Fixing our broken pensions – a transforming approach to pensions reform

Kenmare paper, 2011 by Dónal de Buitléir and Don Thornhill | Download Full PDF

Extract:

“We will reform the pension system to progressively achieve universal coverage, with particular
focus on lower-paid workers, to achieve better risk sharing, and to provide for greater flexibility
for those who wish to retire on a phased basis.” – Programme for Government, 2011  (page 55)

Introduction

Many people face the prospect of inadequate pensions. Aspects of present policy seem to be geared more to achieving necessary improvements in the public finances but the long-term sustainability of pensions also needs to be addressed.

Pension coverage in the working population is too low with too many people likely to be dependent, either totally or in part, on the State Pension. Costs in the pension industry are too high. There is an unacceptable lack of transparency. Radical change is necessary.We set out a new model for pensions and savings provision in the future. Our model would apply to all individuals working in the economy and would not differentiate between different types of economic status such as self–employed, farmers, private or public sector employees. We propose a two–tier approach to pension provision. The first tier would build on the current PRSI pension arrangements – essentially providing a floor against poverty. The arrangements for the second tier would involve so-called “soft mandatory” contributions by employees and employers and an income related SSIA–style Exchequer contribution (which would be capped at a certain level of income). The cost of the Exchequer contribution would be offset by the abolition of tax relief on pension contributions. An important feature is that each contributor would have an individual account in a central fund. The accumulated payments and contributions made by them and on their behalf would be available for funding post –retirement income – but there could be some opportunities for pre –retirement partial encashment. The paper also reviews the investment performance and costs of the pensions ―industry‖ and the existing rules and structures. We signal approaches to transition mechanisms from the existing arrangements to the new structure. We also look at the implications of the proposed central fund for investments and savings at the level of the national economy and national debt management. The model also has the potential to facilitate new approaches to “retirement” – through part time employment arrangements where an individual might be both a beneficiary and contributor to the national fund. This will be a necessary and appropriate response to the projected increase in the proportion of older people in the population. We also highlight the need for robust governance arrangements arising from the need for assuring contributor investor protection and confidence.

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