Opening Statement
Dr Orlaigh Quinn
at the meeting of the
Joint Committee
on Education and Social Protection
CHECK AGAINST DELIVERY
Wednesday 5 March 2014
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Chairperson and members, I wish to thank the Committee for the invitation to
discuss pension reform, including the implications of the EU White Paper on
Pensions.
Pension Challenges
Over the past number of years, pension provision in all its forms in Ireland has
experienced considerable challenges and change. The sustainability of the wider
system is a particular concern because of the demographic issues Ireland faces
and the associated increases in pension (and other age related) costs. These
issue have been exacerbated due to investment losses and the deterioration in
the public finances since the recession.
Currently, there are 5.3 people of
working age for every pensioner and this ratio is expected to decrease to
approximately 2.1 to 1 by 2060.
Life expectancy is also increasing. In the mid-1990s, life expectancy for males
was 73 and for females, 78.5. For those aged 65 today life expectancy for males
is 82 years for men and 85 for women, by 2030 this will have risen to 84.1 and
87.4 respectively. This is very welcome news, of course, but brings with it a
number of significant challenges in terms of funding pensions into the future.
Key drivers of reform have included the need to achieve sustainability of our
systems over the longer term whilst also striving for adequacy in those systems.
This has included reforms to the State pension and public sector pensions and
efforts to increase supplementary pension coverage whilst working to ensure the
continued viability of defined benefit pension schemes.
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Pension Reform in Ireland
Ireland has undertaken considerable research on pension issues, commencing
with the Green Paper 2007. This included a comprehensive consultation
involving submissions from some 370 organisations and individuals, as well as
a number of national and regional meetings involving some 500 people. This
led to the National Pensions Framework in 2010.
A number of reforms have
since been implemented.
With regard to the State Pension, a number of significant reforms have been
introduced recently and more will be implemented in the years ahead:
 In order to provide for sustainable pensions and to facilitate a longer
working life, legislation was introduced to increase the State pension age
in three separate stages. In January 2014, the State pension age was
standardised at 66, with the abolition of the State Pension Transition
payment. Pension age will increase to 67 in 2021 and 68 in 2028. The
changes to pension age also include consideration of measures to
encourage longer working by older workers.
 With effect from April 2012, the number of paid contributions required to
qualify for a State Pension increased from 260 paid contributions to 520
paid contributions.
 From September 2012, new rate bands for State Pension were introduced.
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 These additional contribution requirements and payment rate band
changes more accurately reflect the social insurance history of a person
and ensure that those who contribute more during a working life benefit
more in retirement.
 It is also planned to introduce a ‘total contributions approach’. This will
align the pension payment with the number of years a person has
contributed to the social insurance fund: arrangements will also apply to
cover periods outside of the workforce. This will more accurately award
contributions made over a working life. It will remove the current
anomaly whereby some people qualify for higher pension payments even
though they have fewer contributions (but a higher average) than others
who do not qualify, or qualify for a lower pension, due to the average
contributions test. The proposed date of introduction is under review.
Occupational Pensions
There have also been a number of regulatory measures to support the
sustainability of defined benefit schemes in recent years. These include:
 In 2009, legislation removed the priority given to post-retirement
increases for pensioners to ensure a more equitable distribution of assets
in the event of the wind-up of a defined benefit scheme;
 The introduction of the Sovereign Annuity initiative in 2012 which is an
option which the trustees of a scheme can exercise in order to reduce
scheme liabilities and better match their assets to their liabilities.
 The introduction of the risk reserve in 2012 to improve the future
sustainability of defined benefit schemes, and incentivised schemes to
improve their exposure to risk.
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
A widening of the type of assets in 2013 that can be used to reduce the
reserving requirements of the Funding Standard, which improves the
flexibility of the risk reserve requirements;
 In 2013, regulatory powers were strengthened to provide the Pensions
Board with the power to wind up a pension scheme. This power can only
be exercised where a scheme is underfunded and the trustees and the
employer are not in a position to adopt a funding proposal or where the
trustees of a scheme fail to comply with a direction from the Pensions
Board to restructure scheme benefits.
 Legislation was also introduced in 2013 to provide for governance
changes to the Pensions Board and amalgamate the Pensions Ombudsman
and the Financial Service Ombudsman. These changes are aimed at
strengthening regulation and ensuring greater consumer involvement and
opportunities to input to matters of pension policy.
 Finally, the Social Welfare and Pensions (no.2) Act 2013 which was
signed into law in December 2013, provides for a fairer and more
equitable distribution of scheme assets in the event of the wind up of an
underfunded scheme. It also facilitates a greater sharing of the risk when
a scheme is underfund between all the beneficiaries, while still providing
for priority protection of pension benefits.
Another non-legislative initiative has involved the development of a pensions
tracing system for the private sector to support those nearing retirement to
identify previous pension benefits and enable the pensions industry to contact
former contributors to schemes.
EU White Paper on Pensions
In February 2012, the European Commission published a White Paper looking
at how to create adequate, safe and sustainable pensions in the European Union.
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The White Paper contains a range of initiatives intended to help create
conditions that will enable a balance between time spent working and time in
retirement, to ensure that those who move to another country can keep their
pension rights, and to help people obtain adequate pensions once they are
retired. Similar to Ireland, the White Paper describes the ageing of the European
population as the main challenge for the future of the EU’s pension system.
Identifying challenges
The White Paper identifies a number of the main challenges to the sustainability
and adequacy of pension systems.
 Financial sustainability
 Maintaining the adequacy of pension benefits
 Raising the labour market participation of women and older workers.
