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Pensions are at the crossroads Back  
At the end of 2001 we reached a crossroads in the whole area of pensions and retirement, said John Feely. It looks like the same crossroads that we reached about 5 years ago, when we set out on the whole National Pensions Policy Initiative (NPPI). The only difference is that we now seem to be coming at it from an entirely different direction.
To begin to explain the current situation we need to look back at the NPPI process. The impetus for this initiative stemmed from the poor levels of pension coverage, particularly among the low-paid, self-employed, employees of small firms, part-time, temporary and contract workers, and women.

Pensions (Amendment) Bill
2001 saw the culmination of the work undertaken following the publication of the NPPI report in May 1998. In July of this year the Minister for Social, Community and Family Affairs, Mr. Dermot Ahern T.D. published the Pensions (Amendment) Bill. This Bill is probably the single largest piece of legislation to come before the Dail in the term of the current Government. It deals with a number of important areas, including the establishment of the office of Pensions Ombudsman and the long-awaited introduction of Personal Retirement Savings Accounts (PRSAs).

The introduction of PRSAs is a direct response to concerns about pension coverage. Some of the reasons given by people who do not have pension cover include lack of access to an appropriate pension vehicle, lack of flexibility particularly in the area of payment of contributions, cost, lack of transparency, and just plain difficulty in being able to understand the complex rules governing pensions and pension product structures.

The framework for PRSAs that is set out in the Bill deals with many of these issues. PRSAs are designed to be simple, accessible, easily understood and relatively flexible. However, whether PRSAs will, in the event, have a significant impact on pension coverage remains to be seen.

Despite their obvious attractions, not least in terms of the fiscal incentives, I believe the success of PRSAs will depend on the level of awareness built up among the general public on the need for retirement savings. This has always been a key element in the PRSA strategy, but little has been done to prepare the ground for an intense public awareness campaign.

Impact of SSIAs
One other factor that could have a negative impact on the take-up of PRSAs is the government‚s introduction of Special Savings Incentive Accounts (SSIAs). Clearly, while SSIAs are popular, there is still a distinction that must be made between short-term savings and long-term savings. Unfortunately, savers will be unlikely to make this distinction and are likely to deflect savings into SSIAs that would otherwise have been invested for their retirement in PRSAs.

However, despite these issues PRSAs still provide a tremendous opportunity to increase pension coverage. The publication of the Pensions (Amendment) Bill during 2001 is, of course, only half the battle. Its enactment early in 2002 will be crucial if we are to avoid a long period of uncertainty during the 2002 general election process. The Minister for Social, Community and Family Affairs and his departmental officials have to be commended for getting the Bill to this stage. However, the minister must sustain his efforts in the coming months to retain priority for the Bill to ensure it gets through the houses of the Oireachtas and is passed into law in the life of the current government.

The new debate
One of the most significant developments during 2001 has not been driven by legislative or regulatory changes, but by the market itself. This is the fundamental re-evaluation of the nature of pension funds. This process is only just beginning, although some would argue that it has been gradually catching up with us over the last few years, but either way it will be one of the major policy issues going forward.

In the UK there is now clear evidence of a move away from traditional Defined Benefit (DB) schemes to Defined Contribution (DC) schemes, even among large traditional employers. Although lamentable, this move is inevitable as companies are faced with escalating pension costs and changing financial reporting arrangements on the back of the introduction of FRS17. Irish companies face the same pressures.

It has been clear for some time that DB schemes had become less attractive for employers. This was reflected in the fact that almost no new DB schemes have been established in the last 5 years. However, with this move to DC comes real concern that the adequacy of retirement income will reduce as a lower level of benefits will emerge under such arrangements. The debate has now been extended from the level of coverage of pensions to include the adequacy of benefits. I have no doubt that next year will see more focus on this issue.

In 2001 the Government made further progress with the establishment of the National Pensions Reserve Fund (NPRF), and, thankfully, has resisted the temptation to dip into the fund in its infancy against the background of more difficult public finances. The commissioners of the NPRF were appointed to oversee the investment of the fund‚s assets. However, with the assets held in liquid form during the stock market turmoil, Ireland probably had one of the best performing pension funds in the world! The process of appointing fund managers is nearing completion and next year will see the true nature of the NPRF as it develops a more typical pension fund investment profile.

In Europe, two specific developments have moved the debate on pensions to a new level. The first of these was the issuing by the European Commission of a communication on the elimination of tax obstacles to the establishment of pan-European pension funds. This communication is significant, as it has opened up the potential for establishing cross-border pension arrangements. A number of test cases and a pilot project have now been developed to test this proposition. The potential significance for Ireland is obvious, with the large number of multinational companies operating here.

The second development was the adoption by the European Parliament of the draft EU Directive on the development of ‘Institutions for Occupational Retirement Provision’. This, however, is an altogether slower process and the draft Directive must now work its way through the Council of Finance Ministers.

So, as we move into 2002, it is clear that we are still facing many challenges and much change in the area of pensions and retirement. Unfortunately, the over-riding memory of 2001 has little to do with pensions - the sheer horror and disbelief associated with September 11th has made a lasting impression. In the weeks following the attack all sorts of repercussions became apparent. Pension funds did not escape as they struggled with the effects of falling stock markets that exacerbated an already poor investment climate that was feeling the effects of global economic slowdown.

However, as time has passed the stability of our pension system has again been proven, as has the resolve of our society. This inspires us to continue to move forward and find more solutions to the problems of protecting and enhancing the financial security of people in retirement.

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