JOINT COMMITTEE ON SOCIAL PROTECTION debate -
Wednesday, 19 Jan 2011

Pensions to Power Prosperity Proposal: Discussion with Irish Brokers Association

Chairman

I welcome the Irish Brokers Association to the meeting. The association believes there is an opportunity for the State to harness in part the resources of private pension funds for the benefit of the State while at the same time providing the public with the level of security they need. The association believes that investing just 10% of pension funds into Irish businesses would put €7.2 billion into the Irish economy and give a new angle for the pensions framework being promoted by the Department of Social Protection.

I welcome Mr. Ciaran Phelan, chief executive, Ms Rhona Burke, vice president, Mr. Aidan McLoughlin, chairman, IBA pensions committee, Mr. Gavin Howlin, actuary, Willis, and Mr. Frank Lahiffe, public affairs consultant, Lahiffe & Associates. The format of the meeting will involve a brief presentation by the association followed by a question and answer session.

Members are reminded of the long-standing ruling of the Chair to the effect that members should not comment on, criticise or make charges against a person outside the Houses, or an official, either by name or in such a way as to make him or her identifiable. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give this committee. If a witness is directed by the committee to cease giving evidence in relation to a particular matter and the witness continues to so do, the witness is entitled thereafter only to a qualified privilege in respect of his or her evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and witnesses are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person or persons or entity by name or in such a way as to make him, her or it identifiable. I invite Mr. Phelan to commence his presentation. We will devote one hour to this matter.

Mr. Ciaran Phelan

I bid committee members a good afternoon. I am thankful for the opportunity to present our views on the impact of the proposed changes to the tax regime for pension contributions and benefits as outlined in the budget. While we understand the serious fiscal challenge the country faces, it is important that the decisions that must be made take into consideration the effects on future generations.

The Irish Brokers Association, IBA, is the primary representative body for brokers. While it has been in existence since 1980, it has been representing brokers in one guise or another for over 70 years. Over 5,000 staff are employed by our 500 members, including large international brokers, large national players and small and medium-sized brokers throughout the country. There is an IBA member office in most towns and our headquarters is located at 87 Merrion Square, just across the road from Leinster House. Our members are at the coalface in the provision of pensions advice, yet, despite numerous requests, we do not have a seat on the Pensions Board, on which our wealth of experience could prove invaluable in the development of pensions policy.

As members will be aware, the subject matter of our presentation is private sector pensions. We can speak on this subject with a certain amount of authority, as our members are responsible for in excess of 70% of all pension contributions paid in Ireland today.

With regard to the recent budget proposals, tax relief on pension contributions is being reduced. This year there will be no relief from the levies and in the next four years there will be a phasing in of standard rate tax relief on employee contributions. The tax-free lump sum has been capped at €200,000, with effect from January, which led to a significant number of early retirements in both the public and private sectors in December. Prior to the budget the National Pensions Framework made proposals that will impact significantly on pensions.

With regard to pensions policy, the challenge faced regarding private sector pensions is not only one of coverage but of the adequacy of retirement income. The Minister for Social Protection stated recently in answer to a parliamentary question that "good pensions cost money, so it is important that the level of contributions made by individuals to their pension plan is sufficient to provide the level of income they desire in retirement." In the majority of cases pension funding is inadequate to provide for a sustainable retirement income, even when supplemented by the State pension. The national pensions policy initiative set a 50% pre-retirement income as a reasonable benchmark for retirees. If this is still Government policy, private sector workers would require funds of €400,000 to provide a pension of €25,000 per annum, including social welfare. It may surprise members to learn that the average private sector individual pension fund in Ireland today is between €100,000 and €120,000, which equates to a pension of approximately €100 per week.

Workers need to be persuaded to save, not dissuaded from saving, more for retirement. Tax reliefs are what make adequate pension funding affordable. People will simply stop providing for their retirement if the net cost increases owing to the reduction in reliefs. Decisions are being made on out-of-date and inaccurate figures estimating the cost to the Exchequer of pension reliefs. My colleague, Mr. McLoughlin, will point to some of the flaws in the Department's figures. Pension funds could play an important role in the recovery of the economy, but individuals need sufficient incentives to save for 30 to 40 years to fund an adequate retirement fund which, unfortunately, the State cannot provide.

Deputy Róisín Shortall

Is there a copy of Mr. Phelan's presentation available?

Mr. Frank Lahiffe

We can get a copy for the Deputy. It was not intended that what Mr. Phelan read would be the main contribution. The document the Deputy has received is the main contribution. Other comments are based on notes.

Deputy Róisín Shortall

The presentation made at the meeting is the main contribution. It is normal practice for members to be given a copy.

Mr. Frank Lahiffe

Has the Deputy not received the main document?

Deputy Róisín Shortall

We would like to receive a copy of the presentation.

Mr. Frank Lahiffe

We can certainly provide it, if the Deputy wishes. I have one copy to hand, if that would be of help to members.

Mr. Aidan McLoughlin

My presentation is based on the paper circulated.

The past three years have taught us that ordinary decisions can have extraordinary consequences and that we need to be aware of this. In our industry we have not always been sufficiently vocal when we have seen problems, with a view to alerting those who can effect change. An example is that, although the death of defined benefit schemes was visible within the industry for a long time, the body politic was not made aware of the difficulties that ultimately arose.

My paper focuses on three areas in which effective decisions can be made, including our proposals that pensions can power prosperity. The basis of the argument for pensions powering prosperity is very simple. The last time we had a major financial crisis was in the late 1980s, at which time €7 billion in total was available in pension funds. The economy now has over €100 billion in pension funds available between private sector pension funds and the National Pensions Reserve Fund. That asset is available to the State to assist it in its current financial difficulty. This is identified in the paper, Pensions to Power Prosperity.

