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Minister for Social and Family Affairs, Mary Coughlan, T.D.

Minister for Social and Family Affairs, Mary Coughlan, T.D.

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About this Event

21 Apr 2004

Old Age – the Age Old Problem of Pension Reform – Burdens and Solutions

Speech by the
Minister for Social and Family Affairs,
Mary Coughlan, T.D.
At the Institute of European Affairs seminar

“Old Age – the Age Old Problem of Pension Reform – Burdens and Solutions?

21st April 2004


“Ireland is in a different position to many of our EU partners in relation to the ageing issue. A relatively low proportion – 11 per cent - of our population is over 65 compared to an EU average of 16 per cent. This does not mean that we do not face an ageing challenge ourselves – only that the difficulties will arrive that bit later.?

“Financial sustainability is a necessary pre-condition for a system of adequate pension provision. Public service and social welfare pensions now cost the Exchequer about 5% of GNP. While this percentage will remain stable over the next few years, it is expected to double by 2050.?

“Participation rates for older workers compare favourably with many of our EU neighbours. For example, participation of the 55-64 age group is significantly higher in Ireland - at 45.3% - than the European average of 37.7%.?


Introduction

I would like to thank the Institute of European Affairs and, in particular, its Director General, Alan Dukes, for inviting me here today to address this Seminar, particularly as the subject is of such importance for society generally.

The title of today’s seminar, referring as it does to pension reform as an “age-old problem? is apt because, as we are all well aware, the effect of ageing on the cost of pensions is an issue which is currently exercising Europe as a whole. Of course, pension reform is not new but rather is evolving and new approaches may be needed to reflect changing dynamics.

Open method of co-ordination
However, what is new is that we in Europe are now sharing our experience and learning from each other in a more formal way under the open method of co-ordination established following the Laeken and Stockholm European Councils in 2001. As part of that process, all Member States were required to submit national pension strategy reports based on a broad set of objectives in the area of adequacy of pensions, sustainability and modernisation in the context of changing social and economic needs. The aim is that Member States learn from each other while remaining free to develop their pensions systems in accordance with their own traditions, values and priorities.

One thing we have learnt from that process is that while the challenge of ensuring financial adequacy and sustainability of pensions in the context of an ageing population is the same for us all, the scale of reforms required to address this challenge differs according to the pension regime in each country. Most European countries, with the exception of ourselves, the United Kingdom and the Netherlands, have relied primarily on publicly provided pensions which are funded on a “pay as you go? basis.
Of necessity, these countries are engaging in very significant reforms aimed at ensuring a greater emphasis on funded schemes and the switch to individual pension arrangements. These fundamental reforms are attempting to strike a difficult balance between the financial sustainability of pensions systems and their social objectives. This is a balance that is not easy to achieve and there is no magic formula to ensure reforms achieve such a balance. Debate is currently taking place as to the cost and underlying equity of many reforms and proposed reforms in terms of meeting social objectives and there is resistance in many countries leading, in some cases, to industrial unrest.

Ireland’s strategy
In this country, we are to some extent lucky in that we already have a well developed second pillar system underpinned by a State pension now accessible to most citizens. Also, Ireland is in a different position to many of our EU partners in relation to the ageing issue. A relatively low proportion – 11 per cent - of our population is over 65 compared to an EU average of 16 per cent. This does not mean that we do not face an ageing challenge ourselves – only that the difficulties will arrive that bit later. In considering the development of our pension system to meet this challenge, we must strike a balance between social and financial concerns, while at all times seeing the growth in the number of older people as a very welcome development with positive impacts for society as a whole.

Adequacy
In trying to achieve that balance, our strategy for ensuring adequacy of pensions is twofold. In the first instance, we have concentrated on increasing the basic State pension to bring it into line with the target of 34% of average earnings proposed in the National Pensions Policy Initiative which underpins our overall strategy. In moving towards this target, since 1997, pensions have increased by 69% - or 43% - above inflation. More recently, the Government committed in ‘Sustaining Progress’ to achieving a rate of EUR200 per week in the basic State pension by 2007.
The second important element of the strategy to ensure adequacy of pensions is to increase coverage in private or occupational pension systems from 50% to 70% of those at work aged over 30. This was and is an ambitious target, some would say too ambitious. The main component in achieving this target is the new Personal Retirement Savings Accounts (PRSAs) which are a low-cost, portable product featuring a high degree of consumer protection designed specifically with today’s mobile workforce in mind. Since September 2003, employers who do not provide an occupational pension scheme for their employees are required by legislation to facilitate access to one of these products.

To date, the take up is, in my view, encouraging. Up to December 2003, 19,022 accounts have been opened with a total asset value of EUR 41 million. I look forward to the figures up to the end of March which should be available shortly. We are working extremely hard to increase pensions coverage by the voluntary route which was the approach favoured by all in the National Pensions Policy Initiative process, including the social partners. However, as I said the target of 70% is ambitious and, at the end of three years – when we are required to review our strategy – if we find that the voluntary approach has not delivered the increase in coverage we require, then other measures, including some form of mandatory option, will need to be considered.

