Following the recent announcement by the Government of a new 0.6% levy on private pension funds, pensions are back in the news yet again for all the wrong reasons. Many believe that such a retrospective move goes against the grain of what previous governments were trying to achieve, namely, to increase private pension coverage and reduce the pension burden on the State in future years. Given the current state of our public finances,
we should not underestimate the scale of the problem – there is a Pensions ‘Time Bomb’ and this recent move is going to exacerbate the problem, especially for those in the private sector – the current annual cost to the exchequer in respect of public and private sector pensions is estimated to be in the region of €7.35bn.
Let’s take a look at some of the numbers. According to the Quarterly National Household Survey Q4 2010, Ireland currently has a workforce of just over 1.8m. Of that, approximately 300,000 are working in the public sector, suggesting that there are approximately 1.5m working in the private sector. The cost of public sector pensions alone is going to put a significant strain on public finances as the Government continues to struggle with balancing the books. In 2010, the total payment to pensioners previously employed in the public sector is estimated to top €2.35 billion and the Comptroller and Auditor General recently estimated that total pension liabilities accrued for public sector employees to December 2009 was €108 billion – a staggering figure, even in the context of the ‘billions’ that we have now become accustomed to! The public sector pension bill is financed from current expenditure, the cost of which is somewhat offset by contributions from current employees and the public sector pensions levy, but these fall well short of what’s required.
The National Pensions Reserve Fund was originally set up to smooth the expected increase in the cost of Social Welfare and Public Sector Pensions. With questions over future contributions to this and the use of much of the funds to recapitalise the banks, it remains to be seen if this can be achieved.
Back to the private sector – who’s going to pay for their pensions and is the old age contributory pension in its current guise sustainable? The number of retired individuals at the moment is approximately 365,000 at a cost of over €5billion per annum to the exchequer. If we look at the age profile of the workforce at present and assume that the birth rate remains constant, a stark picture emerges. It highlights that there are significant pressures to the sustainability of the state pension in its current guise. This pressure is on a number of fronts; firstly the age profile of the country is set to alter significantly over the next 25 years, meaning there will be less people working to support those already in retirement – the dependency ratio will increase greatly. Secondly, it is anticipated that individuals will live longer with continuing improvements in both medical care and lifestyle and thus increasing the longevity of pension payments from State coffers. The last government recognised these problems and set about increasing the retirement age for the old age contributory pension from 65 to 68 – this has yet to be put in train. Given this pensions ‘Time Bomb’ is it prudent to take from the future to finance the present by penalising those individuals who have been providing for their retirement by introducing this levy of 0.6% on existing funds? In tandem with this, it is being suggested that the present government will further discourage private pension provision by reducing the tax relief associated with making private pension contributions, leading to more and more people relying exclusively on the state to provide for their retirement.
In these difficult economic times, it is understandable why most of us ‘live for today’ and hope that the future looks after itself. However, the Pensions ‘Time Bomb’ continues to tick and it is in everybody’s interest that there is a joint and cohesive effort (through both public and private provision) that ensures each and every one of us can have a comfortable and enjoyable retirement.
Gerry Moran is the Managing Director of ODCL Financial Services, an independent Financial Planning Firm that specialises in providing retirement planning advice.
