what they gain. It is all about them being able to see the fund grow. Rather than giving tax relief, we should deposit an amount equivalent to the tax relief in the PRSA fund? Would Mr. Burke consider that a more attractive way to encourage people to contribute? As Senator Terry said, we must ensure that people do not face huge poverty when they reach a particular age.

Mr. Burke

We would agree. We made proposals along similar lines in our budget submission to the Department of Finance. As Mr. Dalton said earlier, pensions need to be sold; they are not bought. The SSIAs were not particularly heavily sold except by the media, which announced a giveaway. People needed to queue to sign up for SSIAs because most of them left it to the last date. Perhaps having a deadline forces people to make a decision to sign a mandate. We can learn many lessons from the SSIAs and the Department of Finance should be congratulated for encouraging the start of a savings approach. Considerable money has been invested in SSIAs and the rollover into pension schemes would help people with those savings in their retirement if they were given some form of relief or incentive to do so. The greater prize would be to encourage people to continue with a scheme to which they were attracted. The simplicity, as outlined by the Chairman, is key.

We agree with Senator McDowell and Mr. Kenny on the demographic impact, which we regard as a deferral of the pensions time bomb. We have views on investment and the appropriateness of investing nationally as opposed to having all investment opportunities open. This is a question of utilisation of capital and falls back on our social policy objectives. It is probably more relevant to a political discussion than to an investment debate.

We would broadly support the objectives of the National Pensions Reserve Fund. Earlier I mentioned that deficits were increasing because of lower long-term interest rates and increased mortality. This has meant that defined benefit schemes in particular are suffering. Defined contribution schemes are not necessarily suffering — it just means people can buy less of a pension with their money. The biggest defined benefit system is the public service one. While demographics may help the pensions time bomb, the increasing cost of pensions may work against that mitigating factor. While I suspect that there may be mitigating factors within the equation, I doubt if it is being reversed. It would be interesting to carry out a study to ascertain how quickly this could happen. For three or four different reasons, 2025 remains an important date.

The issue of the net gains of taxation was raised earlier. We have surveyed assets that are under investment excluding property assets and smaller group assets. Senator Terry mentioned a figure of approximately €64 billion. That asset pool has become quite a big bubble. While it had a bad investment period, it continued to grow following continual funding. This matter relates to demographics. Mr. Kenny referred to the timing of public service retirements. The same is also true for banks and the private sector. In the next ten to 15 years a large number of defined benefits will crystallise with the deferred tax becoming repayable to the State. It would be very helpful for the State to have statistical data as to the timing of those tax deferrals that will start to revert. We expect the subsidisation of tax by deferral to revert. If I have missed anything, I am sure Mr. Byrne, even though he is just back from honeymoon, will mention it.

Mr. Byrne

I only want to mention, in connection with the €62 billion, that this is invested in pension funds and that there is no guarantee with that amount. The money is invested by large and small companies that have pooled their resources trying to manage their resources to best effect. As Mr. Burke stated, we need to create a situation where they have the breathing space to manage their funds long term. For example, if we looked at pension funds during the oil crisis in 1974, probably every pension fund in the country would have been bankrupt. Currently, half the pension funds do not meet the standard.

There has been quite an amount of comment about property. The EU directive encourages people to invest prudently. They should not, therefore, have all their eggs in one basket. While property has been a great success in the past ten years, this does not mean it will be a great success forever. Most of our members, for example, would have 8% or 10% of their funds in property. Their money is spread across other investments to hedge their bets so that they do not have all their eggs in one basket.

We encourage pension provision in any shape or form. If one listened to complaints in the media, everyone would look for an excuse not to invest in a pension. Some comments were made as to why people should invest if they will not benefit from it. In fairness, the Government, the Department of Finance and the Pensions Board have introduced cost effective products in recent years such as, for example, the introduction of the ARFs and PRSAs. The PRSA, for example, is a cost effective product and people who put their money into it will get it back. One quarter of what they get back will be tax free and the balance can go to an ARF. There is no question of people losing the benefit of the money. In the long term, if people invest for 30 or 40 years, they should get a reasonable return. We need to educate people and move away from the attitude that they should not invest in pensions because of the many reasons not to do so.

Some years ago there was a change in legislation which allowed people invest their AVCs in their ARF. I have never come across a person who, after ten years making AVCs, has said that he or she should not have made those contributions. We hear people say that they are a very good idea but few people make them, despite the encouragement of tax relief and ARF facilities.

With regard to the public sector, not everybody has a guaranteed pension. I do not have one, nor does Mr. Burke. The majority of the members of the 200 plus funds in the IAPF do not have guaranteed pensions. Many of these companies chose, in the 1960s and 1970s, to set up pension funds and they are trying to manage their way through difficult circumstances. Many pensions are being paid from these funds. Complaints will be made about pensions but many of those receiving them have no complaints. We are managing pension funds through a difficult time. They were affected by the attacks of 11 September 2001 and various other events. Funds have picked up over the past two years and interest rates are at an all-time low. We could be looking at the situation from the worst possible scenario. We must give the funds breathing space and try to manage things better in the future.

Senator Terry

I thank Mr. Burke and Mr. Byrne for their presentations. I do not have many questions. I must read more about the State annuity fund because I have not come to grips with how it will work. On the management of pension funds, it seems that the sole purpose of the IAPF is to get money into funds and that it will do whatever it can to do so. Does the IAPF feel any sense of responsibility to provide a return to individuals investing in a fund? This is important but all I hear from the pension industry is about the importance of getting money into the funds and getting people to invest their SSIAs in them.

As I said earlier, the funds should not get the SSIAs unless they can guarantee a return. People put their money into SSIAs because they were easily understood and they knew what they would get from them. They do not, however, know what they will get from PRSAs. People feel they cannot hand over their money because there are no guarantees. What views have Mr. Burke and Mr. Byrne on that?

Some companies are winding down defined benefit schemes while directors of those companies are paying themselves bonuses of up to €10 million and, probably, investing a significant portion of that in their individual pension funds. How can the IAPF stand over this practice, where directors tell their employees that they cannot afford to continue paying the defined benefits schemes and are winding them up?

Mr. Burke

To clarify, the Irish Association of Pension Funds is perceived, because of its name, as being involved in investment management. It is not. We try to promote the interests of members, trustees and sponsoring employers as employers running schemes and intending to provide benefits. I am happy, however, to comment on those points from where the IAPF sees it, rather than in response from the investment industry.

