The Pensions Act, 1990, was introduced over ten years ago and the first reform cycle regarding this legislation was completed with the Pensions (Amendment) Act, 1996. Over the past five years there has been considerable research and debate about the new and emerging challenges for pensions policy, and the culmination of this process is the Pension (Amendment) Bill, 2001. This Bill, which begins a new cycle of reform, is one of the Government's top priorities and a specific commitment of the PPF. In keeping with the underlying philosophy of the PPF, its overall objective is to ensure that all retired persons have an adequate income to enable them to live with dignity and to share in the benefits of economic growth.
Given the overall aim of developing pensions policy the legislation has a number of key objectives, which briefly are as follows: first, to increase overall occupational pension coverage, which is currently less then 50% of those at work – the main mechanism addressing this is the personal retirement savings account – PRSA – framework which is provided for in Part 2 of the Bill; second, to provide a right of redress for those who have a dispute or complaint in relation to an occupational pension scheme and, in due course, a PRSA through the introduction of a pensions ombudsman – this is provided for in Part 3 of the Bill; and third, to enhance the current provisions of the Pensions Act so as to improve the position of existing and future pension scheme members in terms of the security and quality of their pensions entitlements, allied with providing increased flexibility – these improvements are set out in Part 4 of the Bill. I will outline the main provisions in more detail shortly. There are currently 630,000 members of occupational schemes and pension fund assets amount to £41 billion –€52 billion – which is equivalent to 54% of GNP.
The purpose of the Pensions Act, 1990, is to regulate occupational pension schemes, to ensure that they are properly administered and, above all, to ensure the pension rights of members and their dependants are safeguarded. The Pensions Board was established under this Act as the statutory regulatory authority. The role of the board is to promote the security of occupational pensions by monitoring and supervising the administration of schemes in line with the Pensions Act; to provide guidance to trustees and scheme administrators on compliance; and to provide information on members' rights. The board's role also includes the promotion of the future development of pensions in Ireland through the provision of policy guidance and advice on pensions issues generally. In this regard, the board has a statutory role to advise me, as Minister. The aim is to encourage the wider application of adequate, secure, flexible and cost efficient pensions to meet the challenges in the coming decades of pension provision for an ageing population.
The board comprises a chairperson and 14 members who are representative of trade unions, employers and various professional groups in the pension industry, together with departmental representatives and three nominees of the Minister. It is widely accepted that the board represents partnership in operation and that the current arrangements work well. The current board was appointed last December for five years.
The provisions of the Bill are based on a detailed examination of the proposals of the National Pension Policy Initiative – NPPI – set out in the board's report Securing Retirement Income, of various other policy reports received from the Pensions Board and of experience of the operation of the Pensions Act to date. All the reports to which I refer are from the previous board and I want to take this opportunity to pay tribute to hard work and commitment of that board under the chair of Eamonn Heffernan.
The current system of pensions coverage in this country comprises a compulsory social insurance pillar and voluntary occupational and personal pension pillars. In meeting the objective of adequate provision for people in retirement, the strategy is one of a reasonable social welfare pension on a flat rate basis supplemented by an occupational and-or personal pension to give an earnings related pension. There is considerable ongoing debate on the pros and cons of voluntary versus mandatory second pillar provision. The unanimous view of the Pensions Board in its NPPI report was that pension coverage should be extended on a voluntary basis in that while employers would have to provide access to pension schemes, contributions would not be mandatory. In the board's view it is essential to balance the risks and costs of compulsion with the benefits it can achieve, and to go no further down the road of compulsion than is necessary. The board considered that full mandatory provision should be held in reserve but could be introduced following a review of the effectiveness of the measures adopted. It saw this review taking place five years after implementation of the proposals.
I have considered this approach, which is fundamental to the coverage issue and how I proceed, in detail and on balance, given the partnership basis of the board, I have accepted their views in this area. However, it will be necessary to monitor the impact of the new PRSAs, as is required under the PPF. In this regard, the Central Statistics Office has piloted questions in relation to pensions coverage with a view to asking these in its Quarter 1 National Household Survey next year. The results of this will provide a benchmark coverage rate against which changes could then be measured.