The difficulty is that this asset is being affected by decisions made for other reasons. The first example we give concerns the approved retirement fund. The recent budget has increased the requirement for a draw-down on that fund to 5%. That means somebody with €100 in the fund is required to take out €5 every year and pay tax thereon, whether he needs to do so. That has been driven by budgetary considerations. The gain to the State is estimated to be €3 million in the current year and €5 million in a full year. It is a small tax gain, but there are two net effects. First, it means the funds cannot be invested by the State in infrastructure because the rate of return that would need to be achieved would be more than the State would be prepared to pay. That denies up to €4 billion in investment that would be available for investment in Irish infrastructure. Second, the individuals who own such pension structures are facing wipe-out. The funds will run out before their lives have expired. An average couple aged 60 years has 30 years to cover, but we estimate the fund will be gone in 15. This creates an enormous future liability for the State, far exceeding the €5 million involved. A decision made with one consideration in mind - a budgetary consideration - has a very significant impact elsewhere and this should be recognised and built into decision-making. With regard to considering pensions as a golden goose, rather than nurturing the golden goose that could continue to lay golden eggs, one is plucking the odd feather from it and ultimately causing it to wither and die.

Our second example concerns Government policy which has been focused for a decade or more on extending coverage of pension funds. That policy has been based on the assumption that the vast number of people not covered by pension funds should be covered. We are challenging this statistic on the basis that it is misleading. The target the State set itself in 1998 was 70% of those aged over 30 years. There was at the time 62% coverage and it has the same level of coverage today.

Chairman

I am obliged to absent myself to attend another meeting urgently. Is it agreed that Deputy Thomas Byrne will take the Chair in my absence? Agreed.

Deputy Thomas Byrne took the Chair.

Mr. Aidan McLoughlin

We do not believe the problem of coverage is as extensive as the Government believes. The focus by the State on solving the coverage problem is to the detriment of adequacy. The solutions in this regard have not been beneficial in the improvement of adequacy. For the past decade the PRSA has been the solution to improve adequacy, but the current budget has rendered it obsolete; it will no longer exist as a contract of use to the vast bulk of the saving public.

The proposal for auto enrolment assumes the level coverage will be increased, but it has been shown from experience in the United States and elsewhere that it reduces adequacy. People regard funding as a tax and, therefore, opt for the minimum level rather than an adequate level.

The final point on which I want to comment concerns tax relief. The figure constantly regarded as the tax cost of pensions is €2.9 billion. In my paper I quote numbers from the four year plan. It identifies the bulk of these costs which amount to €2.5 billion. These numbers are enormously misleading. The €1 billion attributable to tax relief on contributions is based on figures from 2007, which is only three years ago but a world away in terms of finances and what people were contributing.

Deputy Róisín Shortall

What figures is Mr. McLoughlin referring to?

Mr. Aidan McLoughlin

Those in the four year plan. It provided a breakdown of the figures. A total of €2.9 billion is typically allocated for pension relief. This consists approximately of €1 billion on pension contribution tax relief, €500 million on benefit-in-kind tax relief and €1 billion on tax relief from pension funds. Those numbers are enormously misleading because the first figure of €1 billion on tax relief is based on data from 2007 when the economy was in far better shape and people were better able to make pension contributions. That amount today would be far less.

Acting Chairman (Deputy Thomas Byrne)

Is the four year plan based on 2007 figures?

Mr. Aidan McLoughlin

Yes. That was the latest available data. I have quoted the specific paragraph but not the underlying numbers on it. The flaw in this is that the tax contributions are based on 2007 numbers. Even more so, the tax foregone on pension funds is €1 billion a year. Pension funds, however, for the past decade have enjoyed a maximum growth of 1% per annum which is a problem in that it is not sufficient to generate the level of tax yield expected. To assume a tax on pension funds would generate the same would be misleading.

To give an example, another proposal being looked at is a levy on pension funds as a means of raising finance for the State. Fine Gael has also proposed to introduce a similar measure. A levy would alter the tax treatment of pension structures. The four year plan makes the point that pension funds are exempted because the benefits on the way out are taxed and are, therefore, a form of deferred taxation. If the tax is put forward, then the fund should be taxed but the benefits should be exempted.

This will have two benefits. First, it continues to leave pensions as reasonably attractive options for people and, second, it has the advantage that it balances public sector pension provision. By definition a levy on private sector pension funds is not paid by the public sector and, therefore, it continues to be taxed on the way out. The advantage is still there for the State when it has money now when it needs it in return for giving up a theoretical right to tax in the future. Most pensioners do not come into the tax net, so the cost to the State will be significantly lower.

If done properly, a balance could be achieved which would allow the golden goose that is pensions to grow while meeting the budgetary constraints that apply to the State.

Acting Chairman (Deputy Thomas Byrne)

I thank the delegates for their presentation.

Deputy Michael Ring

I welcome the delegation from the Irish Brokers Association.

A concern among people is that with the downturn in the economy, investments in pension schemes over many years will see poor returns. Instead, many feel they would be better off putting their money under the mattress. What can be done to allay these concerns?

Why do we need outside investors for, say, motorways with tolls when €100 billion is held in assets by Irish pension schemes? Why should a German or Polish pensioner benefit from Irish taxpayers paying road tolls which earn massive profits and are taken out of the country? This is Irish money which should be invested in Ireland. What is restricting this €100 billion in pension funds being invested in Ireland? Has the Irish Brokers Association spoken to the Government on this? Why does it not have more investment in Irish companies?

There is a massive time bomb out there regarding pensions. People are concerned that there is such a shortfall now in pension funds that there will be serious problems with future pension provision. Will the delegation comment on that?