We would be more than happy to provide further detail on our thinking on the State annuity fund. I will deal with our view on guaranteed outcomes and what we propose as best practice to trustees and employers in defined contribution pensions in two segments. Funds should have a range of choices available. The Pensions Board has made this possible through the Pensions Act. A member can choose whether he or she wants to have a guaranteed outcome, invest in cash or whether to have a portion in equities and a portion in fixed interest. The member can have choice and can get enough information to make adequate choices with regard to performance return. The member should be equipped to deal with these issues. Largely, the information members will get is that they plan to save a retirement pool and want a guaranteed return to a cash-based investment, they are unlikely to be able to combat the effects of inflation. They may get 1% or 2% interest on the money but inflation may run at 3%. Therefore, they lose real purchasing power and also the opportunity of taking investment in asset classes that may go up or down.

Typically, our best practice advice to trustees is to explain to members that at a certain age they can take more risk, if they are willing to do so, but as they get closer to retirement, they might wish to close off those areas of risk. The Senator's point regarding members understanding of these risks and exposures is important. They must have these options made available to them. In terms of PRSA products, it is a requirement that this information is provided.

Senator McDowell

Is it normal for workers in an occupational scheme to be offered a choice? My wife works for an American multinational and she is given a choice as to what level of risk she wants to take. Typically, she is offered the choice of three different funds — one low risk, one medium and one high — and given an indication of the annual return over previous years. Is that the norm or is it unusual?

Mr. Burke

It is becoming more normal. This practice was promoted by the Pensions Board and we regard it as best practice. The information requirements are the most critical element. The practice does not apply in the case of defined benefit. It applies to AVCs and to defined contributions. This is another policy issue. The number of people who avail of the option when it is given to them is low. It takes continuous repetitive engagement with members to encourage them to decide what they want done with their money, despite the fact that it is their money going in every month.

Senator McDowell

They opt for the default.

Mr. Burke

Typically, they opt for the default mechanism. The trustees then take the view that they should, depending on age, move the member's fund in a lifestyle fashion. These are new trends that have come into force in the past ten years and I suspect they are quite prominent in larger schemes.

There are no guarantees under the defined benefit scheme. Senator McDowell has touched on an important point that frequently arises. When, under the defined benefit scheme, one reaches retirement age, one is given a percentage of one's pre-retirement income, subject to the caveat that there needs to be enough money in the fund to keep it in place until one reaches that age. Under existing legislation, which has been criticised in certain quarters, one is almost guaranteed that percentage, in the sense that one becomes a first order priority when one reaches the relevant age. That does not necessarily mean one is absolutely guaranteed the percentage. If, however, there is not enough money to pay the preferential predators, for want of a better phrase, they may be given a proportionate reduction. Under the priority system, if the scheme were to wind up, a person who is 59 or 64 years of age and due to retire next week would be treated substantially differently to a 65 year old who reached their pension age the previous week. That aspect of the system can have a substantial impact because the drawing of a line in the sand in such a manner makes it very inequitable. Like any other guarantee, the element of guarantee in this instance is always subject to the existence of sufficient assets.

An interesting point was made about pension protection funds. I was asked to state whether they are good or bad and to explain how they work. What happens, in effect, is that the good pay for the bad. Those who support their schemes through difficult times are made subject to a levy to meet the one or two exceptions who, unlike the vast majority of people, do not support the schemes. That typically accelerates the exit from defined benefit schemes. One can consider the circumstances in the UK in many different ways but many commentators consider that jurisdiction to be in a much worse position than Ireland in respect of pensions. It is sometimes useful to examine other models to see where they have failed and where their policies have had a negative impact. The bonuses given to directors were also mentioned. If a direct benefit scheme winds up, which can occur in Ireland due to the nature of the trust, it is a matter for companies, most of which have audit committees in place, to decide whether they should allow pension entitlements to remain unsatisfied or partially unsatisfied. I cannot say how companies rationalise the decisions they take about the distribution of their incomes.

Chairman

Senator Terry said she is worried that people will lose out under certain schemes. Surely a scheme can be put in place in such circumstances. When the banks lost money many years ago, it was not long before a scheme was put in place to ensure they could function within the overall system. We all carried that price. The banks soon forgot that ordinary taxpayers helped them out. It did not make them any more generous to those who helped them. The Motor Insurance Advisory Board is in place to ensure that people are compensated if they are involved in an accident with, for example, an uninsured driver. Motorists involved in accidents often cannot be traced. The board is the place of last resort for people who need to be compensated. Its fund has been put in place by the Irish Insurance Federation and the Department of the Environment, Heritage and Local Government, which represents the Government in this regard. I do not want to put words in Senator Terry's mouth but I am sure she wonders why similar steps cannot be taken to assist people who are disappointed by pension schemes. If measures can be put in place to assist people involved in accidents, not to mention wealthy financial institutions, why can they not be introduced to help people living in poverty who entrusted their savings, whether small or large, to companies?

As Mr. Kenny said, the literacy levels of some of the people who avail of pensions schemes are not very high. I refer to ordinary people who anticipated that they would have to provide for a rainy day by participating in a savings scheme. We should be in a position to assist such people. Does the Irish Association of Pension Funds wish to promote the idea, which was suggested by Senator Terry, that something should be done by, for example, the association, the investment managers or the Government to ensure that people who find themselves with significantly less than the anticipated benefit are not left virtually poverty-stricken at the end of a period? We need to show some ingenuity in this regard. Everybody seems to be lolling around and saying it is somebody else's problem. If we were able to devise the Motor Insurance Advisory Board agreement — we even have an agreement to cover visiting motorists — surely we can support the almost 2 million people to whom I refer. I accept that not all of them will find themselves in such an unfortunate position. As Mr. Burke said, the number of people involved in the scheme has been reduced. It is a question of a specific number of people that will not increase.

