- The AE system is proposed to supplement the State Contributory Pension and tackle private sector pensions poverty.
- It will not address the unfunded liability of over €115bn for public service pensions, and an unfunded liability of over €335bn for Social Protection pensions.
- The unfunded liabilities amount to twice the size of Ireland’s national debt.
- AE systems are the only way to tackle widespread pensions poverty in the private sector, and affordable pensions for the public sector.
- Government must introduce ‘universality’, whereby all citizens are treated equitably in the funding of their pensions.
- There are still areas of weakness with the proposed AE system such as employer affordability and the continued apartheid between private sector and public sector workers.
The DEASP update published on 30th October on its pensions Auto-Enrolment (AE) system represents a starting point in what will be a very long process to address Ireland’s chronic pensions shortfall in the private sector.
The AE system will provide for compulsory, opt-out pension contributions for private sector workers earning more than €20,000 per annum. Employers, employees, and the state will contribute to the individual’s pension fund; although this week’s announcement did not define the state contribution, which the DEASP previously suggested would be of the order of 1.5%.
The AE system is proposed to supplement, not replace, the State Contributory Pension.
Therefore, the AE system does not propose to tackle the so-called pensions ‘time-bomb.’
The pensions ‘time-bomb’ refers to the fact that there is an unfunded liability of over €115bn for public service pensions, and an unfunded liability of over €335bn for Social Protection pensions.
These unfunded liabilities, at a total of about €450bn, are more than twice the size of our national debt. This liability of €450bn compares to the annual ‘tax expenditure’ of €2.4bn on private sector tax relief on pensions. Currently, the Department of Finance is only looking at tackling the latter, not the former.
Failure to address the funding of public sector and Social Protection pensions means that future pensioners will have their pensions reduced, or taxpayers will pay substantially more tax, or both.
AE systems are the only way to tackle widespread pensions poverty in the private sector, and ISME has been campaigning for over a decade for such a system. We therefore welcome this outline proposal to address the issue.
The greatest threat to the long-term financial and social stability of the Irish state is its unfunded pension liabilities. Until the Government introduces the principle of ‘universality’ whereby all citizens public sector and private, make an equitable, economic contribution to the cost of their pensions, this threat will not disappear.
However, the AE system design announced this week has many areas of weakness, which will have to be managed out over time.
- The most significant issue is the lack of universality in the AE system. The AE update suggests a continuation of the apartheid between private sector and public sector workers. It does not propose that public sector workers will make an economic contribution towards their pensions.
- This is most apparent in the area of tax treatment. Public sector workers contribute a maximum of 10.5% of earnings to get a defined benefit pension. This contribution is not remotely enough to cover the value of the lump-sum and pension payments accruing, therefore there is an actual transfer of Exchequer income to public sector pensioners which is not treated as a benefit in kind for tax purposes. These Exchequer transfers are not capped or taxed as a BIK. Public Sector pensions benefits are uncapped.
- However, private sector workers must fund their own pensions, which are almost all defined contribution pensions, from their own income. While they do not currently pay tax on their pension contributions, their total contributions are capped, as is the value of their pension pot (at a current value of €2m).
- By way of comparison, most TDs, senior civil servants, judges, hospital consultants, and Gardai above the rank of sergeant, have a pension pot with an open market value in excess of €2m. This is not taxed at present, nor are there any Government proposals to do so.
- The proposal to increase employer contributions to 6% over time means that employer contributions social contributions will reach 16.95% (inclusive of PRSI) over time. This will significantly impact the cost of business, especially for small and micro enterprises, over time.
- The fact that the DEASP press release states that employer contributions will be ‘tax deductible’ suggests a distinct lack of knowledge of company taxation among senior staff in that Department.
- The AE system proposal suggests a government contribution of €1 for every €3 made by the employee, and previously, the DEASP suggested this would be capped at €1,125 (and could be reduced). This compares with an annual equivalent Government contribution of approximately €20,000 per annum for public servants, €30,000 per annum for teachers, €33,000 per annum for Gardaí, €80,000 per annum for hospital consultants, and €80,000 per annum for judges.
- By this yardstick, the state contribution to the AE system will be miniscule, for what will be a smaller, unguaranteed pension.
- At the same time, the AE system update suggests that tax relief on current private sector pensions contributions could be revisited.
- Were this to happen without equivalent treatment for public sector workers, legal challenge from private sector workers would be almost inevitable.
- ISME should be referred to as the Irish SME Association
For further information, please contact ISME offices T: 01 6622755 E: firstname.lastname@example.org