Deputy Róisín Shortall

I welcome the delegation. It is regrettable and unfortunate there is such a poor attendance at the meeting. I accept other meetings are taking place today-----

Acting Chairman (Deputy Thomas Byrne)

The Deputy sent apologies earlier for being late.

Deputy Róisín Shortall

Yes, that is right. There was a presentation earlier which members attended. It is difficult for members to attend a meeting over a long period. It is unfortunate that has happened.

Deputy Mattie McGrath

I have this and two other committee meetings – agriculture and communications - at the same time. Deputy Shortall should know that and be respectful to other members. She apologised earlier for being late yet she often remarks on attendance at this committee. I think it is downright blackguarding.

Acting Chairman (Deputy Thomas Byrne)

We will move on from that. I thank Deputy Mattie McGrath for that.

Deputy Róisín Shortall

Maybe if Deputy Mattie McGrath had listened to what I actually said.

I welcome the Irish Brokers Association delegation and thank it for its presentation. It is an important and complex area. I was somewhat surprised by its use of the analogy of the golden goose. It is not helpful because pensions policy should not be about a golden goose but about providing for people in their later years, ensuring they have an adequate standard of living.

We did not hear much from the Irish Brokers Association during the boom when pension funds were making huge returns and those working in the industry were making huge profits. We now find ourselves in the nightmare situation because of the pensions policy pursued during those years. It promoted an over-reliance on tax relief instead of having a safe and secure pensions policy provided by the State. Another factor was the minimal regulation of the industry with much of its funds invested abroad and subject to the whims and volatility of the markets. That is why many people who believed they had adequate private pension provision have seen their funds go down the tubes and now find themselves in terrible straits.

There is also an issue about adequate, open and transparent information on pensions provided to people. In the earlier session, the committee heard from public sector pensioners who were sold additional voluntary contributions, AVC, products when they would have been better off buying additional notional service from the public sector. Their difficulties were due to the absence of independent and transparent advice.

The Irish Brokers Association is coming to this issue with considerable baggage from the industry. Another sore point for many people is the level of fees charged by brokers. It may have been regarded as a golden goose issue for people working in the industry. Again, however, due to the lack of regulation in this whole area, it got to the point where it was unsustainable.

Everyone is now paying a high price for the lack of an adequate pensions policy and the lack of proper pension provision by the State. The Irish Brokers Association is part of that. It is hard to blame it for taking advantage of the lax regime in place but that is the reality. That is why so many people find themselves with very poor provision for their older years.

Many of us would argue against the general approach of basing a pensions policy on tax breaks when the vast bulk of the relief has gone to the better off. It is estimated that about 80% of tax relief has gone to the top 20% of earners, so that again is unsustainable. It might have been grand while it lasted, but it is not sustainable in the current circumstances. I should like the IBA to address those issues with regard to the lack of information and the level of fees that were charged.

I also want it to comment on the implications of what the Government now proposes in response to a request from the industry to allow for pricing off Irish sovereign bonds, and the extent to which that will impact on existing pension funds. Apart from the academic exercise of pricing off against Irish sovereign bonds, can it shed some light on the extent to which there will be uptake in terms of investing in those bonds, in practice, as well as the pricing mechanism? What can we expect in terms of an inflow into the economy as regards investment in those products?

Acting Chairman (Deputy Thomas Byrne)

I thank Deputy Shortall. Has Deputy Mattie McGrath any issues to raise?

Deputy Mattie McGrath

No, I do not.

Acting Chairman (Deputy Thomas Byrne)

There are a couple of points, and in fairness to Deputy Shortall, she has raised very valid issues. The four year plan talks about the current tax arrangements, from 2008 anyway, being most beneficial to those on €45,000 a year. I wonder who the brokers' typical client is, because when the issue of pensions and tax relief is being debated in the Dáil and in the political world, one tends to get exaggerated figures for pension pots, and the impression is given that we are somehow helping a super-wealthy elite. I should like the IBA to give the committee a picture of the typical client.

It has questioned some of the figures in the four year plan and I will not contradict it, because I do not have the information to hand. I want this to be examined, nonetheless, because it is not a very happy situation. It is also the case that other parties have put forward much greater figures, in terms of the amount we spend on tax expenditures, and these areas. I do not know whether this is an issue the association has ever come across. Perhaps those points could be addressed along with those of my colleagues.

Has Deputy O'Connor something to add?

Deputy Charlie O’Connor

I was just about to suggest that the delegates should be allowed to answer the questions.

Mr. Aidan McLoughlin

I will come in initially on one or two points, and my colleagues can contribute, in due course. To return to the phrase, "the golden goose", because I used it myself, I should like to clarify the extent of that. Pensions are multifaceted, so there are two effects. As the paper explains, there is the impact on the individual and on the economy as a whole. The reference to the golden goose is a reference to the economy as a whole. As a country, in 1987-88, when there was a previous financial crisis, there was only €7 billion in pension funds available at that stage. Today we have €100 billion. By definition, therefore, the State has greater flexibility if it can harness the power of that to do stuff in the economy, that otherwise it would have to borrow to do.

There is another player it can bring to bear that does not conflict with the need of the individual to save. In fact, it can help with that because it can provide a return greater than the 0% or 1% per annum that is being achieved. If one takes the previous paper we did, it is perfectly valid for the State to allow people to invest in Irish bonds. It can guarantee them 5% which is far better than the return they have necessarily achieved to date, so it is a win-win situation. The country is better off as is the individual, so the golden goose being referred to here is for the benefit of the State. We can recognise that decisions are being made for one reason, but there is a need to recognise, too, that the State can harness this power and direct it towards investment in Ireland.