I am aware, in this regard, that there are very strong views held by different stakeholders and commentators not only on the mandatory versus voluntary approach but also on the overall nature of our pensions system and, in particular, on the role of the public and the private sector. Recently, I had the pleasure to launch a book entitled “Reforming Pensions in Europe: Evolution of Personal Financing and Sources of Retirement Income? which was co-edited by our chairperson, Jim Stewart, which challenges a number of current pensions developments in different Member States. All such analyses will have to be taken into account in any future review which is undertaken.
Sustainability
Financial sustainability is a necessary pre-condition for a system of adequate pension provision. Public service and social welfare pensions now cost the Exchequer about 5% of GNP. While this percentage will remain stable over the next few years, it is expected to double by 2050.

One element of our strategy, to maintain the financial sustainability of public pensions, centres on the National Pensions Reserve Fund which was established to assist in financing both social welfare and public sector occupational pension schemes from 2026 onwards.

However, sustainability also depends on dealing with the root of the challenge facing pension systems, which is a reduction in the active workforce and an increase in the number of pensioners. Therefore, increased workforce participation amongst all sectors of society, including older people, has a vital role to play in ensuring the sustainability of our pensions system, as possibly will in migration in the longer term.

Participation rates for older workers compare favourably with many of our EU neighbours. For example, participation of the 55-64 age group is significantly higher in Ireland - at 45.3% - than the European average of 37.7%. Obviously I am pleased that these rates are higher in Ireland but I also know that we cannot afford to be complacent. A report from the National Economic and Social Forum – “Labour Market Issues for Older People? – found that 29% of employers preferred to hire younger people.

This is the type of practise we need to change. Employers should draw on the full range of skills and talents available to them from the whole population. A start has already been made.

With the enactment of the Public Service Superannuation (Miscellaneous Provisions) Act 2004, the minimum age for receiving a pension is 65 for new entrants to the public service from the 1st of April this year. Furthermore, there will be no compulsion in the system for these people to retire at a certain age.

Also, the Government has committed to removing the retirement condition associated with the State retirement pension while my own Department, as part of a review of the conditions for receipt of the State old-age pension, is considering allowing people to defer receiving the State pension and receive an actuarially enhanced payment when they decide to claim.

It is with incremental steps such as these that mindsets are changed and we meet the pensions modernisation challenge.

Other issues for occupational pension schemes.
As I said earlier, part of Ireland’s strategy for ensuring adequacy of pensions in the future is to attain a coverage rate of 70% in the supplementary or second pillar pension system. However, achieving a target of 70%, difficult though that might be, is not a panacea. We must also ensure that such funded pensions, whether defined benefit or defined contribution, will deliver retirement security.

This means, on the one hand, addressing the issues that are bedevilling defined benefit schemes at the moment and, on the other, ensuring the adequacy of contributions to defined contribution schemes and PRSAs. Certainly in Ireland, recent years have seen a shift in provision from defined benefit to defined contribution schemes which, in effect, shift the investment risk from the employer to the employee. This is a reflection of the changing nature of the workforce - which has become more mobile - and significant funding difficulties which have emerged in DB schemes in recent years due to charges on both the asset and liability sides of pensions provision and, in particular, to volatile equities markets.
There have also been changes in the accounting requirements which, it is argued, have impacted negatively on pensions provision. While there has been a shift towards DC schemes, a substantial proportion of the working population remain in DB schemes.

Last year, I took measures to provide temporary relief for DB schemes which were experiencing difficulty in relation to the actuarial Funding Standard because of the problems being experienced in the equities markets. Thankfully, we have seen some improvement in markets, meaning that at least some of the losses made by schemes over the last years were recouped, though there is still substantial ground to be made up, which can only happen in the medium to long term.

However, the effect of the negative equity returns on defined benefit schemes has raised questions about the appropriateness of the minimum funding standard. In particular, it has highlighted the tension that exists between the need to ensure the security of members\' benefits in the event of a wind-up and the desire to ensure that employers, who have voluntarily set up occupational pension schemes, are not penalised in the short-term when they can in fact meet their liabilities in the longer term.

To deal with these issues, the Pensions Board is actively reviewing the funding standard in the light of experience here and abroad over the last number of years, while also keeping in mind the original objective and intent of that standard and they will report to me later this year in this regard. Reforming the funding standard policy may need us to think in new ways and offer new solutions and this is another challenge we must face.

Such a fundamental review of this standard should, by definition, look at issues and objectives from first principles again and make the various components of the current funding problem explicit.
Ordinary pension scheme members, and indeed policy makers, need to understand the various developments and possible systems failures at different levels that have brought us to the current serious pensions funding situation. If we do not clearly understand the causal factors, both internal and external to the pensions schemes, and the outcomes, intended and unintended, then, in my view, we cannot move forward safely to develop a new or revised standard.