All are agreed that if the proposed PRSA arrangements on a voluntary basis provided for in this Bill do not succeed the position regarding mandatory provisions would have to be reviewed. While I have no definite views at this stage on the review period, I consider that it should be sooner than five years. In considering the reports of the board, I was conscious, as the board was, of a number of underlying principles. These include first, the need to extend coverage without undermining existing provision, particularly defined benefit provision and, second, the need to ensure a balance between protection and equitable treatment on the one hand and over-regulation on the other.
Next to the debate on voluntary or mandatory provision often comes the debate on defined benefit versus defined contribution arrangements and which is better. This is probably the wrong question. I am aware that while the majority, over 71%, of current pension scheme members are in defined benefit schemes, there have effectively been no new defined benefit schemes established in the last decade and that some major employers have introduced defined contribution arrangements for their new entrants. The key issues relate to the level of contributions and the fact that the investment risk is borne by the employer in a defined benefit and by the employee in a defined contribution arrangement. Defined contribution arrangements are argued to facilitate the current more flexible mobile workforce. They give the employee ownership of his or her pension fund and allow the person to share in the benefits from the fund performance. The modern employee profile of many firms is changing with the “same job for life” scenario being replaced by a high turnover of employees at a number of age groups. Various remuneration type arrangements are often linked to performance, which is usually not pensionable. We have a more educated workforce nowadays and a desire for early retirement.
The labour force position and the desires and values of employees are obviously related to the economic climate. Against this climate, social partners and employees must take a view on their work environment and whether the shift from a more to less paternalistic approach to a totally individual choice is desirable. If so, what are the implications and are there any unintended outcomes looming? Like defined contribution schemes, PRSAs will be money purchase arrangements and will have the same flexible characteristics.
I referred earlier to this Bill being the start of a new cycle of reform and I consider that the completion of this cycle will take a number of years as various impacts are measured against economic cycles. There is no doubt that one pension arrangement does not fit all and that pension reform is an ongoing process which must be monitored, evaluated and the course corrected, as necessary. I assume these issues will be addressed in the partnership process going forward.
I would now like to turn to a brief description of the main provisions of the Bill. Under the PRSA framework we wish to increase the level of occupational and personal pensions coverage from its current position of less than 50% to 70% of the total workforce over the age 30. To do this we are setting up a new type of pension – the personal retirement savings account – PRSA – as provided for in section 3. The PRSA will be a low cost, easy access, long-term personal investment account designed to allow people to save for retirement in a flexible manner and it will complement the social welfare pension. The PRSA will be a contract based product between the individual and a PRSA provider.
The Bill provides that PRSAs will be regulated by the Pensions Board who will license the PRSA provider, which is required to be a private company, registered in the State. This decision that the board would be the regulator was taken to ensure that regulatory and policy issues in relation to pensions, especially issues relating to increasing pensions coverage, are dealt with by one body. PRSA products will be approved by the Pensions Board and the Revenue Commissioners. The Bill includes provision for standard PRSAs, which will be "off the shelf" products with charges capped at 5% of contributions and 1% per annum of the assets. Any person will be able to make contributions to a PRSA irrespective of employment status. Employees can take PRSAs with them when changing jobs. Contributors will be able to take benefits from a PRSA from the age of 60.
The Bill also sets out disclosure requirements on PRSA providers including statements of reasonable projection to signed-up contributors showing, at various intervals/times, on an individualised basis, the level of benefit which can reasonably be expected. The functions of the Pensions Board are set out in relation to its regulatory role as regards licensing and approval of providers and products as well as their ongoing supervision.
Given the commitment of the social partners to promoting pensions coverage, I hope that PRSAs will lead to a significant increase in coverage, especially for those with no cover at present. Under the Bill employers will have to provide access to at least one standard PRSA. While employer contributions to PRSAs will not be mandatory, I hope employers will contribute, where possible, so as to enhance the quality of the pension benefit for the employee.
As I said earlier, a second objective of the Bill is to provide a right of redress for those who have a dispute or complaint in relation to occupational pensions and, in due course, PRSAs through the introduction of a pensions ombudsman, which is provided for in Part 3 of the Bill. This proposal was made by the Pensions Board on foot of its experience of disputes and complaints by scheme members. The board is a regulatory authority and does not, therefore, by definition, have a dispute resolution role. The ombudsman will be set up on a statutory basis and his or her decisions will be binding subject to a right of appeal to the High Court. The scope of the ombudsman will relate to complaints regarding maladministration of schemes and disputes of fact or law between beneficiaries and those responsible for the management of the scheme or PRSA.