To address Deputy Ring's question on why this is not being done, there are very good reasons for this. There were valid rules and regulations - and arguably, this area is over-regulated - which said, in effect, "You must diversify, and invest across Europe". For example, in terms of securing retirement, one invests in eurobonds currently, which must be AAA rated, so that the vast bulk of Irish pension funds invest in the German bonds that drive the German economy, and not in Ireland. There is some logic to this in terms of diversification, but with regard to where the Irish economy is, it is not that sensible. It is recognised, and we mention in the paper, that this is being addressed with the sovereign bond idea, and other bonds, so there is a potential flow-in. We have to see the terms to predict what that will be, but certainly I see a potential for significant inflow.

Defined benefit schemes, in particular, are in financial trouble and are not sustainable. We have seen a number of high profile crises. This will continue to recur in the current environment. The sovereign bond, as we mention in the paper, offers them the potential to die with dignity. It will not revive them and we do not see a future for them from where we are looking, but it will allow people to exit gracefully with a decent fund, in the event. That is a positive step with regard to the sovereign bonds and the other initiatives, but it is only one element in how pensions can help the economy as a whole.

I shall now pass over to my colleagues who can brief the committee on some of the other points.

Mr. Gavin Howlin

I shall just talk about sovereign bonds for a minute. I am not sure exactly what will happen with sovereign bonds, and there will be issues with trustees because they will need to see the details of what is on offer. For example, a trustee has to look after the beneficiaries, so if the sovereign bond annuity has some type of default mechanism that falls back on the pensioner, he or she will have to consider that before allocating money to the sovereign bond. I am not saying it is not a useful concept, but rather that there are many considerations to be addressed.

Deputy Róisín Shortall

Has that not all been thrashed out?. There has been a good deal of negotiation and discussion with both Departments over the past six months or so.

Mr. Gavin Howlin

I am not a member of the Society of Actuaries in Ireland committee that is dealing with that. I am just saying that trustees run the fund, and all funds. In the event, the trustee of a defined benefit scheme will need to see the detail and get advice on where it is appropriate to secure those sovereign bonds and sovereign-backed annuities.

Acting Chairman (Deputy Thomas Byrne)

It would never have been envisaged that funds would be obliged to invest in any type of bond.

Mr. Gavin Howlin

No, I am just trying to say that for me it is unclear whether the sovereign bond would completely solve the problem. As one can see it is a useful tool to have, but it does not necessarily mean that all trustees will suddenly start to invest in Irish bonds. I also understand that it is not just Irish bonds, and there could be a range of other European sovereignty debt, not just Ireland's, which would have a higher yield than German bonds.

Deputy Róisín Shortall

Is Mr. Howlin saying Greek bonds, for example?

Mr. Gavin Howlin

Not perhaps Greek bonds, but it could be Italian bonds. Italian bonds are giving much higher yields and from what I understand, although I am not a bond expert, they are reasonably secure. If they give a higher yield, then obviously a better pension can be paid for an investment.

Deputy Róisín Shortall

Are the two issues not separate in terms of the pricing of annuities against sovereign bonds, and then the actual investment in the bonds?

Mr. Gavin Howlin

The two are separate, I suppose, but one is hardly going to allow funds to price annuities off sovereign bonds if ultimately they are not going to invest in them. Is the Deputy asking whether we can benchmark against a sovereign bond and a sovereign annuity cost, while not investing?

Deputy Róisín Shortall

Yes, I am.

Mr. Gavin Howlin

I imagine there has to be some type of link between the two.

Mr. Aidan McLoughlin

I act in several capacities as trustee of group pension schemes. If one has a choice of investing in a number of different countries around Europe, the risk requirements one has to deliver to the Pensions Board will dictate that it is a greater risk to invest in the bonds of any one country as distinct from a bundle of bonds. By definition, while there are valid legal reasons the option to invest in the bonds of a number of countries was available, it serves to dilute the potential benefit for the Irish State. That is the point which must be made. It is hard to assess, therefore, whether €1 billion, say, or €5 billion will flow into bonds as a result. It will have a positive impact because it puts a new buyer in the market, but the extent of it is unknown at this stage.

Deputy Róisín Shortall

Is there any estimate of it, though? The industry has been lobbying hard for it, and in the event is there any "guesstimate" of what is likely to come in?

Mr. Gavin Howlin

The problem with defined benefit plans is that they are benchmarked against this German-priced annuity. German yields have gone from, say, 5% two years ago, down to roughly 3% as of last October. That is an enormous drop in yield and therefore means a huge increase in annuity costs. Therefore when one is doing the funding standard, one's liability is benchmarked against the Germany annuity. This means that one's pensioner liability has shot up, while the assets are already in deficit and one has this annuity-----

Deputy Róisín Shortall

That is the point I am making. Part of this proposal is to allow for the academic exercise of pricing the annuity so that it would be cheaper to buy annuities priced against Irish bonds. That is one element. My question is how much is likely in practice to be invested in Irish bonds?

Mr. Aidan McLoughlin

We have not done an official assessment, so the view we give is personal. My belief is that in the order of €5 billion could flow into Irish bonds. I base that simply on looking at the defined benefit schemes of which I am a trustee. This offers an opportunity, depending on the pricing, to eliminate a problem that was otherwise unsolvable and therefore the ability to provide out and be able to say to beneficiaries that their scheme was 70% but we have now bought out liability with the Irish State and they are in a better position that they were before. This allows closure, a death with dignity. The scheme will not survive and will be brought to an end by transferring the balance to the State. In terms of general investment in bonds, it is harder to gauge because of the diversification principle and the fact that there is an array of other bonds available with lower and higher ratings.

Deputy Róisín Shortall

Is there a view that there is a potential for a greater level of investment in pension funds in the Irish economy?