Mr. Burke

The Chairman is correct. Looking at it objectively, the Irish Association of Pension Funds thinks it is desirable that protections be put in place to cater for such incidences. The Chairman made a comparison with motor insurance, which is compulsory for all drivers. I expect that insurers are taking a levy from our premiums to, in effect, pay for the MIAB system. If we were to put in place such a system in the pensions sector, we would encounter difficulties because the safety net would apply only to defined benefit schemes. We could not necessarily apply it to all savings. Approximately 50% of pensions savings are in defined benefit schemes and approximately 50% are in defined contribution schemes. We cannot necessarily levy our tax on all savings. We need to take the distinction I have mentioned into account. The association has proposed some possibilities in this regard, however. I would be interested in hearing the committee's views on one of the proposals relating to the State annuity fund, which certainly has full scope to do similar things. The association, which has made representations and produced policy documents, etc., certainly supports that objective. It is a complex and difficult matter.

Chairman

The committee might invite the association to discuss this subject at another meeting because it is getting late and we must hear from some other groups.

Mr. Byrne

I agree with Mr. Burke that this is a complex area. The Irish Association of Pension Funds would not be fully in favour of the approach adopted in the UK, where a protection fund was put in place. The problem is that it is all a function of money if pension funds are short. When one of the major companies in the UK — possibly the Rover group — ran into trouble, it had first call on the funds. In such circumstances, the protection fund is under serious pressure for capital even before it starts. Money is the big problem.

There has been a great deal of discussion about SSIAs and pensions. People tend to forget that an SSIA is a very good product because it is simple — one can get one's money back after five years. One of the problems with pension schemes is that one's funds are locked away for 40 years. The SSIA scheme is not the answer to the pensions problem. It has helped to create some discipline in the savings sector but the money that will come from it is trivial in the context of the long-term cost of pensions. If one wants to give a person who is retiring at the age of 65 a fixed pension of €10,000 per year, it might cost one €250,000 or €300,000. Sums of €20,000 from SSIAs are quite small in that context.

That people are living longer is one of the biggest problems in the pensions sector but it has not been discussed during this meeting. It used to be the case that people worked for 47 years — they joined the workforce at 18 and retired at 65 — before drawing a pension for approximately ten years. People are now working for 37 or 40 years before trying to draw a pension for more than 20 years. The maths do not add up. There has been no discussion about this aspect of the matter because not many people are in favour of the conclusion that might have to be reached, which is that people might need to retire later. That is a difficult issue politically. When it is raised at meetings of the Irish Association of Pension Funds, it is clear that nobody is in favour of later retirement, which is one of the answers to the problem. Perhaps one should work for a longer period and draw one's pension for a shorter period. The figures could be driving us in that direction. One of the reasons pension funds are in such short supply is that the benefits have stayed at a similar level, even though people are drawing pensions for a longer period. It is natural, therefore, that we are short of capital.

Chairman

I thank the delegation from the Irish Association of Pension Funds. I invite Mr. Liam Murphy of the Department of Finance and Ms Anne Vaughan of the Department of Social and Family Affairs to address the committee before we take some questions. I imagine that there is some overlap between the interests of the Departments.

Mr. Liam Murphy

As I am conscious that it is getting late, I will give the committee a quick summary of the document submitted by the Department. I deal with the taxation area of the pensions sector; I do not deal with other areas. My colleague, Sarah Kyne, deals with certain public sector pensions.

There are two main components to the pensions system in Ireland — a flat rate social welfare pension that provides a basic adequate payment and a supplementary component on a voluntary basis that provides an earnings-related component. The State encourages persons to supplement the State pension with private pension provision by offering generous tax relief on pension provision. The cost is not insignificant and the Revenue Commissioners have tentatively estimated the cost of tax relief for pension funding for 2002 at €2.7 billion. Reliefs for employee contributions were €563,300; employer contributions were €623,100; retirement annuity contract premiums were €250,900 and exemption of the pension fund income or gains was €1.2716 million.

This total cost estimate covers tax relief on contributions by employers, employees and the self-employed and the exemption from income and gains in the pension fund. It does not include the cost of the retirement lump sums, which is not available. This structure of taxation treatment is long-standing and has helped a significant portion of the labour market arrange supplementary pensions, thereby lessening the pressures on the Exchequer to fund pension needs. This approach, though long-standing in Ireland and some other countries, is now gaining wider emphasis in other EU countries. These changes have been promoted by the pensions industry, by governments and the EU Commission as a response to forecast increase in pension costs due to changing demographic factors. In Ireland, important changes have been made to pension provision in the past few years enhancing considerably the value of the tax relief involved in some areas.

Tax relief is available at a person's marginal income tax rate on pension contributions, both occupational, including public sector, and personal pensions — for the self-employed and employees in non-pensionable employment — subject to certain limits. There is also relief from PRSI — 4% — and the health levy — 2% — for contributions by employees to occupational pension schemes and personal pensions. Employers similarly benefit from a reduction in employer's PRSI for either their corporation or income tax. Furthermore, employer contributions on behalf of employees are a deductible expense in arriving at taxable profits. Employees are exempted from a benefit-in-kind charge in respect of employer contributions. The income and growth in the pension fund during the funding period are free of income and capital gains tax. Benefits payable on retirement are taxable, subject to a tax-free lump sum. This system is known as the EET system — exempt contributions, exempt growth, and taxable benefits.

An employee on the top income tax rate making a net contribution of €100 to a pension fund gets an Exchequer contribution of €92. This is relief at 42% income tax, 4% PRSI and 2% health levy. An employee on the standard rate making a net contribution of €I00 to a pension fund gets an Exchequer contribution of €35. This is tax relief at 20% plus PRSI of 4% and levy of 2%. This may not be evident to most employees, however, as relief is given through the PAYE system by taxing the salary, net of pension contributions.

The tax relievable amount that employees and the self-employed could contribute to their pension scheme was increased recently to an age-related scale ranging from 15 to 30% of salary — 30% applies if a person is over 50. At the same time, an annual earnings cap of €254,000 was introduced to limit the earnings that qualify for tax relief on pension contributions. The cap originally applied to personal pensions typically used by the self-employed, such as retirement annuity contracts. It was then extended to cap relief on employee contributions to occupational schemes in 2003. Finally, there is a funding restriction which confines the maximum occupational pension that can be provided to two-thirds of final salary. This effectively limits the employer contribution.