Pension Awareness
As I said, one of the concerns relating to defined contribution schemes and indeed PRSAs is that people are simply not providing early enough for their retirement. The education process needed to address this and other pension issues is a challenge for us all. For its part, the Government committed under “Sustaining Progress? to implement an information and awareness campaign to promote and encourage supplementary pensions provision. A very successful campaign, built around the slogan “Think About Tomorrow Today? was run by the Pensions Board in the latter half of 2003. This campaign supplemented the significant effort being made by suppliers to market and promote PRSAs. An assessment of the campaign at the end of the year showed a high level of awareness amongst the public in relation to pension issues.

For my part, I have provided resources in 2004 to enable the Pensions Board to continue with the campaign, which for 2004 is focusing on reaching the key groups where there is low pension coverage, in a more in-depth way, in order to move on from awareness building to an action level where the consumer actually starts to adequately fund a pension.

This is a real operational challenge as I found recently in my own town of Donegal, where there was a poor turnout to a pensions forum organised by the Pensions Board.
It is very difficult to get people of any age, but particularly younger people, to actually do something positive about their pensions provision, and we know the reasons for this.

This is an area where we must all play our part and I would encourage employers, trade unions and representative organisations to take a more active role in this regard as I believe they have a leading role to play in promoting the changes required to increase pensions awareness and coverage.

Other EU developments
I would now like to return to EU related issues.

We have been extremely busy since Ireland took over the Presidency in January. Making work pay is a key priority for EU Member States and a core objective in the EU level process to support the modernisation of social protection systems. To this end, “Making Work Pay: Exploring the Interaction between Social Protection and Work? was chosen as the theme for the Informal meeting of Employment and Social Policy Ministers which was held in Galway in January. There was full agreement among Ministers on the need for specific and targeted recommendations to stimulate job creation in the EU.

The Presidency Conference on “Reconciling mobility and social inclusion – the role of employment and social policy? was held in Bundoran earlier this month. The aim of this conference was to examine how employment and social policies and resources could best be focused on supporting the mobility of migrants for work or other purposes and promoting their social inclusion. The Third European Meeting of People Experiencing Poverty will be held in Brussels on 28th and 29th of May.


In relation to the open method of co-ordination and following on from the submission of the national strategy reports on pensions, it was agreed that further special studies would be undertaken on pensions issues of common interest. As I mentioned earlier, we are working hard not only to extend supplementary pension cover but also to ensure its sustainability. The indications are that the EU focus this year will also be on the sustainability of second and third pillar pensions and the contribution these can make to providing adequate pensions for retired people, including as I said earlier, a growing focus on the public cost and equity of outcome of financing such pensions through the taxation system.

Work on the implementation of EU Directives is always ongoing. Only last month, two Council Directives providing for equal treatment in the pensions arena were transposed via the Social Welfare (Miscellaneous Provisions) Act, 2004. Among other things, this Act amends the Pensions Act to extend the principle of equal pension treatment beyond gender to an additional eight equality grounds of age, disability, sexual orientation, religion, race, Traveller community, marital status and family status.

We will now continue to work on the pensions fund Directive – known as IORPS which refers to Institutions for Occupational Retirement Provision. As you may know, the main aims of this Directive are to ensure the security of pension funds and to remove barriers to investment in this area. Both of these aims are ones to which Ireland is strongly committed. There is at present a financial working group under the auspices of the Department of the Taoiseach, which is examining how the financial sector in Ireland can best position itself in the light of this Directive, which I plan to transpose by April of next year.

Yet another Directive currently under discussion in Europe relates to the principle of equal treatment between men and women in the access to and supply of goods and services.
While most of the public debate surrounding this Directive, both in Ireland and in other Member States, has focused on the effect of unisex pricing on motor insurance, there is also concern about its possible effects in the pensions area. However, it is good that these issues are being brought to the forefront at this time and that there is debate among ordinary people taking place at national level on this Directive including the concerns raised by the various actors involved.

Focal Scoir
Mar atá léirithe agam, is iomaí agus is casta iad na dúshláin a bhaineann le córais pinsin in Eirinn agus san Eoraip agus tá gá le cur chuige agus réiteach difriúil sna Ballstáit eágsúla. Táim cinnte go gcuideoidh an díospóireacht idir leibhéal náisiúnta agus leibhéal Eorpach chomh maith le seimineáir mar seo le cinneadh níos fearr a dheánamh maidir le cúrsaí eacnamaíochta agus shóisialta.

Mar fhocal scoir a chathaoirligh, ba mhaith liom mo bhuíochas a ghabháil leis an Institiúid Gnóthaí Eorpach agus dá Stiúrthóir-Ghinearálta, Alan Dukes as ucht an cuireadh a thabhairt dom labhairt ag an seimineár seo agus beidh mé ag tnúth le cúntas iomlán ó oifigigh na Roinne ar a mbeidh á plé agaibh um thráthnóna.

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