Mr. Aidan McLoughlin

Completely.

Deputy Róisín Shortall

Has Mr. McLoughlin exact proposals on some other type of vehicle?

Mr. Aidan McLoughlin

The pensions to power prosperity proposal which we presented to the Joint Committee on Finance and the Public Service looked at that because it is based on developments in the economy. We highlight that in Australia 5% of the pension funds are invested in Australian infrastructure. Taking a simple €100 billion in Ireland, replicating that could have up to €5 billion flowing into Irish infrastructure. Deputy Ring made the point, and I agree with it entirely, as to why we rely on German money, which may be more expensive and demand greater returns that Irish money. There is also a greater acceptance of investing our own money. When I drive to Galway, my home place, I go through two toll roads. It is a great deal easier to pay the tolls if I think it boosts my pension because it is feeding back into the pension funds. There is a greater acceptance at local level if people know this will ultimately go back into their pension fund. It seems sensible and a good way of boosting and continuing to grow the pension funds, which will benefit individuals and the State at the same time. They should not be in conflict if they work together.

Deputy Shortall raised a number of points. I will address the question of fees. The pensions industry is very large and covers different segments. This delegation represents independent advisers in the industry. There is no law that requires the public to deal with our members, so they deal with our members because they choose to do so. We believe we offer very good value for money otherwise people would not deal with us.

On the issue of transparency, a great deal of work has been done and there is much disclosure. One of my colleagues gave me an example of a person who required a mortgage protection policy because she had taken out a mortgage for €300,000. The policy cost €12 a month and after spending a couple of hours of wading through the disclosure paperwork required, she then asked if she really required a mortgage protection policy. My point is that to take out a policy costing €12 a month she had to wade through dozens of papers, all for the valid reason of creating disclosure, but ultimately becoming an annoyance to the consumer. The net effect of this paperwork, which is not assessed by regulators is that each time more pages are added, more time is spent, which by definition means there is a greater cost to the individual providing this service which ultimately must be passed on to the consumer. There is not necessarily a proper balance between the need for disclosure, the way it is done and the benefit to the individual. There should be a better balance.

Investment is regulated. There is regulation to require pension funds to diversify and invest appropriately. Ireland represents less than 0.5% of the world's stock markets, therefore in theory one should invest less than 0.5% of an Irish pension fund in stocks and shares in Ireland. From a diversification principle that makes sense, but from the point of view of the Irish economy, this is not sensible planning. The last paper we did would show that 45% of all stocks in the US are held by the US pension funds; 40% of all Dutch debt is held by Dutch pension funds, the reason that Italy is regarded as a safer bet than Ireland is that 90% of its debt is held by Italians. It is the home team support that gives it the security. We have not got enough home team support. We want more of that to be allowed to occur.

The point has been made that the Irish Brokers Association is not well known. We acknowledge that is our failing. We are a diverse representative body but we have recognised that in so far as we can raise our voice, we should and we should make our position known to those who can influence policy. As Mr. Ciaran Phelan has identified, we are not represented on the Pensions Board, which stymies the IBA so we are not able formally to feed into pension policy and we have not been able to do for the past decade.

The chairman asked who is a typical client of the IBA. In a study conducted two years ago an actuarial firm called Life Strategies shows that the maximum advantage on tax relief was generated at an income of €45,000. The reason it declines thereafter is down to a simple tax deferral mechanism. Whatever goes into a pension fund is ultimately taxed on the way out. So no matter how much tax relief a person receives at the entry point, the government takes it all back again when it comes out. The benefit maximises at an income of €45,000.

Deputy Ring raised the issue of the pensions time bomb. This is quite significant, as it is an issue of adequacy. As Mr. Phelan identified, the average private citizen has €100,000 to €120,000 set aside to provide for pension. That is inadequate and the figure needs to be significantly more than that.

Mr. Ciaran Phelan

That is the average citizen who has a pension plan.

Mr. Aidan McLoughlin

Yes.

Mr. Ciaran Phelan

That does not take into account all the people who do not have a pension plan.

Mr. Aidan McLoughlin

That is quite correct. We need to look at policies that continue to encourage people into pension schemes. Unfortunately many of the decision being made that affect pensions in the recent past have the opposite effect of discouraging people. The issue of costs has been raised, but many of the things that cause people to get costs were decisions made for a good reason. For the past ten years our members would have actively encouraged people to take out PRSAs, which were put forward as a policy initiative to encourage greater pension coverage. At present 150,000 people have PRSAs, but all those people will now have to come out of PRSAs and into a new structure. Our members will bear a cost to do that which will ultimately be bourne by those individuals. That cost is not really adding value to the members' funds other than they must do it to continue to preserve the benefits and save efficiently. The inconsistency in policy is causing that cost rather than being able to add full long term value because the fund just continues to grow. There is a need to change direction because policy has changed to the detriment of the PRSAs. Equally the Minister for Social Protection is about to offer the ARF option to all. This is seen as a very good option and we, as advisers are in a position where we are not able to advise anybody to take up the ARF option because it no longer makes financial sense for them to do so, because of other policy decisions that have occurred in the meantime. We are arguing for the need for greater co-ordination on the policy.

Mr. Ciaran Phelan

To return to the time bomb issue, raised by Deputy Ring. A previous Minister for Finance recognised that and put in place a National Pensions Reserve Fund. That is no longer there and the reason it was put in place is that the State cannot afford the public sector and social welfare pensions it currently provides. People must fund their own pensions. Tax relief is what makes that affordable. I was glad the chairman asked a question about the extremes. We should be looking at the significant number of people in the private sector who must fund their own pension and tax relief is the only mechanism that will make it affordable. We have plenty of evidence of employees and self employed people who have stopped paying their premiums because of impact of the new austerity measures on their pay-packet.