By providing for what is essentially a tax deferral — apart from the lump sum — on the contributions paid, this system encourages the making of private pension provision. It is argued by some commentators, however, that there is an overall cost — not just tax deferral — because relief is given at the marginal rate on contributions during the person's employment, but many of the groups covered will pay tax on the pension drawn down at the standard rate. This system is common to 11 of the pre-1 May 2004 15 EU member states, although it is only widespread in Ireland, the UK and the Netherlands. The cost estimate of €2.7 billion for tax relief for pension funding is tentative and work is being carried out to improve this costing. The Finance Act 2004 now obliges employers to provide information on the level of contributions made by employees and employers for the year 2005 onwards. This will enable more accurate costing of tax reliefs for pension funding in the future as data becomes available.

The clear Exchequer interest in supporting and extending private pension provision is to address the unsustainable burden which would otherwise fall on the public purse. Approved retirement funds were introduced in the Finance Act 1999. The old rule which forced certain pensioners to take out an annuity on retirement was abolished and instead some individuals, such as the self-employed, employees in non-pensionable employment and proprietary directors and PRSA holders, have the right on retirement to invest in an approved retirement fund, ARF, or an approved minimum retirement fund, AMRF. Tax at the marginal income tax rate is due on drawdowns from ARFs or AMRFs. The ability to invest in an ARF or withdraw the funds in cash is subject to the individual having a guaranteed pension or annuity from another source of at least €12,700 a year for life. If this is not the case, €63,500, or the balance of the fund if less, must be transferred to an AMRF or used to purchase an annuity payable immediately.

I will not discuss personal retirement savings accounts because time is limited. Mention was made of the State annuity fund. In administering this fund, the State is faced with the same factors as private sector providers, namely, demographic factors, longevity, interest rates and investment returns. There is no reason to suggest that the State could deliver any real cost reductions compared to private sector providers. The State would also be forced to establish a new administrative apparatus and pay for appropriate skills. As an official in the Department of Finance, I must state that there is a danger that the State annuity fund could end up putting a new and indeterminate liability on the Exchequer and general body of taxpayers.

Chairman

Ms Vaughan might bring us greater joy.

Deputy McDowell

Does this mean the Department of Finance sees no merit in supporting defined benefit schemes?

Mr. Murphy

I did not say that.

Ms Anne Vaughan

The advantage of going last is that most of the issues have been dealt with.

Chairman

Ms Vaughan gets all the hard questions as well.

Ms Vaughan

I will discuss our pension system and pick up on some of the issues raised by members of the committee. We are unique in Europe in having a flat rate system. The social welfare pension is approximately 32% of average earnings and there is a commitment to raise it to €200 per week by 2007. It has increased far more than the consumer price index and earnings. Members of the committee probably know that the social welfare pension has not kept pace with overall household income because of the overall growth rates in the economy.

Senator McDowell spoke about poverty rates and pensioners and the Department of Finance is aware of the risk of poverty for older people. Non-cash payments, such as the free electricity allowance and free travel, are a unique aspect of our system and are valued highly by social welfare pensioners. Members will be aware of them from their own clinics. These payments are valued at approximately €900 per annum on average. We also have voluntary arrangements, which have been discussed and which are very tax-advantaged.

It is impossible to open a newspaper without reading about pensions in Ireland, other EU member states and the rest of the world. Different countries face different challenges. The EU is examining pensions under the three headings of adequacy, sustainability and modernisation. There should be adequate pensions although people will disagree on what constitutes an adequate pension. Any pensions which are provided must be sustainable in the long term.

Modernisation refers to the idea that pension arrangements, both social welfare and a private pension, should not interfere with the labour market. The challenge is to provide an adequate, sustainable, modern pension and we have discussed that extensively. I do not intend to rehearse these issues but, referring to the discussion we have had, it is clear that two Senators are in disagreement on how to move forward. That is an indication of the debate on this matter. As with all policy areas, there is no right answer. Pensions flow from the philosophy of what we should deliver and how we should do so. Different EU member states deliver this in different ways. Through open co-ordination the EU Commission is not telling member states what they should deliver. Rather, it is advising them to consider adequacy, modernisation and sustainability.

As Mr. Moriarty stated, the Pensions Board has completed the review requested by the Minister. Shortly before appearing before this committee, the Minister told me the report would be published following the budget. It is unfortunate we do not have the report now but the committee can discuss its findings another day. As well as my role as a Department official, I am the Minister's representative on the Pensions Board.

Chairman

We will not tell anyone else.

Ms Vaughan

In that case I might hold on to my job.

Chairman

We know what is in the report.

Ms Vaughan

Yes, and many of the issues raised today have been considered by the report. When the report is published it will make an important contribution to the debate.

Mr. Moriarty referred to the Pensions Board, which is composed of 16 or 17 people representing the pensions industry, pensioners, consumers, IBEC and ICTU. This results in a partnership approach, seeking to cope with difficult challenges to which there is no single correct answer. Some EU countries do not have an adequacy problem but do have a sustainability problem. New member states have different problems as they have different arrangements. One hat does not fit all.

There was much debate on defined benefit schemes. We are very conscious of problems of defined benefit schemes and we are trying to protect these positive arrangements. The Minister introduced changes in a number of social welfare and pensions Bills to deal with asset problems and liability problems. From what the social partners have stated, we will have to return to this issue and the Minister may ask the Pensions Board to examine this matter further in light of the board's experience and demands by the Irish Association of Pension Funds and others.

Senator Terry referred to the figures and knowledge we have. It is most important that we monitor this and Mr. Dalton replied to the Senator on this. The Department of Social and Family Affairs, the Pensions Board and the Central Statistics Office, CSO, have put arrangements in place to gather more information on pension coverage. With benchmarked publications and annual publications we can track the level of pension coverage. Subject to confirmation, the CSO plans to undertake a larger module on pensions where we will track occupational pensions and personal pensions but not occupational pensions and PRSAs. The reason for this is that when the survey was tested people were confused about the pension they had. We will be able to determine how many people are involved in both pension schemes and determine a reasonable estimate of coverage. The questionnaire will also ask people if they hold a special savings incentive account, SSIA, to determine figures for this. I agree that we need data.

Mr. Dalton mentioned data on the age of PRSA holders and the CSO has matched this with data from the Department of Social and Family Affairs records on income. This was channelled through the CSO for reasons of data protection. The CSO intends to publish this as a joint publication demonstrating how this data can be used. This will be helpful in determining how to make progress.

Deputy Stanton

I am pleased the Minister will make the report available but we do not know how soon after the budget it will be available. It might be useful if we could use the report to contribute to the budget debate.