The time limit for bringing cases will be three years from the date of action giving rise to the dispute or longer than that if the ombudsman decides it would be reasonable to extend the period. There will, however, be an absolute limit of three years prior to the establishment of the office. The office will be financed by the Exchequer and the ombudsman will be appointed by the Minister for Social, Community and Family Affairs.
Part 4 of the Bill provides for a significant number of improvements to the existing provisions of the Act, which on enactment will be of significant benefit to a large number of pension scheme members. These include a reduction in the vest ing period from five to two years and a preservation of and revaluation of benefit will be extended to pre-1991 service. We will provide new options on transfers of preserved benefits. We will introduce a minimum value of contributory retirement benefit equal to 120% of the member's contributions which will mitigate the effect of integration with the social welfare pension for low income earners on reaching retirement. There will be mandatory review and disclosure procedure relating to indexation of pensions in payment. It will also provide for mandatory disclosure and consultation with members regarding the treatment of surpluses in cases of scheme wind-ups and bulk transfers. Finally, there will be a statutory requirement on employers to remit employee pension contributions within a specified period.
I now wish to refer to the composition of the board. To enhance the composition of the board and mindful of its increased regulatory responsibilities with the introduction of PRSAs, section 47 provides that it will be extended by the addition of a representative of consumer interests.
As I indicated at the time of publication in July, I welcomed the reaction and comments to the Bill and said that these would be considered in detail during the passage of the Bill. I think this is a reasonable and practical approach given the complexity of the Bill and the need for specialist input. The deadline for receipt of comments was last week and there was a considerable response, which is not unusual given the size, scope and technical nature of this legislation. All the responses will be examined by my Department in consultation with the Pensions Board and the various bodies, as necessary, with a view to bringing forward any required amendments on Committee Stage. In addition to any such amendments, I also intend, as I indicated on publication of the Bill, bringing forward further improvements during the passage of this Bill, probably on Committee Stage, relating to the operation of the Act. These include the following proposals: an amendment to take account of the provisions of the Employment Equality Act, 1998, in so far as these should apply to pensions; an amendment to ensure compliance with the EU mobility directive and the setting up of a limited pensions compensation fund. In addition, as agreed with my colleague, the Minister for Finance, amendments to the Taxes Consolidation Act, 1997, to provide for the tax treatment of PRSAs will be brought forward as part of this Bill.
I mentioned at the beginning of my speech that I saw this Bill as the start of a cycle of reform and I would now like to outline briefly what I meant by this. As I have already said, an underlying principle of the Bill relates to achieving improvements on a voluntary basis. While mandatory disclosure is introduced or enhanced in many areas, it is still in a voluntary environment. The success of this approach in achieving the overall objective will have to be monitored closely.
There have been a number of economic cycles since the current pensions discussions – which culminated in this Bill – began in 1995. The pensions strategy going forward has to be, at the same time, robust and flexible enough to accommodate external shocks and circumstances while keeping a clear focus on the target objective. Changes in working patterns and people's values and requirements will have to form part of the strategic objective. A balance has to be struck between perhaps the inefficiencies of an over-paternalistic approach and the poverty risks of an over-individualistic approach. These issues are not black and white but shades of grey and our views of what is desirable are always open to challenge and debate in our democracy.
At a more practical level, we have to ensure that whatever the underlying philosophy, the overall pension system in place does lead to an adequate pension on retirement. There is a danger, especially in DC and PRSA arrangements, that a person may consider any pension to be "a good pension" and this of course is not true. The provisions in this Bill through, for example, "statements of reasonable projection" of pension value, will help to address this issue but we need to be vigilant in terms of issues that may arise in this area. In this regard, we must be prepared to accept that at the end of the day the amount that can be put aside by a low paid worker for a supplementary pension and the possibility of intermittent contributions and lapsed policies is unlikely to result in a pension fund of sufficient value to deliver an adequate second pillar pension on retirement. If the situation unfolds along those lines there may be a need for the State to get involved in some way in supplementary pension provision particularly for those people whose savings are insufficient for the market to deliver an adequate income on retirement. This is an issue for the future.
This leads, finally, to the key area of information on pension provision to raise overall awareness among the public of the issues involved. The Pensions Board recommended a national pensions awareness campaign as a prerequisite to improving coverage. The Government fully accepts this recommendation and my Department will discuss this further with the board early next year.
I commend the Bill to the House.