Ms Rhona Burke

May I comment? I am a trading broker and the issue of tax relief is very important. The average client does not ring and ask to come in to discuss taking out a pension. People do not do that. It is very rare for a person to make a telephone call. I am an authorised adviser and have been trading for 25 years. Our findings are that pensions are an advice area, one has to sit down and give them a great deal of time explaining things to them.

I revert to Deputy Shortall's point on transparency, or the lack thereof, and fees. My response is that it is incorrect, as ours is a highly regulated and transparent industry. When I meet customers, I give them a choice. They can pay me a fee for my advice and the time I spend with them or, if they wish, they can choose to pay what is deemed to be a product-based commission. Such a product-based commission must be disclosed to clients up front. I must hand a client a quotation and show him or her the commission I will receive. Consequently, prior to making any decisions, the customer is absolutely aware of how this operates. In addition, when a client agrees to transact business, he or she has 30 days in which to revoke the contract. While I agree with the Deputy that in the past the industry was not regulated, it is now highly regulated. We must introduce reality to this issue. Mr. McLoughlin has mentioned that 150,000 people have taken out PRSAs. I will put this in perspective by providing an example. Were I to sell a PRSA of €100 per month to a client and receive a commission for so doing, the amount I would receive is €5, not €50 or €70. My client can pay me if he or she wishes. I do not mind, once he or she recognises I am giving advice. The reason clients come to me is to get professional advice.

Deputy Róisín Shortall

I have a few other questions.

Deputy Michael Ring

I apologise because I must leave the meeting to meet some disability sector representatives before 2 p.m. I had thought the meeting would conclude earlier and, as I have given a commitment, I must leave. However, Deputy Durkan will take over from me.

Deputy Bernard J. Durkan

I also intend to meet the disability sector representatives.

Acting Chairman (Deputy Thomas Byrne)

We will be concluding shortly.

Deputy Róisín Shortall

Mr. Phelan made reference to the National Pensions Reserve Fund and members know what is happening to it now. Under the new rules brought in recently, public service pensioners will pay the full cost of their pensions. For example, a recent report showed that teachers would be meeting the full cost under the radically changed rules introduced recently. While the Acting Chairman asked about the size of the average pension pot, a huge problem with the subject of pensions is that so little information has been made available. The Department of Finance and the Revenue Commissioners did not and still do not collect information on the extent of pension relief or on who is getting what and what are the biggest pots. It is known by chance that someone like Mr. Michael Fingleton has a €27 million pot. If that is the case, presumably other high nett worth individuals have similar pots, which is indefensible. Why should the ordinary taxpayer be subsidising such pension pots? That is what has discredited the entire system. However, it would be helpful if the State were to provide the data in order that members knew what was happening. Given the unknown number of very large pension pots, do the delegates think there is an argument for incentivising their early drawdown? It appears as though there is an unknown but considerable amount of money in pension pots. Is there an argument in favour of incentivising, by way of an incentivised rate of tax, their immediate drawdown and their consequential investment in the economy?

I turn to what the Government has signalled it intends to do if it remains in government. As the delegates observed, the Opposition parties have presented very different pension proposals. I refer to the proposal to provide tax relief at the standard rate of tax for everyone, rather than taking the approach adopted in the United Kingdom where a cap has been placed on the total amount. Do the delegates think this will act as a major disincentive for people in making pension provision, given that they will be paying more? They will be obliged to pay extraordinarily high rates of tax on their pension provisions if they only receive relief at the standard rate of tax on contributions and pay the top rate on money received. This will constitute a major disincentive and rather than encouraging people to make pension provision, the proposals will discourage many because one would be better off putting the money under the mattress.

Deputy Bernard J. Durkan

I apologise for being otherwise engaged, but members must keep two or three kites in the sky at the same time and it is very difficult to keep all of them aloft.

I have had an interest in this issue for a considerable time. During my time in a particular Department I set about trying to learn as much as I could about the pensions system and had a considerable number of exchanges of views with the various pensions authorities. One point about which I have concerns concerns the number of pension schemes that are defunct arising from the contributors' failure to fund them in the last five or six years. Members periodically encounter persons who have been unable to continue to fund their pension scheme simply because their own earnings have shrunk to the extent that it is not possible to continue making contributions.

Mr. Phelan referred to the National Pensions Reserve Fund. While it has now been somewhat emaciated, for want of a better description, the financial markets, the insurance markets and pension funds are interdependent to a certain degree. When I was younger, one was continually warned about what would happen by 2038. At the time I carried out an assessment and found the outlook for pension funds was not as scary as people had pretended. All that was required was a continuation of good, sound policies over time and there would not be a problem. However, the position now is slightly different.

I turn to an issue to which Deputy Shortall has referred. A system whereby I could reduce my income tax liability to virtually zilch by investing it in a pension fund would be very beneficial and ideal for me. Unfortunately, that is not how things work, particularly in the current climate. Do the delegates have an alternative method of addressing the issues that arise in the shrunken economy with a view to ensuring there would be an incentive for those who wish to invest in their pensions to provide for themselves but without reducing dramatically the revenue available to the Exchequer at a time when it requires it urgently? That may be a tall order, but it must be addressed.

Mr. Aidan McLoughlin

On the issue of very large funds, without focusing on a particular individual, there are extreme examples. Some data are available because a funding cap was introduced in 2005. Anyone who then had a fund greater than €5 million was obliged to apply for consent. I understand that some months thereafter the Minister for Finance released data showing that 116 individuals had applied for consent for a fund greater than that amount, of which 85 applications had been granted. My understanding of the statistics is that of these funds, three were greater than €20 million. However, these are extreme examples.