Some commentators have suggested we allow people to work longer, given the longevity of life referred to by Mr. Byrne. What are the implications of such a proposal from points of view of the Departments of Finance and Social and Family Affairs? What is the cost of it and what legislation would be needed?

Many of us are concerned at the level of poverty some women are experiencing. This will probably continue in the future and they have no pension entitlement. This applies in particular to those in rural areas. What is the extend of that and what can be done about this?

Ms Vaughan

I will certainly lose my job if I announce the Department is extending retirement age.

Deputy Stanton

The suggestion is to allow people to work beyond the age of 65. At the moment there are barriers discouraging and preventing people from doing so. The debate concerns allowing people the opportunity rather than making it mandatory.

Ms Vaughan

The Deputy is correct. We have two pensions, retirement pension at 65 years of age and old age contributory pension at 66 years of age. This is an historical hangover. In order to receive the retirement pension one must retire from work for one year. There is a Government commitment to remove this condition, consistent with encouraging people to work. The discussion is about encouraging people to remain in employment, given that a person of 64 or 65 years of age now has a life expectancy of a further 20 years. It would be in line with EU policy to increase the percentage of older workers. In fact, we are not far off the target. Approximately 49% of our older people work — that would be up to 65 years — whereas approximately 50% is the EU target. However, it comes down to choice. As we have said before, the Department is not adverse, in principle, to somebody deferring taking his or her social welfare pension. When somebody reaches retirement age, he or she could decide to continue to work and get a higher social welfare payment, actuarially increased. The Department could not do that tomorrow but I think we agreed, in principle, that it is something we should consider.

By international standards our age of 65 or 66 years is at the higher end. I think the Minister is on record as saying there are no plans to increase the retirement age. I do not think we have any plans to reduce it because that would be counter to the whole thinking and the longevity debate referred to earlier.

The issue of women is very serious for all the reasons about which the Ombudsman spoke earlier. We are quite conscious of that, of women living alone, of income poverty and of all the issues around care and so on. We have statistics on risks of poverty for men and women. We are very conscious of that. I have appeared before the committee previously in respect of provisions for people who are widowed.

Senator McDowell

It was useful to bring in the two Departments at the same time because it has always struck me that they approach things from different perspectives. In a sense, it also reflects our pension structure that the Department of Social and Family Affairs sees itself as ensuring people do not fall into poverty while the Department of Finance sees itself as encouraging essentially private provision which, by definition, applies only to people who can afford it. That brings us back to the argument about a second tier.

Does the Department of Social and Family Affairs see itself as having a role, perhaps further down the road, in compelling people to make provision beyond the basic 32%, 34% or whatever percent of gross average industrial earnings? If we do not do so, we are failing to acknowledge people's expectations and aspirations and that relates to a huge percentage of the population. If we accept that — I anticipate Ms Vaughan may say yes — we have to start to look at ways in which the social insurance fund could be used to supplement private provision in some way. This goes back to the point the Chairman made when he said that when we talk about SSIAs, people understand when we say we will give them extra money. If we are looking at a second tier provision, we have to look at contributions not only from employees but also from employers and possibly from the social insurance fund.

We have a real social insurance fund as opposed to a notional pot of money. Does that in any way change the way the Department looks at what it can do in the future? Does the Department see that as offering a pot of money or possibilities which might not have been the case perhaps five to seven years ago when there was no fund?

Chairman

Those are searching questions.

Ms Vaughan

Everybody should have an adequate pension. We will leave aside what we would all agree is adequate. In the original Pensions Board report, it said people should have 50% of their post-retirement income. One could argue 40%, 50% or 60% — there is no exact figure.

We are quite driven by our at risk of poverty analysis. We look at issues differently. The Minister has said on numerous occasions that he is very concerned about the pensioner population and that is why he deliberately brought forward asking the Pensions Board to look at this issue. He now has the report and I think he wants some time to consider it. Obviously, options are set out in the report for him.

As I said, at EU level, there is more than one way to deliver an adequate pension. Somebody said earlier that we have a mandatory system through the PRSI system. That is one route. I fully accept we have a very good system for those who are in it. Some 50% of those at work have an occupational pension, albeit it might not be adequate for everyone. Somewhere between what we have at present, which is a mixed system — mandatory pillar one, voluntary pillar two — and a totally mandatory system, there are quite a number of options. These options are being set out for the Minister.

All countries will say one should devise pensions policy very slowly because it has a long-term effect, and one is trying to provide for the long-term. One does not want to undo what is good — hence we are trying to help, if you like, defined benefit schemes. The Ombudsman referred to possible down sides of a mandatory system. Everyone around this table might have a different view of what is mandatory and all of that is being teased out for the Minister in the report. I assume we will have to make a response to the report in due course.

The social insurance fund is a real pot; it is real money. As Senator McDowell will be aware, there is a statutory requirement to carry out an actuarial review of the fund. For many people, it provides very good value for money, especially for people on lower incomes and people with families. I think we sent the committee the report we did for Europe under this open method of co-ordination. We set out some value for money issues and some poverty tables — quite a good deal of what we are discussing. We have to carry out an actuarial review which, with the usual projections, goes to 2050. We are required to do that every five years.

At present the fund is in surplus but I remember well many years ago when it was in deficit in the sense that the Exchequer had to make a subvention. It was the employer, the employee and the Exchequer but it is now the employer and the employee in terms of the way the funding works. We look at it when we have demands for additional benefits. We look to see when it will run out at existing contribution rates. That work is done. The last actuarial review was done a number of years ago and we will be due to present one in 2007. We see it as a fund to be run. It is run on a pay as you basis but we carry out actuarial reviews.

Senator Terry

I thank the officials for their presentations. I agree people should be allowed to work beyond 65 years. More people wish to do so because they are healthier and are living longer. I also agree with the idea of people being able to defer taking their pension for a few years thus providing them with a better pension when they need it.

The cost of tax relief on pension funding was €2.7 billion in 2002. That figures now exceeds what we spend on the State old age pension. It is a huge amount of money. I think it is probably the biggest single form of expenditure in any area. I wonder if the Department of Finance has done an audit of that expenditure to determine whether it offers pensioners value for money. If not, the committee should ask the Comptroller and Auditor General to conduct such a review or audit.

