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Pensions framework necessary beginning to tackle problems
THE proposals for a National Pensions Framework, which were published by the government last week, while not providing all the answers, at least have opened a necessary debate on a vital subject which has been left in abeyance for too long and must be seriously addressed right now. The proposals are predicated on the basis of beginning the new scheme in 2014 when Taoiseach Brian Cowen expects the economy to be back in growth – the implication being that, if it’s not, we will just have to wait until it is!
That is like, as the pop song goes, fixing it for ‘the 12th of never – and that’s a long, long time.’ This rather vague aspiration is really not good enough, given the seriousness of the situation that pertains regarding future pension provision and the reality now confronting workers that they are facing a much bigger drop in income and living standards when they retire than they anticipated, as well as the prospect of having to work longer as State pension age qualification is being raised to 66 in 2014, to 67 in 2021 and to 68 in 2028.
People’s hopes of taking early retirement while they are still relatively young and healthy look set to be dashed, unless they have cleverly made their own provision, which would have been difficult what with the poor performances of pension funds in recent years. For the majority of people, the only way they may be able to retire early and enjoy a decent standard of living is by winning the Lotto.
But, back to reality and what is staring us all in the face right now is that, as the population ages and people are living longer, there are going to be less people working and there will not be enough taxation generated to meet State pension commitments. At the moment, six people of working age support each pensioner, but by 2050, there will be only two workers for each pensioner and, clearly, this is not sustainable, so a new supplementary pension scheme is being proposed to help address the shortfall.
Previous efforts to encourage workers to make financial provision for their retirement seem to have fallen on deaf ears and the uptake on voluntary pension schemes was very low. Perhaps the government could be blamed here for not getting the seriousness of the situation across to people better, but this would be hollow criticism, given that many workers were not prepared to give such schemes the serious consideration they deserved.
The more mandatory nature of the new Auto-Enrolment Pension Scheme to be introduced under the National Pensions Framework, possibly from 2014, will bring the majority of workers – those already on better company schemes may opt out – into the realm of paying more towards their pensions than they already do through their taxes, with the State and employers making matching contributions. The State’s contribution will be by way of tax relief, but employers will be expected to come up with added money to match that of their employees, adding an extra burden to the costs associated with jobs provision and, therefore, eroding some of their cost-competitiveness at a vital time in the economic recovery process.
Little wonder then that employers’ groups are less-than-enamoured by aspects of the new scheme that has been proposed, with the Small Firms Association stating that the introduction of mandatory pension provision is premature and will prove costly to the Exchequer, to business and to employees, without any associated benefits in the long term. They maintain that we still have a comparatively young population in comparison to the rest of the EU and have not exhausted the many opportunities still available to increase the success of the voluntary schemes – into which employers are obliged to pay less than they would under the proposed mandatory scheme.
Clearly, earlier efforts to get people to join voluntary schemes have failed and the government has to take some initiative, as it is proposing to do now by introducing the mandatory scheme, as well as coming up with a single new pension scheme for all new entrants to the public service with effect from this year. The collapse of a number of private company pension schemes through no fault of the workers who paid into them means that they will be dependant solely on State pensions, strengthening the government’s argument for a supplementary scheme.
The necessity of people having to work longer to reach retirement age is a new reality that people have little choice but to accept and is frustrating as they have seen the financial yields of the economic boom effectively blown to bail out the banking system. This was money that, by right, should have gone into future pension provision, so workers paying into the mandatory pension scheme will, effectively, be aiding the bail-out process on yet another front, making it a bitter pill to swallow for them.
This hurts even more when one considers that the Minister for Finance, Mr Brian Lenihan, has already raided the much-heralded National Pension Reserve Fund, set up by Charlie McCreevey in 2001 to help with future State pension provision, and used it for recapitalisation of the banks. We were given to believe at the time it was set up that this money was ring-fenced for pension provision, so – while it may be buying the government stakes in the banks it is propping up and may yield a return in the long term – there is a justifiable feeling that the people have been betrayed again by yet another promise not being fulfilled.
Certainly, those coming towards retirement age in the next ten to fifteen years – and whose employment contracts provide for retirement at age 65 – have reason to be worried about how they are going to bridge the gap between this and the new age thresholds for qualifying for the State pension. As a spokesperson for the Irish Congress of Trade Unions stated, it seems that the Taoiseach, Finance Minister and the Minister for Social and Family Affairs, Ms Mary Hanafin, appear not to have fully thought through the National Pensions Framework.
One big uncertainty regarding the whole thing is the likelihood of Fianna Fáil still being in power in 2014, which is the earliest date it is planned to implement the new pension scheme. Would those parties now in opposition be willing to go ahead with the proposals then, or have they got a better set of proposals? If so, we need to hear them now before the new National Pensions Framework is finalised.
The crucial area of future pension provision is not one that should be belittled by political point scoring. All of the parties – both government and opposition – need to get together and tease out the framework’s proposals in a constructive manner, with particular emphasis on some of its implications that have not been fully thought through. While far from perfect, the National Pensions Framework provides a good platform for discussion, but it is really only at the starting point and there is a long road ahead.