Deputy Shortall has asked whether it is possible to levy tax and I must believe it is. If we can levy a supertax on bankers' bonuses, surely we can levy a supertax on very large funds. If that is the issue, it should be dealt with separately. However, one should not affect 2 million others because of the wrongs of one or two individuals. The Government should take whatever action it needs to take. It is simple to state that in the case of funds above €20 million, X will happen and that it will not affect anyone else. While this may sound simplistic, I cannot discern any reason that would prevent the State from introducing a new rate of tax.

Acting Chairman (Deputy Thomas Byrne)

While I agree with Mr. McLoughlin to an extent, unfortunately, the numbers are so low that one would not raise much revenue.

Mr. Aidan McLoughlin

One could argue that justice should not simply be done but that it should be seen to be done.

Acting Chairman (Deputy Thomas Byrne)

I accept that.

Mr. Aidan McLoughlin

It allows the public to see justice being done as they would perceive it.

Deputy Róisín Shortall

That is provided one is discussing funds of more than €20 million, of which I presume there is only a handful. What about funds of more than €2 million?

Mr. Aidan McLoughlin

If one works backwards to €5 million, the figures from 2005, which was the height of the boom, indicate that 116 people believed they were within that bailiwick. The number is not large.

Deputy Róisín Shortall

The limit in the UK is less than £1.5 million.

Mr. Aidan McLoughlin

We have examined the numbers. I would start by rating, for example, the value of a Minister's pension in the private market. It comes in at approximately €6.9 million. If it is reasonable for someone to have such a pension paid for fully by the State, why could someone in the private sector not enjoy the same benefit?

In Ireland, there is a fundamental fallacy that does not exist in the UK as to the cost of tax relief. In most cases, the bulk of pension benefit is paid for by an employer rather than an individual. The State grants tax relief at 12.5%. When taxing the benefit, that is, the money on the way out, the rate is 50%. The situation in the UK is different because its corporation tax rate is higher and its income tax rates are lower. In Ireland, the State makes a profit on pension schemes, but this is not recognised. As Deputy Shortall correctly pointed out, the data are not sufficiently collected to understand what is happening, but most contributions are made by employers and, therefore, the cost is not the same.

A question on the standard rate of tax was asked. This poses a significant problem. We mentioned PRSAs. Once one moves to the standard rate of tax, the net effect sees one's employer paying, for example, €10 into a PRSA on one's behalf while the State says one owes it €5 because the employer's contribution is a taxable receipt, but allows one €2 in tax relief. The net cost of the €10 to a person is €3 in tax paid. When one takes the €10 out as a pension, the State says one owes it a further €5 in tax. Therefore, one's €10 has suffered a total tax of €8. As advisers, under no circumstances can we encourage any client to do this. It is financially nuts. While members might not appreciate it, this is the reason we say the State has effectively killed off PRSAs. For ten years, this policy has been actively encouraged by the State and, therefore, our members who believed we were executing a well conceived strategy developed by the it.

Deputy Róisín Shortall

What about PRSAs?

Mr. Aidan McLoughlin

It affects PRSAs in particular because they define the employer contribution as a benefit-in-kind on the member. This is not the case with an occupational pension scheme. A PRSA is way out on a limb in this respect.

Mr. Gavin Howlin

It is not even sufficient for occupational defined contribution schemes where, for example, the contributions by employer and employee could each be 5%. Employees tend to use additional voluntary contributions, AVCs, to make up the gap. If one is a top rate taxpayer, one will not make one's AVC because one is locking money into a pension system that does not deliver tax efficiencies. Instead, one will save outside the pension system. The problem with this is that, since the money is readily available, one is more likely to dip into it and have less at the end. I will no longer be making AVCs unless I will get my marginal rate relief because it is not efficient for me to do so. It is not a fat cat thing. As a policy, if one wants to limit tax relief to higher earners, one needs to set limits on the contributions, salaries or pension levels while keeping the marginal tax rate in place.

Deputy Róisín Shortall

Not only will it disincentivise pension provision, it will result in most people suffering a cut in their take home pay.

Mr. Aidan McLoughlin

Yes.

Deputy Róisín Shortall

The Government has not thought it through.

Mr. Gavin Howlin

If a country needs to generate revenue and the State is providing tax relief to allow people to put money away for the future, the best way to generate that revenue is to remove those reliefs and tax the money now. I can understand why the country needs to examine this idea, but we have a significant problem in store for us. Deputy Ring referred to a pensions time bomb. We have a pensioner support ratio of 5.6:1, but this will drop to 2.6:1. Who will pay the PRSI to pay for the State pension, which is insufficient now, in 30 years time?

Deputy Bernard J. Durkan

What is the highest level of tax efficiency achievable for a contributor in the public or private sector?

Mr. Gavin Howlin

It would depend on one's salary.

Deputy Bernard J. Durkan

I mean on a graduated basis.

Mr. Gavin Howlin

One could theoretically get the top rate of tax relief, pay no tax at the end and get the same gross roll up fund, but this only applies in the case of a small number of people who are just above the standard rate band and whose pensions will not be taxed. They are doing well out of the current system.

Deputy Bernard J. Durkan

I am aware.

Mr. Gavin Howlin

It is not necessarily bad.

Deputy Róisín Shortall

The problem lies with employer contributions.

Mr. Aidan McLoughlin

Deputy Durkan raised a number of points that we have not addressed. He stated that good policy would deal with the tax time bomb. This issue is a function of benefits for which one has not funded. It is not so much a concern if a fund has already been built up, but it is where a fund has not been built up beforehand. This is an issue for the public sector and the social welfare system, where there is no pre-funding apart from the National Pensions Reserve Fund, NPRF, which is emaciated. Regarding the scale of the issue, it is worth pointing out that in 2007, the cost of public sector pensions was estimated at a capital value of €75 billion, if one describes it as a debt taken on by the State. By 2009, the value had grown to €129 billion. The State has taken on this €54 billion liability without any debate. It is equivalent to the cost of the bank bailout. The sustainability of this position must be examined.