A central part of the pensions problem is that high earners are benefiting from the existing tax reliefs, which encourage them to put as much of their money as possible into their pension funds, particularly in the last few years of their working lives, so that they can get their hands on a tax-free lump sum. That lump sum is a serious cost to the State because it means that tax receipts are lost, rather than deferred. I am concerned that there are no real limits on the lump sum. It could be quite high in the case of a person at the upper limit who puts 30% of their salary into a pension fund. I am surprised that Mr. Murphy does not know the cost of the retirement lump sums to the State, because we need to know what it is. When a high earner who has invested 25% of his income in a pension fund over a number of years retires, he will be able to receive 25% of the total amount he invested without paying tax. He will also avail of a huge pension fund for many years.

We need to consider why the pensions tax relief scheme is in place. It should be in place to ensure that one has a pension when one retires, so that one can have an income that is sufficient to enable one to live outside poverty. The way in which the tax relief system is set up is geared against low earners. Under the system, a person with a low income who pays the marginal or standard rate of tax can avail of a tax deferral of just 20%. Higher earners, by contrast, can benefit from a tax deferral of 42%. I would prefer if people would use the phrase "tax deferral" rather than "tax relief", which is a misleading phrase. Those who sell pensions products using the phrase "tax relief" are almost mis-selling their products. We often speak about ensuring that people understand financial products, but this is one thing that could easily be changed. When people hear the phrase "tax relief", they think it is great and that they will never have to pay the relevant tax moneys back. However, they will have to pay the tax back at the end, although they will not have to pay tax on the tax free lump sum.

While high earners are looked after very well under this scheme, those on low incomes receive fairly modest pensions. I wonder whether we are doing people in the latter group any favours by allowing them to take 25% of their small pension funds as tax free lump sums. If we want to ensure that people's pension funds last for at least 20 years, should we be giving such people 25% up front? Would they not be better served by leaving their funds in place so they can avail of slightly better pensions? We should accept, however unpopular it may be to admit it, that most people love to get their tax free lump sums so that they can put in new windows, go on holidays or pay for their children's weddings. That is not what pensions are about, however. I want to ensure that people have adequate pensions, but I do not think that giving them tax free lump sums helps out in that regard.

I would like Mr. Murphy to tell the joint committee how much the provision of tax free lump sums, especially in respect of high earners, is costing the Exchequer. Can he give the committee some idea of the highest amount that a person has taken from a pension fund as a tax free lump sum? He would not be breaching any confidentiality because he would not have to say who they are or how much they earn. He must be able to tell the committee whether anyone has received a tax free lump sum of €500,000, for example. I have no idea whether it is likely that people have received more or less than that figure. I do not know how much money is contained in the largest pension fund. Taxpayers are funding such lump sums at a cost to people on small incomes. It is another example of a person being allowed to invest money and avail of a tax free allowance in a manner that does not cater for pensioners who have low incomes and frozen benefits. I have not heard anything today that will change my opinion in this regard.

Fr. Seán Healy of CORI and many other people have suggested that we should tackle the pensions tax relief scheme by capping the individual pension funds at €1.5 million. Does the Department of Finance have any plans to adopt this reasonable suggestion?

Chairman

I do not think Mr. Murphy will answer the final question because to do so would be to pre-empt the Minister for Finance.

Mr. Murphy

The Chairman has answered that question for me.

Chairman

I should have joined the Civil Service.

Mr. Murphy

I accept the statistics are poor. The Revenue Commissioners introduced self-assessment and audit to the taxation collection system in 1986-87 because the system that was in place at that time was not working. If one assesses the taxation receipts for the years after 1987, it is clear that the new system was successful in so far as it related to the main purpose of the taxation system, which is to collect funds. One of the downsides of the new system was that it led to a big decrease in tax reliefs or tax expenditures. We have always known the cost of some schemes, like the film relief and business expansion schemes, because they are certified by the Revenue Commissioners. We did not know the cost of many of the other incentives and reliefs, however.

When the move to self-assessment was made, the Revenue Commissioners checked a couple of cases quickly and conducted audits of a few others. They found that most people's affairs were fine, but they did not note every single relief that every person claimed. The system has been changed in the last couple of years. People who have filled in tax forms for 2005 will be aware that the forms have been changed to make them much more complicated. There are many more sections to be filled in.

The Department of Finance, the Minister for Finance and the Revenue Commissioners have been criticised in the media and in the Houses of the Oireachtas for not knowing the cost of various reliefs. I accept that external consultancy studies had to be done this year to try to find out what was happening. The system has improved and will continue to improve. Of the figures I quoted in respect of four tax reliefs, the only one about which the Revenue Commissioners are definite is the retirement annuity contract premium. All the other figures are tentative estimates.

The Department could make some estimate of the amount of money spent on the lump sums, but it would have to get information in that regard from the Irish Association of Pension Funds. Perhaps Mr. Byrne would like to give us some details so that we can make a very rough estimate. I accept it is unsatisfactory that the Department does not know the exact amount, but it is trying to improve the statistics. It should be in a much better position next year. Some on-line forms are being received throughout October and November and more information will be available to the Department next year. I am sorry that I cannot give the committee some accurate figures, but I do not have them.

Senator Terry compared the cost of tax relief on pension funds — €2.7 billion — with the amount of money being spent on the old age non-contributory pension. In 2002, approximately 88,000 people were in receipt of old age non-contributory pensions, whereas over 700,000 people are members of occupational pension schemes. If one compares a scheme involving 700,000 people with one involving 88,000 people, one is not comparing like with like. I just wanted to make that point. I think that is all I can say on the matter.

Senator Terry

Could Mr. Murphy indicate what people are earning with regard to the withdrawal of the tax-free lump sum?

Mr. Murphy

I have no idea.

Senator Terry

The Revenue Commissioners must know what this figure is. I asked this question previously but did not receive an answer. Mr. Murphy has had time to prepare an answer. Somebody in the Revenue Commissioners must know the amount of money people are drawing out as a tax-free lump sum. What is the highest figure?

Mr. Murphy

I do not know.

Senator Terry

Could Mr. Murphy find out for us?

Mr. Murphy

I will ask the Revenue Commissioners and see if they can find the answer to the question. Apart from the limit on employee contributions, there is also a funding restriction which confines the maximum occupational pension that can be provided to two thirds of final salary. This relates to both the lump sum and pension. This restriction has been in place for a very long time.

Senator Terry

What are the implications if a person is earning €2 million?