In the light of these challenges, the White Paper makes a number of proposals
for EU-level initiatives to support Member States’ efforts to reform their
pension systems. These proposals are to:
 Create better opportunities for older workers by calling on the social
partners to adapt work place and labour market practices and by using
the European Social Fund to bring older workers into work.
 Develop complementary private retirement schemes by encouraging
social partners to develop such schemes and encouraging Member States
to optimise tax and other incentives;
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 Enhance the safety of supplementary pension schemes, including
through a revision of the directive on Institutions for Occupational
Retirement Provision (IORP) and better information for consumers;
 Make supplementary pensions compatible with mobility, through
legislation protecting the pension rights of mobile workers and by
promoting the establishment of pension tracking services across the EU.
This can provide citizens with information about pension entitlements
and projections of their income after retirement.
 Encourage Member States to promote longer working lives, by linking
retirement age with life expectancy, restricting access to early retirement
and closing the pension gap between men and women.
 Continue to monitor the adequacy, sustainability and safety of pensions
and support pension reforms in the Member States
The White Paper did not contain country specific recommendations for Ireland
due to the Memorandum of Understanding which was in place at the time of
publication of the report.
The challenges identified in the EU White Paper are those which Ireland has
been addressing over the last number of years. These issues are also relevant to
most other countries.
Ireland plays a full role in EU developments and is a strong contributor in the
various Councils dealing with pensions. During the recent Irish Presidency of
the EU, Ireland was successful in obtaining agreement on a Portability
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Directive.
This proposal aims to remove obstacles to ensure that citizens can
choose, with confidence, to live and work anywhere in the EU without fear
of losing their pension entitlements. It allows EU workers who move to a
different EU country to safeguard their supplementary pension rights
OECD Review
Most recently in April 2013, the OECD published their review of Ireland’s
pension system. This review encompasses the totality of pension provision in
Ireland – State, private, occupational and public sector.
The issues of
sustainability; adequacy; modernity; and equity were central to this review.
The good news from the review is that Ireland today is in a relatively favourable
position compared with most OECD countries, both with regard to pension
spending and the adequacy of retirement income provision. Most importantly,
the economic situation of pensioners in Ireland is comparatively good, both with
respect to other age groups in the population and in international comparison.
In terms of adequacy of pensions, it should be noted that older people do not
experience the levels of poverty that existed in the past. For instance, the ‘at
risk of poverty’ rate for persons aged 65 and over fell from 27.1% in 2004 to
9.7% in 2011 (compared to 16% for the population as a whole). Over the same
period, the consistent poverty rate for older persons also declined from 3.9% to
1.9% (compared to 6.9% for the population as a whole).
Also, the OECD Review shows that the recent decisions that have been made
are in line with the roadmap needed for pension reform. But the report also
raises question marks about aspects of the Irish pensions system.
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The key recommendation from the OECD report is to improve the adequacy of
pensions by increasing coverage in the funded part of the pensions system
through a universal mandatory or quasi-mandatory employment based pension
system. This is also in accordance with the recommendations of the EU White
Paper and is a key issue to be addressed in term of future pension reforms.
While the State pension has been successful in lifting older people out of
poverty, the financial challenges of our changing demographics and aging
population mean that we need to improve occupational and private pension
coverage. Less than 51% of people in employment aged 20 to 69 have pension
coverage and this number is decreasing. This relatively low rate of pension
coverage has already been identified as a key concern of Government.
The OECD has highlighted its view that compulsion, or mandatory enrolment,
is according to international experience, the less costly and most effective
approach to increase coverage of private pensions.
The OECD has also
highlighted that “there is no blueprint for reform which Ireland could take offthe-shelf and implement directly and any solution has to fit the Irish situation.”
What is of critical importance here is that any system chosen is correctly
designed. It is most important that any national employment pensions scheme
is just one significant part of the overall pension policy framework for
retirement provision. The decision in relation to the preferred format of such a
scheme, whether it is a mandatory or soft mandatory system, is one that will be
made by Government with reference to the overall pensions framework. This
will ensure the selection and design of the scheme is aligned and operates
effectively with the State pension and other private pensions policy. In this way
the success of each, and therefore the overall pensions system, are mutually
dependent.
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Developments in other countries are being observed with some interest. In
Britain, the National Employment Savings Trust (NEST) auto enrolment system
was launched in October 2012 and is expected to enrol in the region of 11
million members. Other models such as the Australian, Chilean and New
Zealand systems can provide lessons for Ireland and have significantly
improved pensions’ coverage and adequacy in their countries. As a percentage
of population, the Kiwi Saver programme in New Zealand increased coverage
from 15.7% in 2007 to 63.7% in 2010 (supported by a mix of Government
matching contributions and cash subsidies).
International experience has shown that significant increases in coverage can be
obtained from such systems, which is a key priority.
Another key priority in relation to any new initiative is ensuring that the
consumer benefits.
In an auto-enrolment system, there may be capacity for
more competitive charging structures, which in turn would lead to improved
returns for consumer members. It is critical that the consumer benefits from the
opportunities afforded by the larger economics of scale a supplementary
pension system might bring.
As was highlighted in the Pensions Charges Report 2012, this type of
arrangement could assist in resolving the difficulties inherent in the current Irish
scheme structure of a proliferation of small schemes paying considerably higher
charges than larger schemes, ultimately eroding the value of the pension
received by the member.
Close
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In closing I hope that I have a given you a good overview of pension reforms in
Ireland to date. I look forward to hearing your views.
Thank you.
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