Deputy Róisín Shortall

Does Mr. McLoughlin not accept that it has been examined?

Mr. Aidan McLoughlin

All of the changes made or proposed to be made relate to new entrants to the public sector. None of them affect existing players. Therefore, the problem will continue to grow because the public sector will not recruit anyone. The liability will continue to bound upwards. The only change made to reduce the liability is the 4% restriction.

Deputy Bernard J. Durkan

How does Mr. McLoughlin propose the existing pension funds should be addressed? Future entrants will be covered under legislation that is currently before the Houses. How can a Government deal with existing beneficiaries?

Mr. Aidan McLoughlin

A radical change is necessary. Promising people a benefit that the State may be unable to sustain is wrong.

Acting Chairman (Deputy Thomas Byrne)

Are we veering off topic by discussing public sector pensions?

Mr. Aidan McLoughlin

I have no difficulty with-----

Deputy Bernard J. Durkan

It is an important debate. Public or private, it applies to everyone. People buy into top-ups in various ways. A previous witness mentioned top-ups.

Acting Chairman (Deputy Thomas Byrne)

I know it is an important issue, but the Irish Brokers Association would not-----

Deputy Bernard J. Durkan

It has an important role.

Acting Chairman (Deputy Thomas Byrne)

I accept it plays an important role in terms of the private sector, but it does not have one in the State element.

Deputy Bernard J. Durkan

By implication, there is an impact on the State.

Mr. Aidan McLoughlin

We would be happy to have a fuller discussion with Deputy Durkan and his colleagues in due course, but his instinct is that the situation must be adjusted. Irrespective of whether one likes it, a public sector worker relying solely on the public sector pension is at quite a risk in the sense that he or she is dependent on the State's future ability to pay what it has promised. The worker has no fall back position. My instinct is that a pre-funded defined contribution mixed with the State benefit would be better for such a person. By paying the money out as a defined contribution, the liability would be reduced.

The auto-enrolment system we are considering has been introduced in other countries, such as Australia, but that country also moved the state system to a defined contribution basis. The advantage of this is that, based on the fund, people have a certain amount of lock down regardless of what occurs.

Deputy Róisín Shortall

Security.

Mr. Aidan McLoughlin

Security can be addressed through diversification.

Mr. Gavin Howlin

None of us is saying that public sector pensions are wrong or that major issues pertain. Rather, we must recognise and try to pre-fund and understand the liability. It would be for the best.

Deputy Róisín Shortall

The amount in question is over 50 years. It must be recognised that the change in the rules will mean people will pay for their own pensions.

Mr. Gavin Howlin

Obviously.

Deputy Róisín Shortall

Teachers would claim that they will overpay.

Mr. Aidan McLoughlin

Even in the public sector, differentiating between people before and after a particular year creates haves and have nots. There is not a fair sharing of this burden in the public sector.

Deputy Róisín Shortall

Would Mr. McLoughlin favour capping tax relief instead of standard rating it?

Mr. Aidan McLoughlin

The problem with imposing artificial caps is that they do not allow adjustment for the future. A pension fund requires somebody starting perhaps at-----

Deputy Róisín Shortall

Would Mr. McLoughlin favour it on the grounds of equity and sustainability? I accept that we cannot continue with the present system and that it is unfair and does not provide adequate coverage. However, in terms of changes, would he prefer capping the total amount of tax relief that an individual could claim or introducing standard rating?

Mr. Aidan McLoughlin

In practical terms this issue is linked to a question Deputy Durkan asked about how we can come up with an alternative method without reducing revenue. We previously discussed the idea of levying pension funds. This idea has an element of equity in the sense that everybody pays pro rata according to the scale of their funds but the corollary is that the benefit on the other side should be exempt from tax. There is also an equity element in respect of public sector employees whose pensions would remain taxable because they did not pay the levy.

Deputy Róisín Shortall

What about the lump sum?

Mr. Aidan McLoughlin

The lump sum has become irrelevant at this stage. The problem with reducing the tax free lump sum is that it would only reduce a proportion of the fund that was available to allow people to deal with the liabilities they built up during their working lives so they could jump into retirement free of debt. That is effectively gone at this stage. The potential tax yield from this is a maximum of €5 million. The benefit to the State is tiny but the impact on individuals' lives is considerable. A significant number of people have interest only mortgages which depended on that tax free lump sum. All tax free lump sums will be hit, even those built up over 39 years. People based their finances on the lump sum payment.

Deputy Bernard J. Durkan

Believe me, we know.

Mr. Aidan McLoughlin

It do not think it is equitable. The rules could have been applied from this point onwards for new policies, which is the case in regard to public service pensions. In many ways, it is the smaller part of what has been done. Current policy decisions to not take account of the fact that pensions policy impacts on a range of areas.

Deputy Róisín Shortall

I hope there will be a change of direction soon.

Deputy Bernard J. Durkan

I would like a longer discussion but unfortunately we do not have time at present. I would be delighted to continue the conversation on another occasion.

Acting Chairman (Deputy Thomas Byrne)

I thank the representatives from the Irish Brokers Association for an interesting discussion. A large number of people will be in for a bit of a shock unless something major is changed. Perhaps a transcript of this discussion can be forwarded to the Minister for Social Protection and his Department and we will seek a written reply or, if there is time, a meeting with the Minister.

The joint committee adjourned at 2 p.m. until 11 a.m. on Wednesday, 2 February 2011.