Mr. Murphy

I do not know how much such a person would put in.

Senator Terry

He or she can put in two thirds of his or her final salary.

Mr. Murphy

That depends on the way he or she funds it.

Senator McDowell

The changes introduced in 1999 were revolutionary and concerns similar to those of Senator Terry were expressed at the time. These concerns were that we were moving from a system where people were being asked to provide for a pension to various types of savings schemes where people could draw down a considerable amount of money in terms of tax-free lump sums. Does anyone on the panel have a view about what has taken place since 1999? Do people still typically buy annuities or have we moved to a system where they save and draw down money whenever they choose?

Mr. Burke

Pension provision has largely come from the private sector modelling itself on the public sector. An interesting analogy can be drawn regarding the history of pension provision and its future. A speaker mentioned a maximum pension pot for an individual worth €1.5 million. We could estimate a figure for the committee but we would probably put a pensionable salary cap for a civil servant at approximately €45,000.

Senator Terry

Could Mr. Burke explain this?

Mr. Burke

If a person was going to buy a pension and his or her pension pot was €1.5 million and one used a multiple to return to the value of the salary, one could end up equating it to a salary of approximately €45,000 if one replicated public service benefits. This is an analogy but it gives some indication of the level that one is cutting off.

With regard to people who do not or may not buy annuities, there are question marks as to whether annuities represent good value. I attended a meeting this morning where an individual who works on a factory floor stated that they saw no reason to put money into a pension if they eventually had to give it all to an insurance company at the cost of annuities. It has been argued that the system could be more flexible and possibly this runs contrary to Senator Terry's argument that we should demand that there be pension provision. Possibly, we should try to encourage people to provide for retirement and draw down in their retirement at their own volition. If people look after their own retirement pots before they come to retirement age, whatever category they fall into, should we trust them to look into it after they reach retirement age as well? It is a significant question.

Senator McDowell

My concern is that it might be too flexible. Does the panel know what the experience has been since the changes in the Finance Act were introduced in 1999?

Mr. Burke

On an anecdotal basis, the fact that many members take their additional voluntary contributions does not affect the occupational pension schemes.

Senator McDowell

We are talking about employed people.

Mr. Burke

Anecdotally, these people are still seeking security of retirement income.

Senator McDowell

Employed people?

Mr. Burke

Anecdotally, they still like security of retirement income.

Senator McDowell

So they buy annuities?

Mr. Burke

They may not use the entirety of it that way but they want security at a certain level.

Mr. Kenny

Mr. Burke has demonstrated that the adequacy of a fund like €1.5 million may not be as it appears from the outside. Whatever the Minister for Finance or anyone else thinks about the subject, I implore people not to impose an absolute cap because we have a sorry history of putting absolute caps on everything and not indexing and revisiting them. An amount can be frozen at €1.5 million and remain the same in ten years time, by which time it is worth nothing.

Chairman

It has a considerable impact.

Mr. Byrne

To return to Senator McDowell's question about the annuity, I will discuss an example where the introduction of flexibility has worked well. A number of years ago, the Government allowed people to put additional voluntary contributions into ARFs and people have made greater provision for them since then because they have a retirement slush fund they can dip into. It is possible to draw down the full amount all at once or in stages or leave it untouched.

Senator McDowell

What are people doing with it?

Mr. Byrne

It is early days and to be fair to the former Minister for Finance, Charlie McCreevy, the Irish Association of Pension Funds strongly opposed the introduction of ARFs. The Minister was probably ahead of his time because people are living longer and insurance companies are less prepared to underwrite these kind of risks so everyone will eventually be forced to go down the ARF route. Will insurance companies want to underwrite these kind of risks in 20 years' time? People with ARFs have retired in the last five years.

We do not appreciate the fact that the pension system in Ireland is very immature. When we talk about figures for tax relief, not many people are drawing pensions. Many people will draw down pensions in the next 20 years. The majority of large pension funds in the country were only set up in the 1960s and 1970s so we have a body of people approaching retirement. The number of contributors is far higher than the benefits currently being paid out. Things will level out over time. More people will retire, draw down pensions and pay tax on them. Anecdotally, very few people buy annuities when they have the choice to do otherwise.

Annuities are bad value for money. People are not queuing up to carry out this type of business. Ireland is a small market and competition is not significant, which leads to excessive prices for people.

Senator Terry

Based on Mr. Burke's comments, a person with a salary of €45,000 could have €1.2 million in his or her pension fund while a person earning €100,000 could have €3 million. Is this correct?

Mr. Burke

I was trying to reflect back the capital amount needed in order to buy an annuity, so it probably does not directly reflect into that. We could be of assistance to the committee.

Chairman

That is a very important point to understand. A person must invest this amount in order to give himself or herself the standard pension he or she would like. It calls for a significant investment of capital and is one of the reasons why people outside the Houses of the Oireachtas believe that people within the Houses have a good pension scheme. People outside the Houses argue that they would have to invest significant amounts of money to receive a comparable pension. We have a job that is renewed by the will of the electorate but the scheme we have is generous.

Mr. Murphy

The Minister for Finance asked us to review various pension schemes and we have reviewed 25 of them. We have examined pension arrangements for high earners.

Chairman

I appreciate the point made by Mr. Murphy. To reiterate the point made by Mr. Kenny, when something is put in place by the Department of Finance, it forgets to allow for adjustments, particularly for inflation. Frequently, a cap is imposed on something in such a way as to significantly deplete the product when people go to access it.

Given that there is a significant return on toll roads — entities which I abhor — why was there such a marked reluctance to invest some of the moneys in that area when that return could be given to the State rather than to individuals or corporations? It appears to be not just a secure but a guaranteed return. If everybody could buy six numbers like that we would all be lotto millionaires. When Senator McDowell suggested that some of the pension fund could be invested, there was an outcry. People said it was madness. I do not expect Department officials to comment on Government policy but I have noticed what has happened since then without any outcry. Why is the State reluctant to invest in these types of products which give a significant return? How is the PRSI fund managed to give the best return?

Mr. Murphy

Does the Chairman refer to the national pension reserve fund?

Chairman

Yes.

Mr. Murphy

I do not deal with this area but I have the breakdown of the fund's investments. At the end of 2004, 74% of the fund was in large capital equities, 2% in small capital equities, 0.1% in property, nothing in commodities, 12.7% in bonds and 11% in cash. Targets for the end of 2009 are as follows: large capital equities will be reduced to 63%, small capital equities will be increased to 4%, emerging markets equities will increase from zero to 2%, property will increase to 8%, bonds will remain much the same at 13% and cash will reduce from 11% to nil. I cannot answer the question about toll roads because investment is done by an independent group; the Chairman recently died and Michael Somers of the National Treasury Management Agency, NTMA, is involved too. Like the Chairman, I am struck by toll roads as a potential area for investment.

Chairman

Does anybody in the Irish Association of Pension Funds have a view on that?

Mr. Byrne

People like our members are interested in investing in index linked investments, such as infrastructure, which give returns that are related to inflation. One of our members raised a number of issues, for example that the Government has not issued any index-linked bonds recently — there is a very small market in that — and pension funds want to buy index-linked investments. The Pensions Reserve Fund Commission initially ruled out that kind of investment but has relaxed the rules slightly.

Chairman

They were very aware of that.

Mr. Byrne

There is an appetite for index-linked initiatives such as toll roads and forestry.

Senator Walsh

I congratulate the delegation. This has been an interesting and valuable meeting. I return to my initial remark about a simple booklet for the public. We are privileged to be able to listen to the delegation. Consider the people who do not understand, who want to enter a pension scheme but who are reluctant due to lack of knowledge.

Chairman

The Departments of Finance and Social and Family Affairs could address that matter as a joint project. Senator Walsh takes the view that many people are not aware of how private pension schemes work. People are not aware of the level of investment required.

Ms Sarah Kyne

My area is not of direct interest to this Committee. I deal with the benefit side of public sector schemes, which are generally non-funded. We are more conscious in recent years of the importance of explaining matters to our members. We publish relatively simple booklets and dynamic websites. The devil is in the detail and we appreciate that much of it can seem like gobbledegook when one addresses it in detail. However we have been trying since the 1990s to make the material available. I would like to speak on Senator McDowell's question whether we are wasting money on the pension reserve fund.

Senator McDowell

I said it was a strange priority that we were deferring the benefit for 20 years when there is a need for it now. It is a matter of weighing up the priorities.

Ms Kyne

What I want to say is relevant. Public sector pensions account for a third or a quarter of the total liability between old age contributory pensions and public servant pensions in the long term. The pension bill for the public service is approximately €1.7 billion. In 15 years' time it will have doubled and by the middle of the century it will have trebled. It was envisaged that the pension reserve fund could begin to be drawn down by approximately 2025. By 2025 the public service pension bill was to have peaked at €4 billion and to have remained at a peak until the middle of the century when it was to have started to decline. Due to increased longevity the projected decline may not happen.

Longevity can sound like nothing, but I will illustrate its impact. From a pensions perspective we look at how long people will live after they retire. In 1991, men were living for 13.5 years and women for 17 years after retirement. On the basis of international trends, which Ireland lags, men will live for 22 years and women for 25 years after retirement, so the amount of time that has to be provided for will have increased by 60% between 1991 and the turn of the century. That is why the pensions bomb is serious. The liability exists, is increasing and must be met. The Department of Finance must be cautious and prudent and put the money aside.

The Senator mentioned migration. We cannot predict the future. When, in 2004, we increased the minimum age for receipt of public sector pensions to 65 and provided that new entrants could continue to work indefinitely, immigration appeared to have a negative effect. Immigrants were more dependent, such as women with children, but this has improved, with younger, educated people coming from eastern Europe. If these people remain in employment here, they will contribute tax under the PAYE system. Similarly, if the economy continues to grow, we will be much better able to provide for pensions. While we cannot predict what will happen in 50 years' time, it is prudent to make provision to take the heat out of this issue.

Senator McDowell

It is prudent to provide for a potential liability. There is a measure of liability that will exist and we can argue about how large or urgent it might be in 20 year's time. The Department of Finance has consistently chosen to ignore the fact that we are asking current pensioners who have made their contribution — in light of the fact that we do not have as big a problem as we thought might otherwise be the case — to live on €9,000 a year. That is an immediate difficulty which we are in a position to alleviate. I do not believe, nor do most of the association's members, that in 20 years' time any Government will default on public sector pensions. I do not believe that would be politically possible. If extraneous measures were necessary to deal with that, they would be taken by whatever Government that is in power in 20 years' time. However, we have a current problem, which is that we are asking old age contributory pensioners to live on €9,000 a year. I put that into the pot, so to speak, and point out that we must weigh up these priorities one against the other. I accept that it is a political decision.

Chairman

On that note, I must bring down the curtain. This is probably one of the longest meetings we have had. Only the meeting at which we heard presentations in respect of carers went on longer. Therefore, the delegates have made it into pantheon of committee history.

I thank the various delegates for coming here today and giving so much of their time. We appreciate that their time is valuable. We have had a valuable meeting, exchange of views and discussion on an issue that impacts on each and everyone of us and on many people outside the House. It is worrying that there is such huge difficulty with pension coverage. We hope that, with the assistance of delegates — who all have a vested interest in this issue — progress can be achieved in the not too distant future. There is much food for thought as a result of the lively exchanges that occurred during our discussion. I hope that notes, where relevant, were taken.

Representatives of the Pensions Board, in the same way as the Combat Poverty Agency, has an advisory role to the Government, were present. It is important to highlight those areas where there are perceived to be weaknesses or lacunae in the legislation which do not allow the board to intervene or carry out its supervisory role in the way it would like. It is important that we would be aware of that so we can take the matter up with the relevant Minister. One of the advantages we have is that if it comes to our attention that there areas that need to be addressed, we can request a meeting with the relevant Minister and his or her officials. We have been lucky with the Minister for Social and Family Affairs and his officials, who have come to meetings at short notice on numerous occasions. If there are aspects of the pension area that the delegates consider might need to be addressed, through legislative intervention, secondary legislation or some other means, we would be eager to be made aware of them because this is an issue that concerns each and every one us.

The exchanges today indicated that there is a significant degree of interest in this issue. We thank the delegates for their patience and tolerance at fielding questions and, as somebody who played a great deal of sports, I note that some of them were high balls and some of them were low but the delegates seemed to catch them all, regardless of from where they came. We thank them for that.

The joint committee went into private session at 6.25 p.m. and adjourned at 6.30 p.m. until Tuesday, 13 December 2005.